Incenting Disaster at WaMu

Posted 11.03.2008

Wamu Yesterday's New York Times featured a fascinating article on how financial incentives such as month long trips to Hawaii and negative incentives such as verbal abuse compelled mortgage underwriters at Washington Mutual to eventually tank the institution by making more and more loans to unqualified borrowers.  Kudos to Bob Sutton, author of The No-A**hole Rule, for his excellent take on the WAMU situation as a case study in how the wrong financial incentives can lead to organizational and economic ruin.

How many times have you been involved in a budgeting system that encourages business units to go after their own objectives no matter what the impact is on other BU's or the overall organization?  (Worse yet, maybe you've been the architect of a system like this.)  As both an executive and leadership adviser to lots of different organizations, I see it happen all the time and it's usually in the name of fostering accountability for results.  As Sutton points out, it's hard to come up with financial incentives that don't pit people and units against each other.  He makes the excellent suggestion of looking to non-financial incentives such as longer term financial reporting, building pride in interesting work, praise, recognition and ethical leadership.

What alternatives would make a difference in your organization?