The Future of ERM: 12 Hidden, or Not So Hidden, Threats
#8 Misaligned Incentives – When Incentives Pull Against Sound Decisions
Most organizations do not fail because no one saw the risks. They fail because the incentives that guide everyday decisions point in a direction that makes it hard to see the signals clearly. Incentives shape pressure, pressure shapes behavior, and behavior shapes the information leaders receive. When that chain bends, even the smartest teams drift toward blind spots they never intended to create.
ERM usually enters the conversation too late. Not because the function lacks insight, but because the system it operates within rewards speed, optimism, and clean reporting far more than it rewards thoughtful interpretation of signals. When incentives are set up this way, ERM cannot help the organization move faster or make better choices. It becomes a passenger to forces that were already steering the ship.
Misalignment of incentives is one of the least discussed reasons ERM loses influence. Yet it is also one of the most fixable. The challenge is recognizing how deeply incentives affect the decisions people make long before risks surface on a slide deck.
Below we explore this problem, how it forms, and how leadership can correct it before it becomes a threat to strategy and resilience.
The Quiet Power of Incentives
Incentives are a compass that people follow even when they are not aware of it. They tell employees which outcomes matter, what behavior is rewarded, and where leaders should place their attention. When those incentives favor hitting targets without regard for how those targets are reached, uncertainty becomes something to work around rather than understand.
Think of two different kids growing up. One is rewarded for curiosity, problem-solving, and solid judgment. When they make sound decisions, they are praised for the thinking behind it. They try new things because the incentive is growth. They take risks where appropriate because learning is encouraged.
The other child grows up in the shadow of punishment. Their goal is not to understand but to avoid getting in trouble. They do just enough to stay out of harm’s way. Their world shrinks to minimum acceptable behavior, and they learn to hide mistakes rather than surface them.
Both children grow up. Both enter the workforce. One naturally seeks better options. The other seeks safer optics. Incentives write habits long before performance reviews do.
You can see the effect in many well-known failures. At Wells Fargo, unrealistic sales goals made it rational for employees to open unauthorized accounts. At Boeing, schedule pressure and cost goals shaped decisions that compromised engineering judgment. In both cases, the risk was not invisible. The incentives simply made it harder to acknowledge and decisions suffered as a result.
Organizations often reward the results of risk taking without asking whether the decisions that produced those results were sound. A lucky quarter looks the same as one managed well. A risky move that did not break anything appears bold instead of reckless. This creates a culture where the quality of decisions matters less than the appearance of performance.
ERM becomes an afterthought in this environment. It may be respected, but it is not needed until there is a problem. By then the incentive structure has already done the damage.
The real question is simple. If incentives silently steer the business toward speed, avoidance, or narrow metrics, how can any risk function hope to provide clarity?
How Incentives Distort Signals Before They Reach Leadership
Most executives do not receive bad information, although a number certainly do. They receive filtered information. The filtering happens long before a risk reaches a report or meeting. It happens because people interpret signals through the lens of what benefits or harms them.
When compensation, evaluations, or political capital depend on maintaining a clean narrative, uncertainty becomes something to manage quietly. Leaders are not trying to deceive anyone, though we can argue some are intentionally attempting to do so. More often, they are responding to the pressures placed on them. If calling attention to something slows a project or invites scrutiny, withholding the signal becomes the safer path.
You can see this pattern in how weak signals surface inside companies. Early warning signs often appear, but they arrive late or softened. Teams explain away issues as temporary. Small incidents get categorized as noise. Everyone assumes someone else will say something if the concern is real.
When you learned to ride a bike, falling wasn’t failure. It was how you learned balance. No one scolded you for wobbling or losing control. The environment encouraged the struggle because the struggle was the path to competence. In many organizations the opposite happens. Teams are punished for early signs of instability, so they hide the wobble. They wait until the fall becomes public. The learning arrives late, and the cost arrives early.
ERM often becomes the one function that tries to call attention to what others are incentivized to downplay. It is not that ERM is too slow or too cautious. It is that the organization has been trained to prefer optimistic interpretations, even if rooted in delusion. That optimism is rewarded. Transparency is not.
The danger is not that incentives distort information. The danger is that they distort it quietly.
When Good Outcomes Hide Bad Decisions
One of the most important questions a leader can ask is whether their organization knows the difference between a positive outcome and a sound decision. Many do not.
Imagine two investment decisions. The first is based on careful analysis, strong signals, and a clear understanding of uncertainty. The second ignores early warnings but works out anyway because the market stays favorable. Both may succeed, but only one builds resilience.
If the organization rewards both equally, employees quickly learn that luck is just as valuable as judgment. They will naturally pursue whatever option delivers the fastest win. The long-term cost becomes invisible. That’s a problem for another day.
The same problem shows up in performance reviews. When leaders are measured on growth alone, they optimize for growth alone. When they are rewarded for speed, they prioritize speed. When they are evaluated based on project delivery, they deliver the project even if it means cutting corners that create problems later.
Most of the time, none of this is malicious. It is human nature responding to visible incentives.
This raises a difficult question. If someone achieves their metrics while creating vulnerabilities that emerge months later, should that be considered success?
The issue is not that teams lack discipline. The issue is that they are responding logically to what the company implicitly rewards. Incentives do not only influence behavior. They shape the information that is surfaced, the risks that are ignored, and the opportunities that are never explored.
This becomes dangerous when performance metrics focus on the past instead of what is emerging. Metrics rooted in historical patterns distort what leaders believe they are seeing.
What Happens When Incentives and Decisions Finally Align
To see the danger clearly, look at Abraham Wald’s work in World War II. The planes returning from missions had bullet holes in certain places. The initial conclusion was to reinforce the areas with the most visible damage. Wald realized this logic was backward. The damage on the returning planes showed where a plane could survive a hit. The missing planes, the ones that never came back, likely were hit in the areas without bullet holes. Those were the areas that needed reinforcement.
This is a picture of what happens inside companies every day. Leaders reinforce what is most visible even if it is not what needs attention. Teams report what flows toward incentives and not towards what needs to be said. Important issues stay invisible because the reporting system has been shaped by incentives rather than by truth.
To correct this, companies need forward-looking indicators that show where reality is shifting instead of only where it has been. That is where signals, drivers, and insights replace the narrow view of KPIs and KRIs.
Instead of relying on KPIs and KRIs that often reflect what has already happened, organizations should anchor decisions (including risks and opportunities) in three categories. Signals show where reality is starting to shift. Drivers explain what is influencing those shifts. Insights interpret what the shift means for the decisions at hand.
This structure encourages people to surface what is emerging, not just what is measurable.
How to Realign Incentives Without Slowing the Business
Fixing this problem does not require more oversight, heavier processes, or new layers of review. In fact, those usually make the issue worse. Incentive alignment works best when it is simple and deeply practical.
There are several ways to support that change.
First, reward the attempt, not only the outcome.
Celebrate when someone makes a thoughtful decision even if the result is imperfect. This mirrors how you learned to ride a bike. Progress requires a tolerance for wobbling.
Second, bring emerging information into the conversation.
Use signals, drivers, and insights to help people understand shifting realities before they become problems. This reduces surprises and encourages teams to engage with change earlier.
Third, ensure there is safety around judgment.
People think more clearly and creatively when they do not fear punishment for honest mistakes. They also surface risks earlier and more accurately.
Fourth, reinforce long-term thinking.
Reward teams for actions that position the organization well beyond the current quarter. Good decisions often mature over time, unlike fast money, which trades speed for stability and usually carries a cost too high for most to handle.
Finally, close the loop.
Show people when a thoughtful decision created a benefit. Show them when quick action avoided a problem. When teams see a connection between judgment and impact, incentives realign themselves.
When companies shift from a culture of misaligned incentives (including avoidance) to a culture of thoughtful action, they do more than reduce risk. They unlock a higher level of performance. Decisions become clearer. Opportunities become more visible. Teams begin to act with a sense of confidence.
Good decision making is not a talent. It is a product of the environment. When incentives encourage people to think, learn, try, and adjust, the organization becomes stronger than any dashboard or framework. That environment is what allows risk management to stop being a defensive function and become a strategic advantage.
Let’s discuss how to keep your risk program moving forward without missing a beat. Click here to schedule a Discovery Session or use the Discovery Session button on my website.