April 29

Imagine that you hire a contractor to work to renovate your kitchen. After seeing how quickly the contractor is working, you decide that instead of paying him a lump sum for the job, you might be able to save a little money by paying him by the hour. After all, your research showed that this job would typically take about three-quarters of the time you have allotted to it. So you and your contractor agree to an hourly wage and work resumes. Then, suddenly, the pace of work slows. The contractor is making frequent trips to the hardware store. It seems to take forever to do small tasks.

What happened?

Your incentives are now misaligned! Before, when the contractor was paid for the value created, he had an incentive to do the work quickly so that he could move on to the next project. However, once paid by the hour, his incentives shifted because he is being rewarded him for taking longer to complete the work.

Are there any misaligned incentives in your organization? In your life?

Ensure that your incentives are aligned with your desired outcomes.

Is there any place where your incentives and desired outcomes might be misaligned?