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We Get What We Incentivize

Thom Ruhe on March 31, 2009 Source: e360 Blog

Over the last two decades, I have been involved in several entrepreneurial endeavors that employed over a thousand people collectively. I have interviewed and hired many over that period of time, including negotiating compensation packages. The one thing I have learned from doing that is, you get the kind of behavior from people that you incentivize.

This is painfully obvious in the current economic meltdown compliments of a financial industry (and a few others) acting in their own shameless self interest, bent upon immediate gratification at the expense of creating any long-term value. Who could have guessed giving a half million dollar mortgage to a person with little to no income, low or non-existent credit, without any money of consequence as down payment could lead to problems?

Which is to say nothing about leveraging such worthless devices in convoluted credit default swaps bought and sold by ‘experts’ that were either recklessly ignorant about the construct or willfully (and I hope some day to be proven criminally) turning a blind eye, all the while raking in bonuses that were paid independent of the overall profitability of the parent organization. On what planet does that make sense!?

The better question however is how this came to pass? And the answer is not really as complicated as many would like to make it out to be. In most cases, the mortgage industry was incentivizing volume of loan originations over quality. In the get rich quick ethos that led to the fall we all are now bailing out, people were paid for churning paper, regardless of the ability of the applicant to service the debt.

Now all of the blame doesn’t rest there. Political correctness should also get some credit here thanks to the race baiting bombastic rhetoric of policy makers that were shamelessly pandering to the interests of uniformed constituents that made for great uniformed clients - of the very groups that were funding said politicians at the time.

It was all very cozy and encouraged with a wink and a nod; current moral outrage and fist pounding rhetoric notwithstanding. Those who opposed these sleazy practices at the time were labeled racists for not wanting the same American Dream for all citizens. So many retreated lacking the conviction of character to stand up and call it what is was – wrong and ultimately dangerous.

So it is that I am now wary of the so-called stimulus plan, the TARP, and the various and sundry bailouts being handed out. I am concerned that lost in the minutiae is a basic and fundamental discipline of understanding how the individuals that will lead the efforts to rescue these troubled industries will be compensated. The AIG bonus fiasco shined a bright light on this, but we are unfortunately lacking the stamina, and in many cases, the qualified personnel to evaluate such intricacies influencing many other companies bellying up to the public trough.

Imagine if you will, if the SEC would be empowered to pay investigators competitive wages to Wall Street players. Imagine if they could receive six and seven figure bonuses for uncovering fraud and corruption. Ask any one of Bernie Madoff’s victims if they would have minded paying a government employee a million dollar bonus for discovering his deceit several years ago.

We need to start incentivizing good behavior over bad. We have to be smarter in rooting out systems that still reward rampant self interest at the cost of unsuspecting others. We need to get back to understanding that wealth creation comes from starting and building great companies that employ people and advance new innovation and productivity. This had been the backbone of our economy and our global advantage … until we lost our way. And the surest way of getting back on track is to pay people to do the right thing.

Tags:  incentivize behavior, economic meltdown, incentive pay

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