Incentives: the silent architect of strategy sabotage

There is a moment in the third season of The Wire when a Baltimore police commander explains how crime statistics are manipulated. You want robberies down? Reclassify them as larcenies. You want clearance rates up? Arrest people for nonsense and let the real cases rot. The system does not prioritise whether the city is actually safer. It only cares about making the numbers look good.

David Simon called it "juking the stats". I call it Tuesday morning in most companies I have worked with. If you have ever wondered why execution keeps drifting away from intent, this is usually the reason.

The brilliance of The Wire is that nobody in it is stupid. Everyone is responding, with perfect rationality, to incentives that have nothing to do with the job they were hired to accomplish. The system is functioning exactly as it was designed to. The design is the catastrophe.

Incentives do not corrupt strategy. They reveal what strategy actually is.

The salesman who covered an entire country (on paper)

I once inherited a sales operation that, on paper, appeared to be a masterpiece of lean efficiency. It consisted of one sales agent, let's call him Frank, managing a territory of 360,000 square kilometres, with over 4,000 points of sale to visit. He was paid on a commission-only basis, calculated on sell-in to wholesalers. No fixed costs, just pure accountability.

Let us do some arithmetic.

Four thousand stores. One Frank. How many shops can one human being visit in a day, considering travel time, parking, small talk with the owner, actual shelf work, and the biological necessity of occasionally eating? Ten on a good day.

Ten shops a day, five days a week, forty-eight weeks a year gives twenty-four hundred visits.

With four thousand points of sale, our tireless road warrior could not possibly visit every store even once a year.

And one unavoidable outcome: Frank optimised his effort for himself. That was not a personality trait. It was a physics meeting payroll.

So what did Frank actually do? He drove just enough to keep his own fuel costs under control. He maintained relationships with perhaps two hundred conveniently located stores. At the end of every month, he picked up the phone and called the wholesalers to collect the orders that would generate his commission.

This worked until the wholesalers figured out the game. They knew Frank needed their orders to make his commission. So they started squeezing.

"You want this order? Fine. I need an extra five per cent discount." Then ten. Then fifteen.

Frank would call me to ask for approval of the exception, offering increasingly creative explanations for why it was justified. Just this once. Because otherwise, how was he supposed to hit his numbers?

The result was predictable. The wholesalers bought at margins that made us weep and filled their warehouses with products they had no urgency to sell. Then they disappeared for months because they were sitting on enough stock to last a season. Sell-in without sell-out. The brand presence we thought we were building existed largely in our imagination.

The fairy tale everyone believed

When I took over that market, I was told a story.

A story about a scrappy operation that had built the brand from nothing through sheer hustle. An agent who knew every shopkeeper by name, who had the territory in his bones. I believed it. Everyone believed it. The story had been repeated so many times that it had acquired the weight of fact.

The moment of truth came when I convinced the wholesalers to share their sell-out data. Something the previous country managers, in a period of high growth, had never fought hard enough to obtain.

I sat with spreadsheets that told a different story entirely. The product was not moving. The presence was not there. The system had never actually functioned.

What I felt was not anger at Frank. It was shame.

Shame at the state of the brand I was supposed to be building. Shame at having inherited a fairy tale and mistaken it for reality.

Frank and the company eventually parted ways, for this and other reasons. That solved nothing, because he had never been the problem.

Frank was a rational actor responding to irrational incentives. He delivered exactly what the scoreboard measured. The scoreboard simply had nothing to do with what mattered.

What incentives actually are

When I say incentives, I do not mean bonuses.

By incentives, I mean the whole architecture of signals that tells people what behaviours are actually valued: what gets measured, what gets celebrated, who gets promoted, what gets budget, what happens to the person who delivers bad news early, what is protected when things go wrong.

Every organisation has incentives. The only question is whether they are aligned with the outcomes you claim to want.

Most CEOs do not debate this as a compensation topic. They debate it as a strategy topic. Short-term wins that mortgage the long term. KPIs rewarding the wrong behaviour. A culture that learns to stay quiet. Incentive design is governance.

If you want to align incentives with strategy, start with what the system makes rational.

The museum of perverse incentives

Frank's story is not an anomaly. Once you learn to see incentive misalignment, you start noticing it the way you notice bad lighting in a hotel room. Suddenly, it is everywhere.

The budget that must be spent. If you do not spend your entire budget this year, next year's allocation shrinks. So in November and December, smart people do dumb things. They have learned what happens to the team that comes in under budget: they get punished for being responsible. Projects get funded in Q4 because the line needs to be zeroed out. December is when strategy goes on holiday and procurement picks up the wheel.

The report that exists for protection. I have heard this from consultants who worked with public sector clients, and I have seen the same instinct in companies. Sometimes the report is not there to clarify a decision. It is there to survive a future accusation. Paperwork as body armour. "We did our due diligence." The incentive is covered.

The values that evaporate under pressure. I once watched an organisation built on ethical sourcing sprint toward a deal with a quick commerce operator notorious for treating riders as disposable inputs. Someone raised the question. The response was immediate, almost irritated: "Come on. If we start worrying about that kind of thing, we will never get anything done." The country manager was not a hypocrite. He was hitting his targets. Nobody was paying him to protect brand coherence.

When incentives and values collide, incentives win. Incentives pay today. Values tend to pay later. And metrics, applied naïvely, have a well-documented habit of distorting the system they are supposed to measure.

The slow education of your best people

The obvious costs of misaligned incentives are survivable: margin erosion, bloated inventory, initiatives that launch with fanfare and die in silence.

The hidden cost is more corrosive.

Your best people are watching. They are learning that raising a flag early is risky. They are learning that killing a doomed project can be career-limiting, while launching one is merely unfortunate. They are learning that protecting the KPI matters more than protecting the company.

This is not cynicism. It is pattern recognition. Give people a few months, and they will know what gets rewarded and what gets punished. Then they will adjust accordingly, because they are not stupid and they have mortgages.

Four questions that reveal your real strategy

1. The promotion question. What behaviours got the last five promoted people where they are? The pattern tells you what your organisation truly values.
2. The hero question. Who are the internal legends? Are they celebrated for speaking truth and killing bad projects, or for hitting numbers and never causing problems?
3. The bad news question. What happened to the last person who brought a problem to leadership early? Were they thanked, or quietly marked as "not a team player"?
4. The conflict question. When growth conflicts with margin, when speed conflicts with quality, which one wins in practice? Not in the strategy deck. In the room.

You do not need a workshop to answer these. You need honesty. And the answers will tell you more about your real strategy than any document ever could.

Rethinking the architecture

Incentive misalignment shows up as an execution problem. It is strategy execution failing in slow motion. If your incentives are misaligned, the organisation will still run. It will just run in a way that slowly betrays you, and you often notice only when the numbers force you to.

So what do you do?

Say the trade-off out loud. Every strategy contains a choice. Most leaders keep it implicit, as if naming it would make it messier. The mess already exists. Say it plainly: "This year we prioritise retention over acquisition." "This year, we choose margin over volume." People can handle hard choices. They struggle with leaders who pretend there is no choice at all.

Stop over-engineering the scoreboard. Dashboards sprout KPIs like mushrooms after rain. Scorecards become elaborate tapestries of weighted objectives. People learn to game them. Humans do that when they turn life into points. Try something simpler: one outcome metric that reflects the strategy, and one guardrail metric that prevents sabotage. Growth with a margin floor. Speed with a quality threshold. Two numbers. If your bonus plan needs a user manual, people will still find the cheat codes.

Reward the behaviour you say you want. If you want candour, make it safe. Not as a slogan, as an operating fact. What happens to the person who brings you bad news early? Are they protected, or quietly labelled "difficult"? Publicly celebrating someone who killed a bad project sends a signal that no bonus can match. People watch. They take notes.

Look for incentives that don't look like incentives. Budget allocation. Headcount approval. Access to leadership. If you want collaboration but fund functions separately, you are not asking for collaboration. You are asking for miracles. If you want speed but build approval chains with seventeen signatories, you are training people to wait.

Most incentive problems do not require a new compensation scheme. They require leaders who stop rewarding the wrong thing.

(And yes, Swiss listed companies often formalise downside mechanisms like malus and clawback in their plans, which is a step in the right direction. It still does not fix misalignment upstream.)

The Monday morning nugget

Before your next leadership meeting, ask yourself:

What behaviour is our incentive structure producing, and is that what our strategy requires? What would change next week if we actually aligned incentives with strategy, instead of hoping behaviour follows intention?

Start with what people are actually doing. Work backwards to the incentive that makes it rational. Then ask whether you designed that incentive deliberately, or whether it emerged by accident from decisions made by people no longer with the company.

The lesson that lasts

The most expensive consequence of misaligned incentives is the education you provide, day after day, to everyone watching.

New employees arrive full of energy. They observe who gets promoted and who gets sidelined. They notice what happens when someone speaks an uncomfortable truth versus when someone hits their number through unsustainable means. Within weeks, they understand. They learn what music the organisation actually dances to, beneath the official playlist.

Once people learn that lesson, they adapt. Because they want to survive.

This is how cultures replicate themselves. Not through values statements or inspirational posters. Through the daily evidence of what gets rewarded and what gets punished. Through a thousand small signals that add up to an education no one intended to provide.

Getting the incentives right will not solve all your problems. Getting them wrong guarantees your problems will be faithfully reproduced by every person who joins, long after you have forgotten you created them.

Incentives are culture in disguise.

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