Individual vs Organisational incentives

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Thinking About Incentives

Organisations use incentives to influence how people prioritise tasks and make decisions. Incentives can be rewards or punishments, and the same incentive can be used in either capacity. For example, bonuses are usually used as rewards for good performance. In practice, especially outside revenue‑generating roles, bonouses are often used as punishments, with the threat of losing a bonus used to discourage poor performance or unwanted behaviour .

Incentives typically fall into three categories.

·         Formal incentives are contractual and include salary, bonuses, and stock options.

·         Semi‑formal incentives are not contractual but carry status and social value. Examples include invitations to events, having a private office or preferred seat, better equipment, or higher expense limits.

·         Informal incentives arise from peer pressure and shared expectations about how people should behave.

Informal incentives also arise from outside the workplace. These include expectations set by clients, professional bodies, or peer groups, as well as individuals’ personal values, ambitions, desire for status, or fear of failure.

Why Risk Frameworks Miss the Human Element

Risk teams usually have limited visibility of formal incentives and often do not test whether those incentives work as intended. Semi‑formal, informal, and personal incentives are frequently ignored altogether by risk frameworks. Control frameworks tend to assume people follow processes robotically. However, during periods of stress or change, individuals' behaviour often diverges from what the framework expects.

Example: When Manager's Goals Don't Align with the Organisation

A study[i]  of an Indian garment manufacturer showed how managers' personal goals can conflict with the company's objectives. The study looked at how managers decided which supervisors received soft-skills training and the long-term effects on productivity and staff retention.

Training increased productivity overall, but the biggest gains came from teams led by supervisors who were less strongly recommended for training. Meanwhile, highly recommended supervisors showed smaller productivity gains but were more likely to stay with the company. This suggests managers were using training to retain high‑performing supervisors they believed were at risk of leaving.

From the managers’ perspective, this behaviour was rational. Losing good supervisors creates disruption and extra work, because managers must recruit and train replacements. Whilst using training as a perk reduced turnover , it failed to maximise organisational productivity as high‑performing supervisors already had the skills the training provided.

A better approach would have been to give training to weaker supervisors, where it had the most impact, and use a cheaper alternative reward to retain top performers. One way to improve the mood of the unhappy high-performing supervisors might have been to offer them an internal move.  This would benefit the organisation as a whole, but would be likely to conflict with managers’ personal and financial incentives.  This is supported by research looking at managers at a different manufacturing firm[ii] which found that workers’ applications for internal promotions more than doubled during the periods where their managers were in the process of moving to new positions.

It is not the risk team’s responsibility to teach basic management theory. The reason for exploring these points is that predictable, rational human behaviour is often ignored when risk teams challenge business decisions and assess control framework effectiveness.

How Loss Framing and Fear of Failure Affects Decisions

Organisations use frameworks in decision-making to balance risk and reward, but individuals' risk appetite often changes based on recent successes or failures. After poor performance, people may take more risk to avoid or recover losses. Research has shown that an individual is more likely to increase risk taking behaviour in response to a potential loss, with less of an impact (and maybe even a negative impact) in response to a realised loss.

In well‑governed environments, independent review and collective decision‑making help limit individual bias. Where governance is weak or decisions must be made quickly, personal incentives are more likely to override organisational interests.

Finance Example

For investment managers, losses are often classified at fixed reporting dates rather than when an asset is sold. This can encourage higher risk‑taking before reporting deadlines to offset unrealised losses, followed by more cautious behaviour once losses are formally recognised.

Academic research has shown that this “gain versus loss” framing can produce significant variations in decision-making for problems with identical pay-offs. 

Premier League Footballers

Premier League footballers face similar trade‑offs under extreme pressure. A poorly timed tackle can result in free kicks, cards, or penalties, all of which reduce the team’s chance of winning[iii]. Studies[iv] show players commit more irrational fouls when defending a lead or after losing possession themselves. Players commit 12% more irrational fouls when defending a lead (an attack is seen as an unrealised loss that leads to increased risk taking behaviour).  However, when an individual mistakenly gives the ball away to an attacking player they are 132% more likely to foul the player to stop an attack. This highlights how powerful individual loss framing can be compared with organisational loss framing.

Project Management

Clashing incentives can come from individuals attempting to protect their reputation during periods of poor performance.  This can be particularly tricky for risk teams to point out in an organisational context.

When projects struggle, managers frequently focus on delivering on time rather than on long‑term value. Research has observed that project managers will often prioritise actions that protect their personal reputation over the organisation’s interests, “particularly if they do not anticipate working with project partners again.”[v]

Impact of Stress

Stress can also impact how an individual makes decisions.  It narrows attention and reduces sensitivity to wider signals”[vi]. Under pressure, people tend to focus on tasks they can control, consider most important, or enjoy the most. This helps them maintain productivity and morale in the short term. However, most organisational work is collaborative, and this narrowing of focus can undermine broader business outcomes.

Context Matters

Organisations often tend to ignore the broader organisational context in which a decision is made when scoping, reviewing and challenging a proposal.  Decisions made under pressure or from a position of weakness are often treated in the same way as decisions made from a position of strength.  This can lead to absurd outcomes:  You will buy a different pair of shoes if you are in comfortably footwear on a sunny day with £200 in your pocket than you will with £30 on a rainy day wearing a pair with holes. Similarly, individuals with strong organisational social capital may make different decisions to those with weak social capital.

Challenges for Risk Teams

None of this should be surprising.  What is surprising, to me at least, is that risk frameworks often ignore these human dynamics.  Organisations rely on rules and monitoring to control behaviour, but such controls frequently fail under pressure.  And we should expect them to: you can write “don’t foul an opposition player in the last third of the pitch” in a player’s contract, but when 40,000 fans are screaming at you because you lost the ball, you are going to stop the resulting attack in any way you can. While conflicts between individual and organisational incentives are predictable at a group level, they are hard to predict at the individual level and politically difficult to challenge in advance.

An effective approach for incorporating these ideas into risk strategy is to build team‑level profiles. These profiles should seek to catalogue how teams define success, what tasks they enjoy or avoid, what tasks they have control over, and how they interpret gains and losses. These profiles can be used to identify where controls may break down and allows risks to be anticipated and managed more effectively. For high impact tasks where there are clear, objective measures for success, creating top-down controls to address individual vs organisational incentive clashes is appropriate. Otherwise, building an adaptive risk monitoring and management approach will generally be more effective.

These insights can also help organisations recognise where cultural strengths could become weaknesses as the organisational environment and strategy change.  For instance, a cultural bias to risk aversion and detail-focus could be a strength in a stable operating environment with a dominant product and yet become a weakness following the appearance of a disruptive competitor.

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I hope this blog sparks ideas and discussion. If you found it interesting, please share or connect with me on LinkedIn to contribute or provide feedback!

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[i] On the Allocation and Impacts of Managerial Training, Adhvaryu, Achyuta and Murathanoglu, Emir and Nyshadham, Anant, National Bureau of Economic Research, 2023, http://www.nber.org/papers/w31335

[ii] Haegele, Ingrid, Talent Hoarding in Organization (February 24, 2022). Available at SSRN: https://ssrn.com/abstract=3977728 or http://dx.doi.org/10.2139/ssrn.3977728

[iii] Innerdrive blog, https://blog.innerdrive.co.uk/sports/impact-of-red-cards-on-footballers

[iv] Rational Fouls? Loss aversion on organizational and individual goals influence decision quality

Henrich R. Greve henrich.greve@insead.edu, Nils Rudi, and Anup WalvekarView all authors and affiliations, Volume 42, Issue 7, https://doi.org/10.1177/0170840619878462

[v] McGivern, Gerry. “The Silent Politics of Temporal Work: A Case Study of a Management Consultancy Project to Redesign Public Health Care.” Organization Studies, SAGE Publications, 2017.

[vi] Gill, M. J., & Burrow, R. (2018). The Function of Fear in Institutional Maintenance: Feeling frightened as an essential ingredient in haute cuisine. Organization Studies, 39(4), 445-465. https://doi.org/10.1177/0170840617709306