Avoiding Misaligned Incentives

Managers are faced with a great number and diversity of issues each day. Many of these issues require prompt resolution typically in the form of a decision or direction to be issued by the Manager to subordinates.

Good managers recognize that they must base their decisions on an objective, non-biased consideration of relevant facts and circumstances, always seeking to act in the overall best interests of the organization. Unfortunately, most managers don’t have the luxury of time and tranquility required to give each issue ample and careful consideration. Major and minor issues constantly arise in a seemingly relentless manner, and our intrepid manager must consider each issue as quickly and efficiently as possible, render a judgment or decision, and hope for the best.

Modern managers are (still) human. Artificial intelligence is not yet wielding significant influence over the decision-making process. Even the most well-intentioned and highly experienced managers are influenced by personal and organizational biases, historical precedents that may have been based on faulty premises, and pressures from subordinates or other influencers that may have motivations far removed from the best interests of the organization.

One can wish to forgive managers for not giving each issue ample and careful consideration before passing judgment. Clearly, not all issues are of vital, longterm interest to the organization. However, one must be very mindful that even seemingly minor decisions can serve as precedents upon which future issues will be considered and based. This can be especially true when a decision is related to, or can be consciously or unconsciously perverted, to serve the self-interests of the manager or other stakeholders at the expense of the Company’s best interests. 

These decisions that support misaligned interests often appear to be of only minor significance and importance, and self-interested parties may actively seek to  emphasize the limited significance and impact of the issue in hopes of receiving the desired decision. The less time and effort a manager invests to understand any given issue, the less likely it is that the manager will appreciate the broader or longterm ramifications of the issue.

This may sound philosophically interesting, or mind-numbingly boring, depending on your personal perspective.  A common example might serve to conveniently highlight the issue.

e-Waste Recycling/ Asset Disposal

Every modern office has numerous PC’s, laptops, monitors, printers, mobile phones, and other electronic devices. These devices typically become obsolete before they physically break or cease functioning. It is not uncommon for subordinates to request permission to purchase such obsolescent equipment, and in many countries it is quite common for companies to sell obsolete equipment to employees at bargain prices.

Is this in the best interest of the company? Is this in the best interest of the employees? How should a manager consider an issue such as this, and are there any biases or misaligned incentives that could adversely influence the decision-making process?

The company’s best interests are served if all capital assets are utilized to their fullest potential. If an asset should become non-useful to the organization, the asset should be disposed of in the most appropriate manner, to generate salvage income from the asset, to protect the community and environment from adverse environmental impact, and to always recognize and respect any employee or stakeholder impact or preference.

In the case of a common laptop PC, a well-cared for laptop can function well for many years. Some maintenance may be required during the lifetime of the device, such as battery replacement, memory and/or data storage upgrades, keyboard or display service, etc. Eventually, the performance of the device may no longer satisfy the operational requirements of the user, or the cost to maintain or service the device may exceed the value of the device or may be non-competitive compared with the cost of a new replacement device.

In a well-managed organization, commodity devices such as laptop PC’s can be reassigned to different users or applications to match their performance and condition to the user or application requirements. A top of the line laptop that was suitable for a power-user such as an engineer, field service technician, external sales person, or the ego of an executive when it was purchased new may become completely inadequate for these same functions and applications just 2 or 3 years later. However, many users or applications to not require high performance, especially now that many applications are moving to cloud-based solutions. A basic laptop, even one that is 5 or 6 years old, can still run web browser software suitable to support nearly all cloud-based applications. Even a laptop with a malfunctioning display or a failing keyboard can be very satisfactorily utilized by attaching an external monitor, keyboard, and mouse.

For most organizations and applications, nearly any functional laptop, desktop, or printer can continue to be satisfactorily utilized by properly matching the aging device to the application. And when a device does fail, it can become a source of spare parts for remaining identical devices, assuming that the organization has prudently managed its device procurement strategy to standardize on equipment.

Frankly, if such a device is still functional, or still has useful parts that could be used to maintain similar devices, it should be retained by the organization. When a device no longer has any value to the organization, it should also be expected to offer very little value or interest to employees or other entity except specialized recycling contractors.

So why do so many organizations sell functional (or even non-functional) used equipment to employees?

I strongly suggest that in most cases, these decisions are being made based on misaligned incentives. Supervisors and managers are incentivized to offer used equipment to employees to promote good relationships with employees. Whereas managers should be making decisions on the basis of the best interests of the company (and happy employees are certainly in the best interest of the company), they are actually making these decisions based on self-interest, or being influenced by supervisors or subordinates who themselves are acting out of self-interest.

Does sale or auction of used IT equipment such as laptops to employees promote good relationships? Undoubtedly, there are some employees who would appreciate the opportunity to purchased a used device from the company at a bargain price, especially if the device is being offered well before it has actually reached the end of its useful life. However, the company should also seriously consider whether such a used equipment sale policy can be administered in a way that is fair for all employees? If this program is beneficial to employees, meaning that the employees can purchase the used device for a bargain price compared with other retail sources of such used equipment, then it only benefits those employees who have the interest or opportunity to participate. Employees who are not interested in used IT equipment would not benefit. How many creative programs would the company need to implement to ensure that all employees with their many diverse interests would have an opportunity to receive an equivalent benefit from the company? Good employee relationships cannot be promoted and sustained by special programs that only benefit a small percentage of the workforce.

Environmental protection is certainly an important area of best interest for a company. e-Waste is rapidly becoming a global environmental problem, and companies should ensure that their e-Waste is properly managed to minimize environmental impact. Even a small company has the resources and ability to engage with a qualified e-Waste contractor to dispose of such devices at the end of their useful life. In many cases, companies can recover a salvage value from devices that are consigned to an e-Waste contractor. However, most individual consumers are unable or unfamiliar with e-Waste solutions, especially in less-developed communities and countries. It can be easily argued that a company is failing in its environmental responsibilities when it sells, donates, or otherwise distributes e-devices to individuals or small organizations (such as churches or charity groups) that cannot or most likely will not ensure that these devices are properly recycled when they do reach their rapidly approaching end of life.

I have observed that when management implements a policy to recycle all end-of-life IT equipment utilizing a qualified e-Waste contractor, the quantity of such devices selected to be recycled significantly drops. Departments are suddenly eager to receive an old laptop or desktop that is no longer suitable for its previous function, to address unbudgeted needs or to help stretch their department budgets. Once the misaligned incentive to dispose of useful equipment is removed, incremental value can continue to be extracted from aging but still useful equipment.

To avoid misaligned incentives, managers should always carefully and critically evaluate any program or proposal that seeks to create a benefit or satisfy any unmet need or expectation in a manner that is not absolutely straightforward and transparent. The more lobbying pressure a manager receives in support of a proposal, the more careful and critical the manager must become. Do not yield to popular pressure. Never allow or attempt to create or support any program that seeks to benefit any group of employees by bypassing the budgeting process. If a program is worthwhile and in the company interest, it should be supported by a budget allocation, and all employees should have the opportunity and expectation to realize equal benefit.

Many managers, probably a majority, disagree with my position concerning sale or auction of used IT equipment. I continue to believe that this is a classic case of misaligned incentives influencing policy decisions. I strongly recommend that managers diligentlyavoid implementing misaligned policies such as this. If your organization already has such policies in place, I strongly recommend that you start taking steps to eliminate these misguided programs. If you feel that your employees need and deserve incremental benefits, then create a new benefit or supplement existing benefit programs designed to positively impact all employees.