Conventional wisdom holds that you need economic leverage if you want to manage people effectively within any organization. Align their interests with your goals, and you maximize their effectiveness.
On the surface, this seems so obvious as to go unquestioned. Financial compensation tends to rank highly among the motivations of people working for any company. It’s why employees are offered incentives and given pay raises for good performance and why CEOs are paid with shares of stock.
Yet in practice, workers find ways to qualify for bonuses without giving the expected effort or output quality. CEOs make decisions that look good in the short term but sacrifice the company’s long-term health.
These problems can only be avoided if leaders begin to shake free of the idea that their people are all operating out of rational self-interest. It’s time for organizations to replace that dogma with a firm emphasis on ethics and values.
Leadership and economic agency
In economic organization, inefficiencies can arise anytime a principal employs an agent to create value. Their interests will diverge at some point, and the principle lacks perfect information on the agent’s activities. Research estimates the cost at between 0.2-5% of revenue.
Leaders have a mandate to bring success to their organizations, and this means addressing such outstanding inefficiencies. Thus, to a large extent, our ideas on leadership have been influenced by economic agency theory.
Economic thinkers and philosophers have long argued that people act according to rational self-interest. It’s the basis for Marx’s argument that government should take ownership of the means of production and distribution of goods. Ayn Rand went even further, declaring that self-interest was a virtue and that it’s irrational and immoral to act against it.
Debunking rational self-interest
The problem is that age-old wisdom and science both refute this theory. People aren’t rational economic agents, and self-interest is at best a minor factor in terms of driving most behavior.
The Catholic Church, a millennia-old institution, recognizes the role of human freedom and social nature as part of our autonomous existence. For this reason, Catholic social teachings have rejected even democratic socialism, a moderate version of classic communist ideals, as well as unbridled capitalism. As a moral authority, the Church can’t accept any form of thinking that reduces man to a creature of economic and material needs.
Evolutionary biology, which we usually perceive as opposed to religious thought, also agrees in this matter. The dogma that organisms can’t evolve to behave for the good of the group is rejected by countless observations of prosocial behavior among social animals, dating back to Darwin himself.
Refocusing on values
In line with these refutations, modern behavioral economics is increasingly exploring the idea that people are boundedly rational, based on the concept of multiple selves.
These selves aren’t the product of any specific cognitive process. Rather, they arise in response to the norms and conventions that we’re exposed to in the social setting. Each individual is an aggregate of the different selves that they cultivate and embody over their lives, facilitated by the construction of their personal narrative.
Your people aren’t isolated agents. They work in an environment where they interact with others. Those relationships have the potential to shape a person, and that person has the ability to influence the organization in turn, even in a small way.
And the implication for leaders is that organizational and personal values are what truly matters when managing people.
Establish your norms
Even a self-interested employee in an organization where fairness is the norm will bound their actions accordingly. They will be competitive without cheating and punish unfair behavior.
When CEOs and their boards interact with such positive reciprocity, not only does the organization benefit, but it also has the effect of promulgating those values. Standards of fairness, integrity, and justice are reinforced, and the economic inefficiencies generated by agents acting purely out of rational self-interest are minimized.
Modern organizations are faced with ever-growing complexity. They deal with multiple interacting elements, more factors than they can account for, and the threat of unpredictable black swans.
This complexity is what allows certain agents to continually exploit the rules and incur unacceptable risks. We bailed out the banks after they caused the Great Recession, and still, investment bankers continue to engage in nefarious schemes that imperil our economy.
Prevention is better than cure, but leaders can’t hope to stay on top of everything and keep track of everyone.
Instead, we have to let go of the idea that pushing economic levers can get people to behave the way we want. The only way to get everyone behaving within acceptable boundaries is to establish the right values, making them the norms prevalent within your organization, and upholding them yourself.