Ulrich Pidun, Sebastian Stange

In most firms, incentives are tied to company or business unit performance. The consequences of large investment decisions typically take too long to materialize to have an impact on an executive’s bonus or promotion. This can lead to moral hazard, especially when managers expect to move on after a couple of years in a position.

We recommend tying personal targets and incentives to the success of major investment projects through the establishment of long-term compensation components and accountability. A global chemicals company, for example, has established a manager evaluation system and a long-term bonus pool that assigns a big part of the responsibility for success (and rewards) to the initiator of an investment proposal. External factors are not accepted as excuses for failure; teams are expected to account for them when a project is proposed in the first place. Executives are incentivized to apply scrutiny when they propose a major investment—and also to ensure its ongoing success even after they have moved on.

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