“Organisations invariably tend to reward some employees for A while hoping for B, frequently do not detect the contradiction, and then are bewildered when their behaviour and performance are not aligned with their goals.”- Steve Kerr
“Traditional ‘carrot and stick’ incentives can achieve exactly the opposite of their intended aims.” — Dan Pink
Guinness For Strength. Picture Post, 1954
If you visit the Guinness Museum in Dublin, you’ll find an archive of old advertisements, including a memorable 1950s ad featuring a man effortlessly carrying a horse and cart across a bridge. This humorous illustration is inspired by a local Dublin tale: bridge tolls once charged for horses and carts prompted resourceful individuals to carry their carts across to avoid the fee.
Ranking Systems in Action: The AKC Example
On a recent episode of The Innovation Show, Seth Godin discussed how ranking systems influence behaviour. In This is Strategy, he highlighted how organisations such as the American Kennel Club (AKC) confer status on purebred dogs, making them valuable. This system, however, drives unintended consequences such as inbreeding and overwhelmed shelters filled with unsold or rejected puppies. Much like Dublin’s toll system, ranking systems shape behaviour in both expected and unforeseen ways.
These examples underscore how human behaviour is driven by incentives and penalties — whether in pursuit of pleasure or avoidance of pain, including social acceptance and rejection. When faced with obstacles — such as tolls or corporate structures — people often adapt in unexpected ways, sometimes bypassing the intended rules entirely.
Domino’s and the Cost of Speed: A Lesson in Incentives
A stark example of unintended consequences occurred in December 1993 when Domino’s Pizza faced a crisis that reshaped its strategy. For years, Domino’s promised a hot, fresh pizza within 30 minutes or it was free. While this guarantee helped them dominate the market, it also created unintended risks. A tragic accident in St. Louis, where a Domino’s driver, rushing to meet the guarantee, caused a serious collision, resulted in a $79 million jury award against the company. The incident highlighted the dangerous disconnect between corporate incentives and public safety, forcing the company to reconsider its priorities.
Most organisations implement incentive programs to align employee behaviour with corporate goals through bonuses, vacations, promotions, or recognition. While these programs can be effective, the Domino’s case serves as a cautionary tale of how well-intentioned rewards can backfire.
Steve Kerr’s On the Folly of Rewarding A, While Hoping for B highlights how organisations frequently design incentives that inadvertently encourage behaviours contrary to their aspirations. This misalignment can significantly hinder innovation and long-term success.
Understanding the psychology behind incentives is crucial for leaders aiming to foster the right culture and behaviours. People will always find a way to optimise their outcomes based on the incentives placed before them. This has disastrous consequences for organisations hoping to build a culture of Innovation.
A Common Internal Monologue (Rarely Outspoken)
An Internal Debate
Ram Charan’s “The Attacker’s Advantage” offers a vivid illustration of how rigid quarterly or annual targets can stifle innovation. In many companies, employees know the market is changing, but they feel constrained by near-term financial metrics. Even if someone spots a strategic opportunity, pursuing it might hurt their immediate performance goals — and thus their bonus or promotion chances. This tension discourages both adaptability and reinvention.
One manager, Mary, describes the dilemma in a passage from the book:
“We’ve got targets to meet under really tough conditions, and we’re locked into quarterly and annual budget commitments that are non-negotiable. Wall Street, the board, and the media will slam our CEO if he doesn’t deliver the numbers, and all of our commitments feed into that. The only time we could justify changing things is if we had a crisis in production or a loss of a major customer or were let down by a major supplier. So we’re too busy to watch for bends in the road or speculate about what we could do to change the game. Even if the resources were available, the incentives are all wrong. Say that Matt here sees a bend in the road just ahead and figures out a great strategy to deal with it. Executing it will cut into his numbers for the year, and there go his targets, his bonus, and any chance of being promoted. So what can we do? We might be flexible as individuals, but how can we move on opportunities we see when the organisation itself makes us rigid — and for that matter, what does it mean for an organisation to be agile and flexible?”
From “Strategy Beyond the Hockey Stick”
As Charan explains, Mary put her finger on a tough issue: it’s one thing to know that the external landscape is an ever-shifting mosaic, and quite another for leaders to connect their everyday activities to those changes. Yet doing so is the only way to ensure that the organization stays relevant and preferably on the offense. Leaders have no choice but to steer their organisation to adjust in real time and take control of uncertainty.
This example illustrates a common corporate paradox where the drive for immediate financial results overshadows long-term strategic innovation.
SonoSite: A Case Study in Reward Misalignment
A Sisyphean Effort
“The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies.” — Clayton Christensen
In “How Will You Measure Your Life”, Clayton Christensen and co-author and friend of the show, Karen Dillon provide a compelling example of how incentives can hinder disruptive innovation. SonoSite, a company specialising in handheld ultrasound machines, faced internal resistance despite having a promising new product. Their smaller, more affordable device, the iLook, was highly portable and generated thousands of sales leads within weeks of its launch. However, the sales team prioritised the larger, more expensive Titan model, which offered higher commissions and margins.
Kevin Goodwin, SonoSite’s CEO, witnessed this firsthand when he accompanied a top salesperson to a client meeting. Despite Goodwin’s repeated prompts, the salesperson ignored the iLook in favour of the Titan. The reason was clear — sales incentives were structured around immediate profitability rather than market disruption. As Christensen pointed out, the organisation’s reward system was effectively dictating behaviour, reinforcing the status quo instead of embracing change.
This example highlights the critical need for organisations to align incentives with strategic objectives to ensure innovation isn’t stifled by short-term financial motivations.The answer lies with the incentive theory of motivation, in essence, that the best way to predict behaviour was to understand incentives. We tend to do what we are rewarded for. In this case, the salesman was doing what he believed was best for himself and the company. By selling the Titan he achieved higher margins for the company and thus higher commissions for himself. As Christensen and Dillon conclude, “It was much easier for Goodwin’s best salesman to sell one of the laptop-size ultrasound machines than it was to sell five of the little products. In other words, Goodwin thought that he was giving clear instructions into the salesman’s ear. But the compensation system was shouting the opposite instructions into his other ear.”
Eric von Hippel’s Manufacturing Insight
A similar dynamic was highlighted by Eric von Hippel in a recent conversation for The Innovation Show. He recalled a project where a brilliant innovation was ready for deployment, yet it was the head of manufacturing who resisted. Eric told us:
“I remember well, there was an amazing innovation that we did for a company. The head of manufacturing was saying, ‘No, no, keep it in the lab. It’s not ready yet.’ Well, it was ready. So, I went out and had a beer with him and said, ‘What the heck is going on here? I’m not going to tell your managers, but really, what’s going on?’ And he said, ‘Some years ago, we had a high scrap rate, so management put in a special bonus for me that I can get if I lower scrap rate. And every time we put in a new product, the scrap rate goes up. So I ain’t gonna do that, right?’”
These stories hold important considerations for leaders. Executives must ask themselves, “What do those who resist change have to lose by the change we wish to implement?” Is it a loss of status, power, or personal reward? We must heed the words of Upton Sinclair:
“It is difficult to get a man to understand something when his salary depends on his not understanding it.”
Conclusion: Realigning Incentives for Future Success
The current business environment demands agility, reinvention and innovation, qualities often at odds with traditional reward systems focused on maintaining the status quo. Organisations must reconsider incentives to support forward-thinking goals, fostering an environment where innovation can thrive.
Leaders should reflect on whether their reward structures truly support strategic aspirations or inadvertently reinforce outdated practices. Are their incentives encouraging progress or hindering it?
Join us at The Reinvention Summit to hear from brilliant thinkers including Seth Godin , Rita McGrath, Alexander Osterwalder, Elvin Turner, Michele Wucker and many more, April 29th and 30th, Dublin, Ireland.
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Rewiring Reward: Rewarding Change was originally published in The Thursday Thought on Medium, where people are continuing the conversation by highlighting and responding to this story.
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