Incentives and disincentives have become central to modern management. Companies set targets for their managers and sometimes keep report cards or some other means of tracking the performance of each manager in meeting the targets set for him or her. Incentives are the promised rewards for meeting the targets and displeasure, demotion or dismissal are the disincentives for not doing so. This page explores these issues
Everywhere we go we are faced with pressures, incentives and disincentives - enticements to do something or not to do something. The use of incentives and disincentives to train animals was first studied in rats and the same processes were then applied to humans and shown to work in much the same way.
This led to the behaviourist theory that became an ideology in education in the 1960s. Its critics say that it operates on the animal in us and turns people into rats. Students respond and justify, but don't challenge and reflect about what they do. It does not teach students to evaluate critically and consider whether what they are doing is ethical or appropriate. This reflective evaluation is a human attribute imposed on the animal in us.
So the argument is that when incentives and disincentives are used in business in order to get people to make more money they do exactly the same to the people working there and they are at risk of justifying things that are harmful for others.
This page explores the impact of incentives and disincentives. The next looks at the sort of people we are and how that relates to our response to incentives.
This is a theoretical system that was based on experiments in rats, teaching them to do things using rewards and punishment (carrot and stick). Humans were seen as simply more advanced animals. From the early 1960s, when I first encountered behaviourism, to the beginning of the 1990s when the last vestiges hopefully went in the educational bin, I struggled to counter its effects. It persisted in the use of technology in education where it was dominant and remained entrenched long after it had been discredited elsewhere.
It was the antithesis of what I understood education to be about. Behaviourism's dominance of technology (mechanical systems then computers) set back the unlocking of technology's educational potential by about 30 years.
What behaviourism in its original form did, was to undermine the very essence of our humanity by creating patterns of behaviour where instead of reflecting about what we are going to do, we try to find explanations and justifications that will allow us to get the incentive offered or avoid the disincentive. People are liable to justify what they are doing by using explanatory illusions - sometimes followed by a cascade of others to support it. Most of us have done this at some time and have seen others do it!
Thinking becomes "responsive" finding ways of explaining away contradictions. The essentials of human creativity and innovation, namely reflection and constructive thinking to sort out the contradictions are blunted or lost. Its critics assert that behaviourism works by turning people into rats because that is how they learn to respond.
While the word behaviuourist is not used the market, by its very nature, creates situations where incentives (carrots) and disincentives (sticks) focus on corporate objectives that are not aligned with the common good. It is effective customers and an involved community who reflect on what is being done to them that changes this. By making what they want and expect very clear they force manager to reflect and rethink and in doing so change the focus of intrinsic marketplace incentives and so behaviour.
Modern management techniques
Modern businesses use incentives and disincentives to achieve what they want. But their objectives are seldom those that the customers or community want or need. The market's utility depends on the balance between the objectives of the two participants and it's the objectives of the customer that the market has to meet. Incentives too often cause managers to pursue corporate objectives that look past the needs of the customer.
That is their inability to see the human as anything more than interest driven made it impossible for them to imagine an actively organised pool of disinterest called the public good. p89
Source: "The Unconscious Civilization" John Raulston Saul - The Massey lectures, Penguin books 1997
But when the customer is vulnerable and ineffective, then the only protection they and their communities have is the restraint imposed by the morality, values and ethics of those providing care. That requires those working for the company to think and reflect on what they are doing and examine the consequences.
Incentives and disincentives discourage critical analysis and prevent participants from reflecting critically on what they are doing and rejecting what is being asked of them when it is wrong. When incentives are used then people more readily behave like rats. The many examples I give on other pages illustrate the consequences.
Intrinsic incentives and managerial incentives: There are incentives and disincentives in almost all situations and social systems, but particularly markets. Here the control exerted by effective customers controls what is done and prevents dysfunction. Issues can be recognised and rationally confronted. The effective customer can be seen to release the managers and staff from the pressures of competition that are driving then to behave in an irresponsible manner. It allows them to engage their humanity and reflect on what they are being asked to do.
Added to the incentives intrinsic to the contexts in which we find ourselves (eg a marketplace) you have the incentives deliberately imposed by modern managers. These can be very powerful and dysfunctional. Usually there is not much that employees can do about these except conform or resign. Too often they behave like rats and in doing so become successful in the company.
Strong incentives and disincentives are key facilitators in causing markets in vulnerable sectors to fail those they are there to serve. Modern management frequently sees them as an essential commercial strategy, and in their drive for profits they ignore the adverse consequences in vulnerable markets.
... Even among the most dedicated professionals, financial incentives influence behaviour, and tend to reinforce professionals' desire to apply their skills to problems - rather than encouraging people to become less dependent on health services ..."
Source: Health Policy Reform: Part 2 - Why reform is difficult. Health ministers are in office but not in power. John Menadue 28 Jan 2015 (Also on Crikey web site here)
External incentives and kickbacks: Then there are the incentives and disincentives created by other participants within the market system itself. These include beneficial financial deals and underhand in the pocket arrangements that characterise our market and our political system.
There are payments and deals that ensure that two participants support one another for their mutual benefit. Others establish patterns of referral between professionals that are for the financial benefit of the professional and not in the interest of the vulnerable customer. These have been a major problem among financial advisers. They justify it because it is declared in the fine print, but customers are seldom aware that this is unethical and not in their interests.
Perverse incentives include a multitude of financial, non-financial and existential perks and services to encourage others to refer to you, recommend your product, or in some other way support or make money for you. Drug companies feting doctors to get them to proscribe a particular pill or use a particular product is the best known.
There are financial kickbacks, the provision of secretarial services, free office space, share options, marketing and recommending your activities, mutual referrals (pass the parcel), price fixing arrangements etc. etc. The ways of inducing people in the market to support you or advance your business, rather than act in the best interest of the customer are legion.
Markets without an effective customer are particularly vulnerable and these practices are poison for them. They are used extensively in vulnerable sectors including financial advice, stock brokering, banking and of course health and aged care. If you look behind every scandal unopposed perverse incentives are usually there driving the process. I give multiple examples of market failure in vulnerable sectors on the two web sites linked below. Consider where the incentives in these examples lie and the vulnerability of either the customers or the employees in these examples.
Incentivisation is an established business practice and only illegal in health care for doctors. Even in this sector there is a lot of hair splitting to try to make what you want to do to give incentives to doctors legal. Kickbacks are illegal for the medical professions but there are no legal restrictions to offering incentives to hospital managers, although I think in Australia they need to be declared. That does not lessen the impact of what these managers do as a result. The quote below is from the USA. Mayne Health in Australia also offered its managers large incentives.
... Bonus bonanza. One of the trends in compensation is for incentives to reach further down into the hospital management ranks ..."
Source: Modern Healthcare 8 July 1996 page 33 --- Riding High - - Hospital CEO pay has surged as bonus plans proliferate
Red flags: Examples of kickbacks
The market sees nothing wrong with offering financial inducements to get what it wants and as is revealed below this includes the managers of the large health care corporations. Confronting examples are usually the tip of an iceberg and not rare exceptions.
Example: Stockbrokers were enthusiastic about the company NME because of the amount of money and other perks that doctors were offered for making more money for the company by using its hospitals and other services. For these people, anything that worked in the marketplace to make more money was perfectly legitimate. But in healthcare, this distorts care and is a criminal offence. NME pleaded guilty to kickbacks in a criminal case and its bigger rival Columbia/HCA reached a $1.7 billion fraud settlement in a lawsuit where allegations of kickbacks were made.
... hospitals must spend a great deal of time and money to attract physicians with big practices in order to ensure a flow of patients."
"Helping a physician defray certain costs of doing business can be a powerful carrot to get his patient referrals."
Source: Extracts from stockbrokers reports in 1991 referring to Tenet/NME's policies
... Mr. "A" (senior NME executive in NME's international division) then told me that he could give me a lower price if I could admit more patients into hospital. If I admitted enough I could even be given rent free premises.
"A" insisted on a guarantee, saying my reduction in price would have to correlate with the number of patients --
"B" (a hospital administrator) has mentioned figure of $50.000 and $100, 000 and also 200 patients a year - -
Source: Court Documents - Evidence of a surgeon in an international hospital run by US company NME (now Tenet Healthcare) for more see Submission to Tenet's Ethics Committee section E
... I was given a detailed explanation of how other psychiatrists had been made rich, and was told that this would be done for me if I would go along with the program (company run fraudulent treatment program)."
"Tragically, a large number of psychiatrists, psychologists, ------- , and have - in effect - sold their souls."
Source: Evidence US House of Representatives Inquiry entitled "Profits of Misery" April 1992 -- Dr. Charles Arnold referring to a tape recording he made of an interview with a Tenet/NME administrator.
One of the whistle blowers I met in 1993 when investigating the NME scandal advised me to read Grisham's novel "The Firm" if I wanted to understand why and how doctors had been induced to be part of NME's massive fraud. It describes how young lawyers are sucked into and trapped in illegal money making strategies that harmed the community.
Other whistleblowers described these financial arrangements as "Golden Handshakes" that became "Golden handcuffs".
This description rang a bell with me because many years ago I saw young doctors I had trained sucked into a money making contract medicine system whose structure created incentives that resulted in suboptimal care. I heard their justifications when I remonstrated with them. By now they were paying off expensive cars and nice houses so they were trapped - handcuffed.
Kickbacks and other nasties in Australia
Personal experience with financial advisers
Incentives and inducements are so common and so accepted that most of us don't worry about them. We should!
I retired long before the extensive scandals surrounding financial advisers hit the headlines. My accountant referred me to a financial adviser. His plan for the investment of my nest egg was impressive and glossy. But being worldly wise I looked carefully at it. At the bottom of one page in small print I saw that my accountant was to be paid a kickback each year and if I lived a while it would be a sizeable amount for doing very little - enough to encourage him to refer to this adviser rather than a better one.
The industry has created the impression that kickbacks don’t have an adverse impact and are acceptable if they are disclosed. I indicated my displeasure and went looking elsewhere. A faithful 20 year customer of the Commonwealth Bank I considered it. I was already disturbed by the way it had changed recently. I ducked that one and escaped. I tried Macquarie but soon smelt a rat and went elsewhere so escaped a second time. Both used incentives. Multiple scandals show how banks and financiers including these two exploited and defrauded clients who had come to them believing that banks could be trusted. At the time it was very difficult to find someone I felt I could trust.
One realises just how vulnerable those who have not been alerted to the risks of a market system that considers social responsibility evil are. I had already started studying vulnerable sectors so was forewarned.
Audiology a dicey industry
Audiology is an industry that has been undermined by direct incentives as well as a number of financial arrangements that lead those involved to exploit the vulnerability of their customers - often elderly citizens. A particular problem is that the companies that make and sell the devices own the businesses that employ audiologists. They are in a position to put pressure on the audiologists to sell clients expensive hearing aids they don’t need and this has been happening.
Two representatives from the ACCC (Australian Competition and Consumer Commission) gave evidence to the STANDING COMMITTEE ON HEALTH, AGED CARE AND SPORT on 23 March 2017. I have already quoted this material on the Aged Care Roadmap page but it explains it so well that I am reproducing the extract here.
Note that it is the bigger companies that are most at fault and these companies consider that these practices are a normal part of business and part of a market economy.
Mr. Gregson: - - What is clear is that commissions, incentives and interest on targets are quite pervasive in the industry, - - (later)- - - - - - - the issues of concern followed the size of the players. - - - some clinicians are offered performance rewards like overseas travel.
- - - we have made it very clear- - - through changes such as the NDIS that they need to be conscious of these issues - - .
- - - To some extent the concerns we have about sales practices driven by commissions and incentives lead to the third category of dealing with vulnerable consumers, and indeed we think can lead to the provision of either inappropriate devices or overselling or upselling to devices that may not be necessary. That is the evidence that came through.
Mr Fleming. - - - - the pressure on clinicians was there to sell hearing aids, and that is a significant pressure - - - they were overselling, upselling and focusing on that rather than caring for the clinical needs of the consumer.
Mr Gregson: - - - being upsold products—and not always the best suited product, and there is a financial cost involved—but there is also access to finance that is sometimes provided, and to have a further burden of ongoing payments when a product turns out not to be best suited just adds to those issues of harm that we saw.
- - - - - we do not think consumers fully understand, when you are going into a clinic situation where you have people that you think might be trusted health professionals, that they are also being remunerated on commission, and that might influence what is being sold to you. There are those features, particularly with a potentially vulnerable subset of consumers, either because of age, the hearing issue itself or other disability. So we do think there is that quadruple whammy of impacts that apply here.
Mr Fleming: - - - one of the responses often in these scenarios is to give consumers more information. Our strong view is that that really is not going to help. Given the nature of the consumers involved and the devices themselves are very complex issues. Disclosure alone is not going to remedy the issue.
Mr Gregson: From the features we have seen in their current state, the combination of those (incentives and commissions) will very often lead to bad behaviour and, yes, we think that the issue should be very clearly looked at to stop these commissions or limit them in some way.
- - - - I think it is common when we probe these types of issues in any industry for parties to say that commission-based sales are a normal part of business. They say that providing wage incentives for performance is part of a market economy. They would say that it is an industry-wide approach, and therefore they are doing what they do elsewhere. Invariably, industry tells us that they have the culture, the protocols and the systems in place to prevent bad behaviour while these commissions exist.
Our experience as a consumer regulator is that we see in industry after industry where there are commission- based sales with vulnerable consumers, that the commissions do lead to bad incentives and bad behaviour. You have to have very strong systems and counterculture to deal with that. We have seen that in energy door-to-door and in the VET FEE-HELP space, and we are seeing public reports even in the charity sector about the way in which donations are sought by third-party providers on commission.
What about aged care? The future in aged care is spelled out in the aged care roadmap. It is all about consumer control and choice giving them 'what they want' and there is little control on whether they need it or not. Under Consumer Directed Care the consumers are to be given the money and the market will then offer them a choice of services including a variety of extra services. There will be case managers who will 'assist' the consumers to choose but how independent of influence will they be. Is audiology a foretaste of the future for aged care?
A top down organisational structure creates a context that is structured to capitalise on the use of incentives and disincentives to achieve the objectives desired by management - and in a market these must be commercial if participants are to compete successfully. It's designed to organise and influence.
In my view, the distortions created by economic rationalist thinking, "micro-economic reform", the deliberate use of perverse incentives and their global application as a way of organising, controlling and structuring society, has contributed to the hollowing out of truly democratic civil societies.
In a functioning civil society, the benefits of any practices should be measured first against their consequences for citizens and society and only then against the personal rewards some will get.
Even well intentioned incentives are blunt instruments, often with unintended side effects. In a society dominated by radical market ideology incentives are seen as normal and are expected by employees. The consequences are largely ignored. In health and aged care motivations based on empathy and humanity cannot be replaced by commercial incentives without there being adverse outcomes.
There are vast numbers of examples where the presence of perverse incentives in a vulnerable market has resulted in exploitation - in banking, in financial advice, in the dotcom bubble, in the succession of Wall Street scandals, in the widespread money laundering that has occurred. The USA is rife with these problems but they have occurred in Asia, in Europe and in Australia. I tracked some of these when I examined Citigroup's history and conduct in 2004. The US health and aged care system is packed with examples and I wrote about some and linked them to this web page (written between 2000 and 2008).
Red flags: Clearly we are animals and behaviourism like most theoretical perspectives does provide insights which can be usefully applied in some situations but, when it is used indiscriminately, when it becomes an ideology itself, and when an ideology deliberately creates strong incentives and disincentives to attain its objectives then we should be very distrustful and examine what is being done very critically. No system of thinking embraces all of our world and all the possible consequences of their application need to be considered for each situation. The examples I give are simply red flags pointing to a deep seated problem.