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Systems & Organizations

Incentives Eat Organizational Design

What if your best engineers are actually the ones hurting your company's velocity?

2026-07-111 min read

When designing an organization, most leaders focus on creating the perfect structure and workflow. However, they often overlook the power of incentives in shaping their team's behavior. Incentives can either reinforce or undermine the organizational design, leading to unintended consequences. For instance, a company like Valve Corporation, known for its flat organizational structure, relies heavily on incentives to drive innovation and productivity. Each employee is given a significant amount of autonomy and a direct stake in the company's success, which motivates them to take ownership of their projects. On the other hand, a company with a traditional hierarchical structure may use incentives that prioritize individual performance over teamwork, leading to siloed behavior and slowed decision-making.

Incentives can be a double-edged sword. On one hand, they can drive outstanding performance and motivate employees to achieve exceptional results. On the other hand, they can create perverse incentives that encourage employees to prioritize their own interests over the company's goals. For example, a sales team incentivized solely on quarterly targets may prioritize short-term gains over long-term customer satisfaction, ultimately harming the company's reputation and future growth. To avoid this, leaders must carefully design incentives that align with the company's overall objectives and values.

The story of SAS Institute, a software company known for its exceptional employee retention and satisfaction, illustrates the power of well-designed incentives. By offering a comprehensive benefits package, flexible work arrangements, and a strong sense of community, SAS Institute creates an environment where employees feel valued and motivated to contribute to the company's success. This approach has enabled the company to maintain a remarkably low turnover rate and foster a culture of innovation and collaboration.

Key insights
Align incentives with the company's overall objectives and values to avoid creating perverse incentives.
Consider using a mix of individual and team-based incentives to promote collaboration and collective ownership.
Regularly review and adjust the incentive structure to ensure it remains effective and aligned with the company's evolving goals.
Use non-monetary incentives, such as recognition and autonomy, to motivate employees and foster a sense of community and purpose.
Why it matters

If incentives are not carefully designed, they can create unintended consequences that undermine the organization's overall performance and goals.

Furthermore, poorly designed incentives can lead to a toxic work culture, where employees prioritize their own interests over the company's well-being, ultimately affecting customer satisfaction and loyalty.

Use this tomorrow
1
Review your current incentive structure and identify areas where it may be creating perverse incentives, such as prioritizing individual performance over teamwork or short-term gains over long-term growth.
2
Conduct an experiment to test the impact of alternative incentives, such as offering bonuses for collaborative projects or recognizing employees for their contributions to the company's overall goals.
Go deeper

The concept of incentives eating organizational design is rooted in the field of behavioral economics, which studies how psychological and social factors influence economic decisions. By understanding these factors, leaders can design incentives that "nudge" employees toward desirable behaviors and outcomes.

The design of incentives can also be influenced by the company's culture and values. For instance, a company that values transparency and open communication may use incentives that promote collaboration and knowledge-sharing, while a company that values innovation and risk-taking may use incentives that encourage experimentation and learning from failure.