Index

Mental Models

Incentive Design

The deliberate structuring of rewards, penalties, and feedback to align individual behavior with system-level goals.

Incentive design prevents misalignment between stated goals and actual behavior by engineering the reward structure to drive desired outcomes.

Core question

What behavior does this incentive actually reward — and is that the behavior we want?

Example

A sales team compensated only on new deals ignores retention. Redesigning incentives to include renewal rates aligns individual motivation with company health.

How to apply

  1. 1.Map existing incentives — formal and informal — and the behaviors they actually produce.
  2. 2.Identify gaps between intended outcomes and incentivized behaviors.
  3. 3.Redesign rewards to align with desired outcomes, including unintended side effects.
  4. 4.Monitor for gaming and adjust incentives as people adapt.

Pitfalls

  • ·Assuming people will act on mission alone when incentives point elsewhere.
  • ·Creating metrics that are easy to game rather than hard to fake.
  • ·Changing incentives too frequently, destroying trust and predictability.

Questions

Why do well-intentioned incentives often backfire?

Because people are creative optimizers. They will find the easiest path to the reward, which is often not the path you designed for.

How do you detect misaligned incentives?

Look for where people consistently behave in ways that frustrate leadership. The behavior is usually rational given the actual incentive structure.

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