Alignment of Incentives
Koch’s future depends on providing incentives that motivate our core constituencies to help maximize the company’s long-term success.
This starts with our employees. We seek to align their interests with what will be beneficial for them and Koch in harmony with our principle-based framework. This alignment provides roles, work, authorities and rewards that motivate them to make the maximum contributions to their organization and ultimately to Koch’s long-term success. This includes contributions in building capabilities that have generated or we believe will generate results – including past contributions that haven’t been fully rewarded. And we don’t penalize well-designed experiments that fail, because they create knowledge leading to better decisions.
We structure incentives to align the interests of employees with the interests of the company, our customers and society. As psychologist Abraham Maslow taught, “This includes the need for meaningful work, for responsibility, for creativeness, for being fair and just, for doing what is worthwhile, and for [doing] it well.” Employees also need to feel they are working for a good company and are benefiting others as well as themselves.
Additional key aspects include:
- Using incentives to guide employees toward activities and areas where their abilities and interests will enable them to create the most value
- Structuring incentives to attract, motivate and retain principled entrepreneurs, without putting a limit on compensation
- Basing compensation on overall contribution to Koch’s long-term success, not just on a specific set of accomplishments
- Rewarding contributions, such as knowledge sharing, that benefit other employees and parts of Koch
Aligning incentives starts with eliminating perverse incentives – those that cause employees to sub-optimize their ability to create value or even to destroy value.
Examples of perverse incentives are:
- One-size-fits-all point systems or pay grades, detailed formulas, profit sharing and cost-of-living adjustments, regardless of an individual’s contribution
- Automatic raises and pay based on title, credentials, seniority, experience or number of reports
- Rewarding short-term earnings or the performance of the employee’s unit regardless of the effect on Koch’s long-term success
- Financial compensation for hitting targets that aren’t tied to value creation, such as meeting budgets or exceeding sales goals
It is also important to align incentives for the company’s other core constituencies, such as customers, suppliers, shareholders, co-investors, communities and governments. Doing so by understanding their subjective values greatly enhances Koch’s long-term success.
- By consistently practicing stewardship and compliance – especially regarding safety and the environment – providing good jobs and supporting effective non-profits, we make our communities better and they will want us to succeed
- Persuading retailers to increase our premium shelf space by demonstrating that our products will improve store traffic
- Motivating our suppliers to create the most value for us by empowering and rewarding them appropriately
- Designing the compensation for advisors, agents or consultants to share in our gain so they are motivated to achieve better outcomes
- By understanding what governments value, acting with integrity and keeping commitments, we improve the chance they will allow us to earn good profit by creating value in society