Pay for performance has earned itself a nasty reputation. During shocking revelations from the Hayne Royal Commission, bonuses and commissions linked to sales volumes have been blamed for driving all sorts of unethical and criminal behaviour.

To meet targets and get their bonuses and commissions, employees have charged fees for no service, inappropriately opened bank accounts for children, accepted bribes to approve mortgages, forged signatures, and sold people into loans and investments they could not afford.

All this was foreseeable. The conflicts of interest in tying financial rewards to sales targets have been well researched and documented over the past 50 years.

Yet, corporate leaders chose to stick with a system that rewards people for the volume they sell – sometimes even prioritising the riskier and more profitable investments – rather than the quality of the service they offer.

During the Royal Commission hearings, some banks pledged to remove “conflicted commissions” for their financial planners and restructure incentives for other staff, such as call centre workers. However, they have not always been receptive to the news that their rewards programs may be driving unethical behaviours.

Shaun McCarthy is an authority on organisational culture and chair of consultancy Human Synergistics. He says banks have given him short shrift in the past when he has warned about the conflicts of interest inherent in their incentive programs.

“I can talk to them until I am blue in the face about the unintended consequences but, if revenue is going up and profit is going up, they are not interested”, he says.

“They basically tell me to bugger off because they think their current success is a consequence of [their structures and processes]”, he says. “It is a misattribution of success.”

McCarthy says financial rewards for performance have a place in business, but they must balance with goals for customer service, feedback, repeat business, relationship management and other factors.

Human Synergistics’ research shows 32 variables influence organisational culture – and goalsetting comprises only four of them.

“They have to look at how people are managed through the entire system of the organisation to change the culture – not just get rid of the sales goals or whatever it might be”, says McCarthy.

“I have had banks tell me over the years that they need to have those aggressive cultures to compete in the marketplace, which means they simply do not understand the process – and they are learning it the hard way now”, he says, referring to the Banking Royal Commission.

Corporate leaders are often loath to change their incentive programs for fear star performers will leave and profits will suffer.

McCarthy urges them to hold their nerve. “The reward will be in the long term. You don’t necessarily have to get rid of the incentives, you don’t need to get rid of the goals, you just need to change what they are and how they are managed.”

Jon Williams has 30 years of experience helping businesses connect their people to their business results and has seen first-hand what can happen when individual rewards for performance are scrapped in favour of group rewards.

In his case, the result was an improvement in collaborative behaviour, without damage to business growth. Williams recently left professional services firm PwC, where he was global leader of people and organisation, to launch his consultancy, Fifth Frame.

A few years ago, when integrating two teams into one team of 20 executives, Williams decided to spread the bonus pool equally across all team members, regardless of individual performances.

“I knew that having them effectively compete for bonuses would drive behaviour counter to the aim of creating one new collaborating team.” – Jon Williams

Previously, only 30 percent of those executives – the highest performers – were offered bonuses, funded through the success of the business.

Under the new structure, the highest performers would earn a smaller bonus, while the remaining 70 percent of the team were awarded a share of the bonus pool for the first time.

The business performed well, providing an attractive bonus to all members. However, three months before the end of the financial year, one of the executives explained his results had not been strong, and it would be okay if he received no bonus that year.

“He was treating the relationship with the organisation and his team as a financial one”, says Williams, whose reply was, “No, you are in the team and you’ll get the same bonus as everyone else, and you need to be able look your colleagues in the eye and know you tried your best to deserve it’.”

“Instead of dropping off for the rest of the year, he redoubled his efforts”, says Williams.

“His team’s numbers didn’t actually get any better, but they threw his and their efforts into helping others who were busy and needed support.

“We had retained the incentives to make sure the team was paid fairly for their performance, but we had managed to maintain a social contract between the execs and each other and the company which resulted in better corporate behaviours and performance”, says Williams.

There are other motivations, apart from money, for doing good work, says Williams. Pride, ego, work ethic, long term aspirations, and competitive drive are some of them.

The vast majority of the Australian working population get themselves to work and perform their duties without being offered an extra incentive above their fixed salary.

Behavioural strategist Warren Kennaugh says employers need to accept that not everyone is motivated by money.

 “Extrinsic motivators, such as money, aren’t as powerful as intrinsic motivators [such as pride].” – Warren Kennaugh

CEOs are often commercially oriented and believe that everyone else is too. “It is a problem that gets us into trouble because it sets simplistic behaviours”, says Kennaugh, who works with corporate leaders and elite athletes.

Using money as a reward can even make an enjoyable job feel like a chore, according to a meta-analysis of 128 controlled experiments by US Psychology professor Edward Deci and colleagues.

For every increase in reward, intrinsic motivation for interesting tasks declines by 25 percent and, when subjects know in advance how much extra money they will receive, intrinsic motivation decreases by 36 percent. (There is an argument that monetary rewards can increase motivation for boring tasks.)

“[Financial incentives] reduced creativity, diminished results, foster bad behaviour, inhibit good behaviour, and cost the business more to maintain,” says Kennaugh.

McCarthy says a badly structured incentives program will set employees against each other into a competition for the “prize money”.

“Because the message they take away from that [structure] is that it is not so much how you perform, but how you compare that counts.

“So now, people are focused on a competition, which requires people to win and lose.” You achieve the goal to win and create losers by not sharing information with them, he says.

Kennaugh says efforts to restructure incentive programs have to meet the “fairness test”.

A 2012 global study by PwC and the London School of Economics and Political Science finds “… executives are content as long as they are paid what they consider to be ‘fair’ within the hierarchy of their own company, and comparably against those on a similar level in competitor companies, to the extent that it almost becomes irrelevant how much they are paid”.

Employees will punish employers if they feel short changed, says Kennaugh.

“When it is review or bonus time, I am reflecting on every Sunday night that I left home to fly somewhere, every birthday party I didn’t get to, every State of Origin game I didn’t get to see and I’m not sure I have got a figure, but I have an emotional amount that, in my mind, that is what it has all been worth.

“The moment that I am not [paid fairly], I will go on some form of private strike”, he says. “And the dilemma of organisations is that they don’t own the fairness test.”

When the New Jersey police force won less than officers wanted in salary negotiations, arrest rates and average sentence length declined – indicating that police were putting in less discretionary effort.

“For a period of about 18 months after collective bargaining, the cops went on strike”, says Kennaugh.

This is a warning that employers must tread carefully when restructuring their financial incentive programs – especially when some people will be disadvantaged by those changes.

Employers should try to implement the changes in stages and think about how to deal with the fallout.

“I’d be concerned about the implications about how people are likely to manage it and retaliate. If I’ve been getting it and [I feel] it is an earned right, what are you going to give me to compensate?”

This article was originally written for The Ethics Alliance. Find out more about this corporate membership program. Already a member? Log in to the membership portal for more content and tools here.