Over the Christmas and New Year holiday period, we’ll be republishing popular RealKM posts that you may have missed the first time around. Thank you for reading, and we’ll see you in 2016.
The revelations that Volkswagen Group had deliberately installed defeat devices in at least 11 million of its cars has led to an explosion of outrage and bad publicity for the carmaker. And in Australia, the 7-Eleven convenience store chain has been desperately trying to salvage its reputation after widespread underpaying of staff was uncovered.
The common factor about both of these cases is that those in charge have claimed “no knowledge” of the situation, and being “shocked” by the revelations. Putting aside any personal feelings about whether these leaders “should” have known what was going on, if we assume they are telling the truth and were never briefed, does this let them off the hook?
Absolutely not. Even if the specifics were not completely predictable, the end result of staff fabricating documentation and results in breach of rules and regulations was predicted 40 years ago in Steven Kerr’s 1975 classic KM paper On the following of rewarding A, while expecting B. Kerr cites numerous examples of mismatched expectations and rewards (or avoided risk) including:
- expecting doctors to accurately diagnose our health, when doctors are rewarded if they judge someone healthy as sick, instead of risking the lawsuit that may follow an incorrect diagnosis of health
- expecting university academics to teach their students well, when they are rewarded for completing research and publishing their work
- expecting company executives to focus on long-term growth and environmental responsibility, when they are rewarded for quarterly earnings
Kerr points to four factors that are most likely to lead to misaligned expectations and rewards:
- Use of “objective measures” — A call centre that measures the number of calls answered rather than the number of problems resolved will normally achieve the former and not the latter. Objective measures almost always succeed within the scope of measure but cause very distorting behaviour in other ways.
- Focusing on visible behaviours — Since it is easier to observe whether someone is at their desk than whether they are doing their job, or when an unhappy customer is created than when a happy one is created, a tendency exists to undervalue important but less visible behaviours, including teamwork and collaboration.
- Hypocrisy — It is possible that the rewarded behaviour is simply what is actually desired, notwithstanding any protestations to the contrary. This is the suspicion of those disinclined to give the former CEOs of Volkswagen and 7-Eleven the doubt.
- Factors outside the system — Sometimes rewards don’t match expected behaviour because of concerns about external factors such as morality or equity. Kerr uses the example of war, where soldiers on a time-limited tour of duty have little direct incentive to fight in a risky way, even if ordered to do so.
We can see the perfect storm of these factors in the Volkswagen scandal, since:
- employees were presented a set of objective measures for emissions tests, as well as a range of other performance tests
- finding them impossible to meet simultaneously, engineers modified the car’s software to invisibly behave differently in the required range of scenarios
- management was hypocritical in accepting the objective measure as a proxy for the stated outcome of producing a low-emissions car; this created and encouraged a culture of “just get the numbers to pass”, and
- external consumer behaviour further encouraged this approach by demanding cars that are low cost to buy and maintain, while having little overt interest in the pollution levels emitted by the car
A similar chain can be observed in the behaviours of franchisees, who had to somehow balance the books when head office was taking a share of the profits that left too little to pay staff fairly.
In both cases, the CEOs chose not to think through the systems incentives inherent in the organisations they ran. The fact that they didn’t know about specific wrong activities isn’t the reason they should have resigned. Rather, it is because of the reward structures that these CEOs set up that can be directly traced to the unfortunate outcomes we see today.