Can you incentivise ethical behaviour?

In the wake of the Financial Services Royal Commission, many employers are asking whether they should award bonuses to people who choose to do the right thing.

Boards and CEOs are discussing whether people need an incentive to make ethical decisions and how “ethical incentives” could avoid the risk of encouraging unintended behaviours.

Incentives have a tarnished reputation, with poorly-constructed programs blamed for driving a culture of greed in banks and insurance companies. The international anti-corruption organisation, Transparency International, says performance incentives should not just focus on getting sales, for instance, but also consider how those sales are achieved.

“ … incentive schemes should move beyond mere alignment with values and ethical codes and actively encourage ethical behaviour,” according to the authors of Transparency International’s 2015 report Incentivising Ethics: Managing incentives to encourage good and deter bad behaviour.

“This means that they should not be based solely on financial targets, but should contain non-financial targets that reflect and drive ethical behaviour. Ultimately, this mix of incentives should support the long-term sustainability and success of the company.”

Senior principal advisory at research company Gartner, Arj Bagga, says the Royal Commission has sparked many conversations with his clients, who want to know if they can use ethical behaviour as a measure in the “performance systems” they use to encourage the best work from their people.

A limit on rewards?

Bagga says they can – but within limits. Financial rewards or goods (such as restaurant vouchers) are only effective up to the value of $300, he says.

“Anything over $300 has an incrementally lower benefit on employee performance.”

The reason for this is that financial rewards are an “extrinsic” motivator, meaning that it comes from outside the person, and are much less effective than an “intrinsic” motivator (an inner desire).

“After $300, it starts to extrinsically motivate them too much, whereby they just associate ethical behaviour with financial reward, which is not what you want,” says Bagga.

“You actually want them to be intrinsically-motivated, because, if you remove the reward down the line, because of cost cutting or whatever it might be, employees will then stop acting ethically, just because they’re not being rewarded.

“What we want to do is have a balance between the intrinsic and extrinsic motivation.”

Recognition vs cold hard cash

The most intrinsic powerful motivator is recognition – commending people for their ethical behaviour. Such public recognition can increase employee performance by up to 3 per cent, he says.

However, the effect of that recognition can be supercharged by attaching a financial reward “which we found can increase performance by a further 5 per cent”.

While research has shown that the effectiveness of financial rewards can quickly fade, Bagga says the impact of the small reward can be sustained by using ethical behaviour as a measure in performance reviews.

Because their promotions depend on it, people will continue to try to display the desired behaviours, he says.

Making the right choice

A further question is how to identify ethical behaviour, when it is essentially just doing what would be expected of a decent person. Bagga says managers can reward those instances where people make ethical choices in situations where there is no clear answer.

This could be when, for instance, a salesperson sells a product that earns a lower commission, or no commission, but is a better choice for the customer.

Transparency International, while supporting the use of incentives, points out some of the risks around trying to identify and reward ethical behaviour: the measures are subjective, corrupt employees may be convincing actors, not all ethical acts will be recognised which could cause resentment, and discussion about behaviours may lead to some difficult performance review discussions.

Bagga says ethical behaviour is a good business strategy. If organisations can ensure their people recognise what ethical behaviour is, adopt an ethical mindset and then act upon it, they can increase employee performance by up to 12 percent, he says.

Short term pain, long term gain

Some employers may not be sympathetic to the idea their people forego revenue as they look for the best option for customers. However, Bagga says that view would be myopic.

“It may impact you in the very short term but, longer term, it will actually increase your brand awareness in the marketplace and it will increase your ability to attract talent,” he says.

“In Australia, specifically, ethical behaviour is one of the core reasons a person chooses to join an organisation.”

Australian survey respondents rank “ethics” and “respect for the organisation” higher than manager quality and future career opportunity when they are assessing career paths.

Bagga says that it is not just the financial services companies that are interested in the idea of “incentivising” ethical behaviour.

“I’ve also had conversations with mining companies and telecommunications companies, who are trying to get on the front foot of this and make sure they are bullet proofing themselves against any unethical behaviour that could occur in their organisations because they understand, through the Royal Commission, what the implications of those could be on the performance of their business and the perception of their brand.”

Cashless recognition

• Introducing ethics and values measures into performance reviews
• Good ethical conduct being a prerequisite for promotion.
• Spot awards for good ethical practice, recognising special contributions as they occur, usually over a relatively short-term period.
• Awards for people who speak up or challenge questionable conduct.
• Recognition and/or prizes for people who excel in ethics and compliance training.
• Recognition for outstanding contribution to the ethics and compliance programme.
• A company-wide ethics award scheme.
• Coverage of examples of good ethical or anti-corruption practice in the company newsletter.
• Thank you letters from the CEO or senior managers for people who display ethical behaviour.
• Dinner with the CEO as a prize for people who demonstrate ethical behaviour. 

Source: Transparency International

This article was originally written for The Ethics Alliance. The Alliance is a community of organisations sharing insights and learning together, to find a better way of doing business.