Good Decisions. Bad Outcomes revisited
Thursday, 2 June, 2011 Leave a comment
We can’t entirely avoid outcome-based decisions. Still, we can reduce our reliance on stochastic outcomes. Here are four ways companies can create more-sound reward systems.
1. Change the mind-set. Publicly recognize that rewarding outcomes is a bad idea, particularly for companies that deal in complex and unpredictable environments.
2. Document crucial assumptions. Analyse a manager’s assumptions at the time when the decision takes place. If they are valid but circumstances change, don’t punish her, but don’t reward her, either.
3. Create a standard for good decision making. Making sound assumptions and being explicit about them should be the basic condition for getting a reward. Good decisions are forward-looking, take available information into account, consider all available options, and do not create conflicts of interests.
4. Reward good decisions at the time they’re made. Reinforce smart habits by breaking the link between rewards and outcomes.