The Risk That Incentives Create — Compensation Design and Runaway Behavior

People optimize for what is measured. Put pay on a leash to short-term sales, and people will act to maximize short-term sales. Mixed in among those actions is the temptation to make a piece of material look more effective than it is. Risk is not only something that falls on you from outside. The design of compensation itself manufactures risk from inside the organization.

01What Is Measured Decides Behavior

Performance-linked pay is a device for drawing out effort. Set the target as a number, tie the degree of attainment to reward, and people move toward that number. Up to here, it works exactly as the designer intended. The problem is that the same mechanism also generates the motive to hunt for ways around the number.

So why does this happen? The metrics that are easy to measure are usually sales or prescription counts. The quality of materials and compliance, by contrast, are hard to measure. Tie pay to sales alone and the hard-to-measure values are structurally pushed to the back of the line. This is not a lapse of ethics on the part of the person doing the work; it is the result of a design that bent behavior. The moment you decide what to measure, you have also decided what will be slighted.

02The Two Faces of Pay — Effort and the Loophole

The same reward draws out both the desirable effort and the undesirable shortcut. Miss this double nature, and a rallying cry of "try harder" gets translated, intact, into the pressure to "push closer to the edge."

How to design rewards and incentives is a core management decision. The dynamic by which the scorecard and pay win out over stated principle was taken up in The Executive's View, Vol. 5. Seen from the risk-management side, that design is also the lever that decides "what kind of risk gets generated from within."

03Three Design Levers

Compensation design works in the direction of either adding risk or reducing it. The same tool — "pay" — can become a trigger or a brake depending on how it is placed. Here are three representative cases.

Set the three side by side and you see that pay is not a penalty that bites after the fact, but a design that steers behavior in advance. Which lever you pull, and how far, changes the amount of risk the organization generates from within.

04Deviant Materials Are a Product of Structure, Not Malice

So what does this mean for practice? Most of the deviant materials a reviewer confronts day to day are not born of an individual's malice. Trace their roots and you often arrive at the sales targets and the evaluation system. The answer to "why was this expression used" lies not in the person's character but in the reward structure.

Adopt that reading, and the path to preventing recurrence changes. Find the culprit and scold them; tighten review and stop the cases one by one — those have their place, but the root remains. If the same reward structure stays in place, another person will bring in the same deviation. Preventing recurrence is, before it is a matter of tougher review, a matter of system design.

05To the Review Floor — Speaking in the Language of System Design

So what can a reviewer do? Stopping a single case is treating the symptom. What works is to put into words the reward structure behind the deviation and to send the question back toward the system-design side. As the Ministry of Health, Labour and Welfare's monitoring report on sales-information-provision activities shows, deviations recur — they are not confined to a particular individual or a single company. Something that should not recur if it were an individual problem recurs precisely because the structure is the same.

If a reviewer says only "this material breaches the standard," the field will come back attacking the same edge with the next material. Stop short of that, and instead show, in the language of management, that "this kind of deviation is produced by pay tied single-mindedly to short-term sales," and the discussion moves from the review room to the compensation committee. The place to cut off the source of the risk is that other meeting room.