Santa Clara University


Business Ethics in the News

A discussion of the week's top business ethics stories by Kirk O. Hanson, Executive Director of the Markkula Center for Applied Ethics and John Courtney Murray S.J. University Professor of Social Ethics

The following postings have been filtered by category Compensation and Benefits. clear filter
  •  VETERANS AFFAIRS: Performance-based Pay and the Law of Unintended Consequences

    Tuesday, Jun. 10, 2014


    Source: Christian Schnettelker

    It is clear that the problems at the VA go deeper than individual workers, all the way to core leadership and systemic failures. In an effort to turn the organization around during the Clinton Presidency, performance-driven metrics were introduced throughout the VA. The most important being that patients not wait more than 14 days from their preferred appointment date. But the new system created an unintended consequence: supervisors created a parallel reporting system and pressured schedulers to manipulate appointments to meet performance measures. On paper, the Phoenix facility reported an average wait of 24 days with 43% seen within the 14-day window, but an investigation uncovered an average wait of 115 days and only 16% seen within the 14-day window. How can an organization implement performance-driven metrics, but avoid the pitfalls of incentive gaming and flat out manipulation?

      Kirk: At the same time you implement performance measures you have to put an emphasis on the importance of accurate reporting and the penalties for dishonesty. In a system as large as the VA, it is inevitable that there will be those who actively game the system. Weeding out this behavior must be a top priority of management, even if it is only a few bad apples. To do so, it requires performance measures to be coupled with adequate auditing of those measures. Firms have long neglected to give “human metrics” the same attention as financial measures. It’s time to change this.

      Patrick: This is a culture problem, but in a bureaucratic behemoth such as the VA, fixing it is easier said than done. One thing is certain, when performance-based incentives are introduced without a culture of accountability, misconduct and scandal will soon follow. Going forward, steps need to be taken to maintain the integrity of the metrics, but perhaps more importantly, legislators and management must have realistic expectations. The VA backlog has been a long-time coming, and this is what you get when you try to wish a problem away.

    The problem at the VA: 'Performance perversity' (LA Times)

    A Framework for Thinking Ethically (Markkula Center)


    NEXT POST: How far does "for the sake of the customer" go?

  •  LLOYDS BANKING GROUP: The Pitfalls of Performance-Based Pay

    Monday, Dec. 16, 2013

    Wednesday, Lloyds Banking Group was fined £28 million ($46 million) by the U.K. Financial Conduct Authority for “serious failings” in the bonus and pay structure for its sales staff. The incentive structure, which ranged from substantial pay increases (and cuts), cash bonuses, and even bottles of wine, resulted in widespread instances of sales representatives pushing products that customers did not necessarily want or need. The FCA said that the incentive structure was so extreme, at times increasing or cutting a sales representative’s pay by 50%, that sales staff were likely driven to sell ill-suited products to customers. The FCA also expressed concern over a conflict of interest, as sales managers, whose compensation was tied to the performance of the sales staff, were in charge of administering the incentive structure.

    When do performance-based pay structures result in improper practices? How could Lloyds adjust its incentive structure to alleviate these concerns?

      Kirk: There is an ethical risk within any performance-based pay structure. Managers must strike a balance between incentivizing to produce “at all costs,” and incentives that promote productivity within the context of the company’s values. By and large, maintaining an ethical culture is the only way to walk that line. The more pressure there is on sales teams to produce, the importance of a strong ethical culture grows exponentially. Without it, financial incentives will inevitably lead to improper behavior. A good first step for Lloyds would be to remove the conflict of interest in the program’s administration, and make good with the customers who were adversely affected.

      Patrick: Financial incentives, particularly in sales, just plain work (Lloyds business in areas with these incentives increased by 66% in a 2-year period). In a vacuum, I find nothing wrong with these pay structures: its on sales staff to follow the code of conduct, regardless of the potential payout. But that notion falls apart when it comes to light that Lloyds continued to reward bonuses, despite knowing that customers were being sold unnecessary products. Lloyds incentivized, and validated, the type of production “at all costs” that Kirk mentions above. This program needs a complete overhaul.

    Lloyds Fined Over Sales Bonuses (WSJ)

    A Framework for Thinking Ethically (Markkula Center for Applied Ethics)



  •  CVS: Use of Rewards and Penalties for Improving Employee Health on the Rise

    Thursday, Mar. 28, 2013

    Monday, Aon Hewitt released a survey of 800 companies on the use of incentives for employee participation in programs aimed at improving employee health, with the hope of lowering company medical costs. The study found that 79% of companies offer rewards for participating in programs (e.g. completing a health risk questionnaire or biometric screenings); 5% utilize punishments for not participating (CVS Caremark requires a $600 fee for employees who do not report their weight, blood sugar, and cholesterol); and 16% use a mix of both. Proponents of the use of incentives, such as CVS Caremark, point to an overall blood sugar and cholesterol level decrease, and the reality that "Like it or not, in this country, employment and health insurance and health care are all intimately related." Detractors worry that incentive programs reward already healthy employees while singling out workers most in need of affordable health care with higher costs. Are these programs an invasion of personal privacy or unfairly manipulative?

      Kirk: We accept auto insurance that is more expensive if one has speeding tickets or past accidents, or if one is very young. This is no different, though I think programs should always be structured as rewards or discounts for good health behaviors, not penalties. Let’s face it; good health is good for the employee and good for the company. Get over it!

      Patrick: I’m all for looking at this through a consequentialist lens—improving employee health is good in itself and the bottom line—but the manner in which these programs are administered makes all the difference. Some guidelines companies should follow are employees must consent before being asked personal medical information and the results of questionnaires and tests must be kept confidential.

    Companies Get Strict on Health of Workers

    Aon Hewitt Survey

    A Framework for Thinking Ethically