Beware of misaligned executive incentives

Last updated on Feb 3, 2024

Make sure executive incentives don't work against you. People get used to a certain income level and don't want to share in the loss.

#002 Andrew Wilkinson: Investing vs. Operating, De-risking Leverage, and The Best Part About Business

August 17, 2021

Clip Transcript (43 minutes)

"Or at least work against you. We've seen all sorts of different things happen, such as having an annual budget that we hold people accountable to, with their compensation tied to it. This creates an incentive for them to be hyper-conservative, predicting minimal growth. It actually fosters a negative mindset where they aim to set a low budget so they can easily exceed it and say, 'Oh, it surprised us, we blew the doors off and now we get triple our bonuses.' That's one example where someone might almost work against you. These are lessons we've learned and corrected.

People get used to a certain income level, and if there's a bad year, they don't want to share in the loss. For example, when you tell them, 'We had a horrible year, and though you made 400 thousand last year, this year it's going to be 200 thousand,' their response might be one of dismay, citing commitments like putting their kids in private school or buying a new car."

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Speakers

Andrew Wilkinson