When Your Incentive Plan Sabotages Your Strategy

Common Patterns of Misalignment

Kerr documented specific contradictions that persist across organisations:[4]

Long-term growth vs quarterly performance: Companies claim to focus on sustainable competitive advantage, but reward quarterly revenue targets that encourage short-term thinking and behaviour.

Teamwork vs individual achievement: Organisations espouse collaboration whilst paying bonuses based purely on individual metrics, making cross-functional cooperation financially penalising.

Innovation vs risk avoidance: Companies talk about innovation culture whilst performance systems punish any failure that comes from experimentation, making safe mediocrity the rational choice.

Strategic customer focus vs any revenue: Firms articulate clear target markets and ideal customer profiles but treat all revenue as equal in compensation plans, encouraging salespeople to chase any deal rather than strategic customers.

Capability building vs current productivity: Organisations claim developing people is a priority, whilst measuring managers purely on current output, making talent development a luxury that hurts bonus calculations.

Why Incentives Always Win

When incentives conflict with strategy, according to Kerr’s framework, incentives win every time. Not because people are greedy or unethical, but because they’re logical.[5]

If you tell someone that collaboration matters while paying them for individual results, you’ve created a test of integrity versus mortgage payments. Integrity loses. If you emphasise strategic customer focus whilst counting any revenue equally in the quota, you’ve made strategic discipline financially irrational. People will optimise for what pays, not what the strategy deck says.

This creates what Kerr terms “the Folly” – a systematic gap between what organisations hope people will do and what they’re actually paying people to do. The result isn’t that people are lazy or difficult. The result is that rational people optimise for what gets rewarded.

The Solution Framework

Kerr’s research suggests three fundamental shifts required to align incentives with strategy:[6]

Accept imperfect measurement: Some strategic priorities can’t be perfectly quantified. That doesn’t make them unimportant – it makes measurement design harder. Rather than abandoning strategic priorities because they resist clean metrics, organisations must use approximations, qualitative assessments, and peer feedback to capture progress on these dimensions.

Lengthen time horizons: If a strategy requires three years to build a competitive advantage, annual bonus cycles create misalignment. Effective incentive redesign incorporates longer-term performance measures – multi-year vesting, rolling performance windows, or retention mechanisms that tie rewards to sustained outcomes rather than quarterly results.

Audit current systems honestly: This means asking not “what do we say we value?” but “what behaviours does our current compensation plan actually incentivise?” The gap between those answers reveals the dysfunction. Kerr argues that organisations which successfully align incentives conduct this audit before launching strategy changes, recognising that compensation systems shape behaviour more powerfully than mission statements ever will.

David Rock: Why Incentive Changes Trigger Neurological Threat Responses

The Brain Science of Resistance

Understanding intellectually that incentives conflict with strategy is straightforward. Actually changing what you pay people to do triggers intense resistance – even when everyone agrees the current system is dysfunctional. David Rock’s neuroscience research explains why: incentive redesign activates the same neural networks as physical threats.[7]

According to Rock’s research, the brain treats social threats with the same circuitry it uses for physical threats. When someone perceives their compensation is at risk, their amygdala activates, cortisol floods their system, and cognitive function narrows. They literally cannot think as clearly about strategic rationale because their brain has shifted into threat-response mode.[8]

Rock’s SCARF model identifies five domains of social experience that activate powerful threat or reward responses: Status, Certainty, Autonomy, Relatedness, and Fairness. His research demonstrates that incentive redesign typically triggers threats across all five domains simultaneously, which explains why compensation conversations become so emotionally charged.[9]

The Five Threat Domains

Status: Relative Importance and Value

Status relates to relative importance compared to others. According to Rock, the brain constantly monitors social standing, and any perceived decrease in status activates intense threat responses. When organisations propose changing compensation systems, people immediately worry: will I be valued less? Will my contributions count for less? Will I drop in the organisational pecking order?[10]

This threat is particularly powerful because compensation is one of the few tangible status markers in organisations. Rock’s research shows that even people who claim they don’t care about money become defensive when compensation changes threaten their relative standing. It’s not greed – it’s the neurological response to status threat.

Certainty: Predicting Future Outcomes

Certainty refers to the brain’s need to predict future outcomes. Rock argues that the brain is fundamentally a pattern-recognition and prediction machine. Uncertainty about the future activates threat responses because unpredictability historically meant danger.[11]

Current compensation systems, however dysfunctional, are known and predictable. New systems are uncertain and therefore threatening. According to Rock’s framework, this explains why people resist incentive changes even when they acknowledge the current system doesn’t work. A known dysfunction feels safer neurologically than an uncertain improvement.

Autonomy: Control Over Circumstances

Autonomy concerns the sense of control over one’s environment and circumstances. Rock’s research demonstrates that perceived loss of autonomy triggers powerful threat responses. When leadership announces new compensation approaches without involving people in the design, it activates an autonomy threat. People feel something is being done to them rather than with them.[12]

This matters for incentive redesign because changes to how people are evaluated and rewarded directly impact their sense of control over their professional future. Approaches that involve people in the redesign process reduce autonomy threat by giving them influence over outcomes that affect them.

Relatedness: Trust and Connection

Relatedness refers to a sense of connection and trust with others. Rock argues that the brain constantly assesses whether others are “in-group” or “out-group.” In-group members are trusted; out-group members are viewed with suspicion. When leadership proposes changing compensation, it can activate relatedness threat if people feel leadership is operating from different interests than those of employees.[13]

This explains why compensation changes proposed by finance or HR alone often face maximum resistance. People perceive these groups as out-group – representing organisational interests rather than individual interests. Relatedness threat makes people suspicious of the stated rationale for changes.

Fairness: Just Exchanges Between People

Fairness relates to the perception of just exchanges between people. Rock’s research shows that fairness violations activate the same brain regions as physical disgust. Even small perceived inequities trigger disproportionate emotional responses.[14]

Incentive systems are essentially fairness mechanisms – they define what contributions are valued and how rewards are distributed. Any change to compensation immediately raises fairness concerns: is this equitable? Will some people benefit whilst others lose? Are the new metrics fair assessments of contribution?

Managing Threat Responses During Redesign

Rock’s framework offers specific guidance for managing these threat responses during incentive redesign. The key insight is that threat responses are largely automatic and unconscious – people don’t choose to become defensive, their brains automatically activate threat mode.[15]

For Status: Make the purpose of redesign about elevating everyone’s status through better strategic outcomes, not redistributing status between individuals. Frame it as “raising all boats” rather than winners and losers. Explicitly acknowledge people’s past contributions and clarify that the redesign isn’t about diminishing anyone’s value.

For Certainty: Provide far more detail about the new system than seems necessary. People need to understand exactly how they’ll be evaluated, what behaviours will be rewarded, how metrics will be calculated, and what success looks like. Uncertainty amplifies all other threats, so overcommunicating details reduces overall threat response.

Rock also suggests piloting changes or implementing them in phases. This allows people to experience the new system whilst maintaining some connection to the old, reducing uncertainty about outcomes.

For Autonomy: Involve people in the redesign process. Not token consultation, but genuine influence over design decisions. When people participate in creating the solution, they maintain a sense of control even when the outcome differs from their initial preference.

This doesn’t mean everyone designs their own compensation – that would create chaos. But it means creating working groups that propose solutions, gathering input on design tradeoffs, and testing approaches with real teams before full implementation.

For Relatedness: Ensure that multiple groups – not just HR and finance – are visibly involved in redesign. When people see peers from their own functions participating, it reduces in-group/out-group dynamics. Leaders must also be transparent about their own interests and constraints.

According to Rock’s research, sharing the genuine tensions in the redesign process can actually increase trust. When leaders acknowledge “we’re trying to balance strategic needs with fairness to individuals, and here’s why that’s difficult,” it creates relatedness rather than suspicion.

For Fairness: Process fairness matters as much as outcome fairness. People can accept outcomes they don’t prefer if they believe the process was fair. This means clear criteria for decisions, consistent application of principles, opportunity for voice to be heard, and transparent rationale for final choices.[16]

Rock’s research also shows that fairness violations in one domain can undermine the entire system. If base compensation is perceived as unfair, no amount of strategic bonus design will drive motivation.

Daniel Pink: Rethinking How Incentives Work

The Fundamental Challenge to Traditional Thinking

Daniel Pink’s research challenges the basic assumptions underpinning most compensation philosophy. According to his analysis of decades of psychological research, the carrot-and-stick approach that drives most bonus plans is not just ineffective for complex work – it’s often counterproductive.[17]

Pink argues that traditional incentive systems were designed for algorithmic tasks with clear rules and straightforward paths to solutions. For routine work with obvious steps – processing transactions, assembling widgets, following scripts – financial incentives work reasonably well.

But most strategic priorities that Growth-Mandate CEOs need to execute – innovation, collaboration, customer relationship building, capability development – are what Pink calls heuristic tasks. These require creative problem-solving, judgment, and intrinsic motivation.[18]

When Incentives Backfire

For heuristic tasks, Pink’s analysis of the research shows that external rewards can actually reduce performance. This isn’t motivational philosophy – it’s documented experimental psychology. Studies demonstrate that when tasks require cognitive flexibility, financial incentives narrow focus, reduce creativity, and encourage shortcuts that undermine long-term value creation.[19]

Why? Because explicit if-then rewards (“if you do X, then you get Y”) trigger a specific psychological response: narrowed attention, focus on the reward rather than the work itself, and motivation to achieve the target through whatever means necessary – including gaming the system.

When you tell salespeople, “you’ll get a bonus for closing deals,” you get behaviour focused on closing deals. Whether those deals serve strategic priorities, whether customer relationships suffer, whether long-term account potential is sacrificed – these considerations become secondary to the metric that drives the bonus.

The Alternative Framework: Autonomy, Mastery, Purpose

Pink’s framework centres on three intrinsic motivators that drive performance on complex work: autonomy, mastery, and purpose. According to his research, these three factors predict sustained high performance more reliably than financial incentives do – especially for the strategic behaviours that restart stalled growth.[20]

Autonomy means giving people control over tasks, time, technique, and team. Pink’s research shows that strategic execution requires judgment calls that can’t be scripted. When people have autonomy to solve problems within strategic constraints, performance improves. When they’re tightly controlled by rigid incentive formulae, creativity suffers and gaming behaviour emerges.[21]

The compensation implication is significant. Incentive plans that overly specify exactly how to achieve strategic outcomes – down to precisely measured weekly activities – undermine the autonomy needed for strategic adaptation. Better approach: clarify the strategic outcome, measure progress toward it, but give people flexibility in how they get there.

Mastery is the drive to improve at something that matters. Pink argues that people are intrinsically motivated to develop competence in valuable skills. But traditional incentive systems often reward short-term output over skill development, creating a tension that undermines both motivation and capability building.[22]

If you want managers to build coaching skills, or sales teams to develop consultative selling capabilities, or product teams to master design thinking, the incentive system must reward the learning process, not just immediate productivity. This means longer performance time horizons and assessments that value capability development alongside current output.

Purpose is a connection to something beyond oneself. Pink’s research shows that people are more motivated when their work serves meaningful goals they believe in. This is where strategy-incentive misalignment creates the deepest dysfunction. If people intellectually understand the strategic priorities but are financially incentivised to ignore them, purpose motivation collapses.[23]

Practical Redesign Principles

Pink’s framework offers specific guidance for rethinking incentive approaches:[24]

Remove demotivators first: Perceived unfairness in baseline compensation is so demotivating it overwhelms other factors. Before trying to incentivise strategic behaviour through bonus complexity, ensure people believe their base pay is equitable relative to their peers and the market.

Shift from if-then to now-that: If-then rewards (“if you do X, then you get Y”) work for algorithmic tasks but reduce performance on heuristic tasks. Now-that recognition (“now that you’ve achieved this strategic outcome, here’s acknowledgement”) celebrates success without creating the perverse incentives that if-then systems generate.

Use team and organisational metrics for collaborative priorities: This is critical. Most strategic objectives – customer success, innovation, cross-functional execution – are inherently collaborative. Individual incentives for collaborative outcomes create exactly the dysfunction Kerr documented.

According to Pink, the solution isn’t avoiding financial incentives for collaboration – it’s structuring them as shared team or organisational metrics rather than individual metrics. When collaboration creates value, the people who collaborated should share in that value through team-based incentives. This aligns financial rewards with collaborative outcomes.

What doesn’t work is paying individuals to “be collaborative” measured by activity metrics they can game, or worse, paying them for individual functional performance whilst hoping they’ll collaborate anyway. The key is ensuring incentives reward the collaborative outcome, not individual activity that might look collaborative.

Reserve individual financial incentives primarily for clearly measurable individual contributions that don’t require coordination. Use team and company performance measures for strategic priorities that require genuine collaboration.

Recognise that incremental financial incentives have diminishing returns: Once baseline compensation is fair, according to Pink’s analysis of the data, incremental financial incentives don’t produce incremental strategic performance. What produces performance is autonomy, mastery, purpose, and – critically – removing obstacles that prevent people from doing their best work.[25]

This last point connects directly back to incentive alignment. Misaligned incentive systems are themselves obstacles. When people know strategically they should collaborate but financially they’re rewarded for protecting territory, the incentive system is literally preventing them from doing their best work. Removing that obstacle by aligning incentives isn’t about dangling bigger carrots – it’s about eliminating a source of internal conflict that undermines intrinsic motivation.

How These Perspectives Connect

Kerr, Rock, and Pink converge on a sobering reality: most incentive systems actively sabotage strategy execution. But their frameworks also provide a comprehensive approach to fixing the problem.

Kerr gives us the diagnosis: organisations systematically reward behaviours they don’t want, whilst hoping for behaviours they don’t incentivise. The solution starts with an honest audit – what does our current system actually reward? – followed by systematic redesign to align incentives with strategic priorities.

Rock gives us the neurological explanation: changing incentives triggers five simultaneous threat responses (Status, Certainty, Autonomy, Relatedness, Fairness) that make people defensive even when they intellectually agree that change is needed. The solution is designing the change process itself to minimise threats across all five SCARF domains.

Pink gives us the philosophical grounding: for complex strategic work, traditional carrot-and-stick thinking is limited at best and counterproductive at worst. Focus on fair baseline pay, team metrics for collaborative priorities, and intrinsic motivators (autonomy, mastery, purpose) rather than ever-more-complex bonus formulae.

Together, these frameworks suggest that effective incentive alignment is part diagnostic audit, part neuroscience-informed change management, and part rethinking what motivation means for strategic work.

What You Can Do This Week

1. Conduct an Incentive Audit

Map your current compensation system against your strategic priorities. Create a simple matrix:

• Column 1: Strategic priority (e.g., “cross-functional collaboration,” “long-term customer relationships,” “innovation,” “capability building”)

• Column 2: What our current incentive system actually rewards

• Column 3: Level of conflict (high/medium/low)

Don’t ask “what do we say we value?” Ask “if someone wanted to maximise their bonus, what behaviours would they exhibit?” If those behaviours conflict with the strategy, you’ve found your misalignment.

Involve your CFO and CHRO in this exercise, but also include frontline managers and individual contributors. They know exactly where the system creates dysfunctional behaviour.

2. Assess the SCARF Threat Landscape

Before proposing any changes, map how your redesign will be perceived across the five SCARF domains:

Status: Will anyone perceive that their relative standing is threatened? How can you frame this as elevating everyone through a better strategy?

Certainty: What specific questions will people have? List every detail you’ll need to provide about the new system.

Autonomy: Who needs to be involved in the design process to maintain sense of control?

Relatedness: Which groups need visible representation in the redesign? How will you build trust that you’re considering everyone’s interests?

Fairness: What fairness concerns will arise? How can you ensure both process and outcome fairness?

Use this assessment to design your change process, not just your compensation system.

3. Identify the Biggest Misalignment (30 minutes)

From your audit, pick the single most obvious conflict between incentives and strategy. This should be:

• Clearly undermining strategic execution

• Acknowledged by multiple people as a problem

• Achievable to fix without a complete compensation overhaul

For many Growth-Mandate CEOs, the biggest misalignment is that sales compensation treats all revenue as equal, whilst strategy requires focus on specific customer segments or longer-term relationship building.

4. Form a Cross-Functional Working Group (1 week)

Create a small team (5-7 people) representing different functions to propose solutions for the biggest misalignment. Include:

• Someone from finance/HR who understands compensation mechanics

• Managers who will be affected by changes

• Individual contributors who live with the current system daily

• Someone from sales or revenue operations, if that’s where the conflict exists

Give them a clear mandate: “Redesign [specific incentive element] to align with [strategic priority] without creating new dysfunctions elsewhere.”

Set a timeline: two weeks to analyse, two weeks to propose a solution, one week for executive review.

4. Design for Autonomy, Not Activity (strategic thinking)

Review your current metrics. Are you measuring outcomes or activities? Are you giving people flexibility in how they achieve strategic goals, or scripting every step?

If your incentive plan specifies precisely how people should achieve results, you’re probably undermining the autonomy that enables strategic adaptation. Consider shifting toward measuring progress on strategic outcomes with flexibility in approach.

5. Assess Baseline Compensation Fairness (1-2 hours)

Before trying to drive strategic behaviour through bonus complexity, ensure base compensation is perceived as fair. Survey confidentiality:

• Do people believe their base pay is equitable relative to peers internally?

• Do people believe their pay is competitive relative to the market?

• Are there obvious inequities creating resentment?

If baseline fairness is questionable, fix that before attempting incentive realignment. Unfair base pay creates resentment that overwhelms any bonus calculation.

6. Question Whether Financial Incentives Are the Right Tool (strategic thinking)

For each strategic priority, ask: Is this an algorithmic task or a heuristic task?

Algorithmic (clear rules, straightforward path): Individual financial incentives can work well.

Heuristic (requires judgment, creativity, collaboration): Financial incentives can still work, but structure them as team/organisational metrics, not individual metrics.

For collaborative strategic priorities:

• DO use financial incentives tied to team or organisational outcomes

• DON’T use individual incentives for collaborative work (creates gaming and Kerr’s folly)

• DON’T measure “collaboration activity” – measure collaborative outcomes

• DO ensure people who create value together share in that value together

For capability-building priorities (psychological safety, coaching, development):

• Financial incentives are less effective

• Instead, focus on: removing obstacles, providing development resources, clarifying purpose, and recognising success publicly

7. Extend Your Time Horizon (strategic decision)

If your strategy requires multi-year capability building or customer relationships, does your bonus cycle match that timeframe? Consider:

• Multi-year performance periods for strategic priorities

• Vesting schedules that reward sustained success

• Rolling performance windows rather than annual reset

• Retention mechanisms for strategic roles

The Key Question

Before you blame people for not executing a strategy, ask yourself: What are we actually paying them to do?

If your compensation plan rewards functional delivery whilst strategy requires cross-functional collaboration, you haven’t designed an incentive problem – you’ve designed the outcome you’re experiencing.

If you pay for quarterly revenue whilst strategy requires long-term customer relationships, you shouldn’t be surprised when people chase short-term deals.

If you measure managers on current output whilst strategy requires capability building, talent development will remain a nice idea that never happens.

The question isn’t whether your people are committed or competent. The question is whether you’ve designed a system that makes strategic behaviour financially rational.

For Growth-Mandate CEOs facing stalled growth, incentive alignment isn’t a nice-to-have refinement. It’s likely one of the primary reasons growth stalled in the first place. The behaviours that caused the plateau are probably still being rewarded. Until you change what you’re paying people to do, you’re asking them to act against their own interests, whilst hoping they’ll somehow execute the new strategy anyway.

They won’t. They’ll be rational. And you’ll continue wondering why execution isn’t improving.

Redesigning incentive systems is difficult – emotionally, politically, and technically. But here’s what’s harder: executing a strategy when everyone is financially incentivised to do the opposite.

The choice is yours: align what you pay people to do with what strategy requires them to do, or continue experiencing the gap between strategy and execution, whilst wondering why people aren’t “getting it.”

They get it. You’re just paying them to ignore it.

Footnotes

[1]: Kerr, S. (1975). “On the Folly of Rewarding A, While Hoping for B.” Academy of Management Journal, 18(4), 769-783.

[2]: Kerr, S. (1995). “An Academy Classic: On the Folly of Rewarding A, While Hoping for B.” Academy of Management Executive, 9(1), 7-14. See discussion of measurement fascination.

[3]: Ibid. Analysis of short-term vs long-term outcome measurement.

[4]: Kerr (1975), pp. 774-779. Documentation of common reward-hope misalignments across organisations.

[5]: Kerr (1995), pp. 9-10. Discussion of rational response to incentive systems.

[6]: Kerr (1975), pp. 780-782. Proposed solutions for aligning reward systems.

[7]: Rock, D. (2008). “SCARF: A Brain-Based Model for Collaborating With and Influencing Others.” NeuroLeadership Journal, 1(1), 44-52.

[8]: Rock, D. (2009). Your Brain at Work: Strategies for Overcoming Distraction, Regaining Focus, and Working Smarter All Day Long. New York: HarperCollins. Chapter 4: “Control Your Context.”

[9]: Rock (2008), pp. 44-46. Introduction to the five SCARF domains.

[10]: Ibid., pp. 46-47. Discussion of Status as social threat domain.

[11]: Ibid., pp. 47-48. Analysis of Certainty and the brain’s prediction mechanisms.

[12]: Rock (2009), Chapter 6: “Maximize Your Power.” Discussion of Autonomy and control.

[13]: Rock (2008), pp. 48-49. Relatedness and in-group/out-group dynamics.

[14]: Ibid., pp. 49-50. Fairness violations and neural response.

[15]: Rock, D., & Cox, C. (2012). “SCARF® in 2012: Updating the Social Neuroscience of Collaborating With Others.” NeuroLeadership Journal, 4, 1-16. Updated applications to organisational change.

[16]: Ibid., pp. 8-12. Process fairness in organisational interventions.

[17]: Pink, D. H. (2009). Drive: The Surprising Truth About What Motivates Us. New York: Riverhead Books.

[18]: Ibid., pp. 27-43. Distinction between algorithmic and heuristic tasks.

[19]: Ibid., pp. 8-26. Summary of research on when rewards reduce performance. See also: Ariely, D., et al. (2009). “Large Stakes and Big Mistakes.” Review of Economic Studies, 76(2), 451-469.

[20]: Pink (2009), pp. 69-146. Introduction and development of Autonomy, Mastery, Purpose framework.

[21]: Ibid., pp. 85-108. Discussion of autonomy as motivator.

[22]: Ibid., pp. 109-132. Analysis of mastery and skill development motivation.

[23]: Ibid., pp. 131-146. Exploration of purpose as motivational driver.

[24]: Ibid., pp. 195-219. Practical applications and Type I toolkit.

[25]: Ibid., pp. 44-68. “The Three Laws” – discussion of when financial incentives work and when they don’t.