Incentives in Decision Governance
Decision rights will be exercised, and decision obligations discharged only if there are incentives to do so. If you need to make a decision and bear the consequences, i.e., exercise decision rights and discharge obligations, the only reason to do so is if you see how it makes sense with regards to what you want. This does not need to be financial, although it frequently is in firms: it may be pleasure out of making sure a principle you want to promote is upheld, or for other reasons that don’t need to have an easy conversion into utility.
This text is part of the series on the design of decision governance. Decision governance are guidelines, rules, processes designed to improve how people make decisions. It can help ensure that the right information is used, that that information is correctly analyzed, that participants in decision making understand it, and that they use it before they make a decision. Find all texts on decision governance here.
In any case, there has to be something in it for everyone involved.
Where do incentives show up in decision governance? They are used to ensure that decisions are prepared in some specific ways, that it is clear what it means to be accountable for a decision, and to increase the probability of desired decision outcomes. That is, incentives are used to achieve three types of goals in decision governance:
- Procedural goals that influence the steps taken to prepare a decision,
- Outcome goals that influence the possible outcomes of a decision, and
- Accountability goals that relate interests of the decision maker to their success or failure to achieve procedural and outcome goals.
Incentives are implemented through an incentive mechanism, or roles, processes and metrics that tie goals above to measurable benefits and losses for the decision maker.
If we want to increase the probability that a decision maker considers more than a single option, then we may want a mechanism which rewards the variety of options identified in a decision situation. This would be a mechanism that helps achieve a procedural goal.
If the aim is to ensure that a decision maker is accountable for a decision, then a solution is to introduce incentives that lead them to stick around while outcomes are observed. This can be done by having rules that unlock gains for then only if and when specific outcomes are observed, not earlier.
More generally, an incentive mechanism needs to be designed by starting with what we want to achieve in terms of the three types of goals above, making sure it is clear how to verify if they are satisfied (and how much), and finally, creating benefits for the decision maker that are only unlocked when it is verified that goals are satisfied to some target level.
It is critical when doing this that the benefits are credible. For example, if it is hard to determine if a procedural goal is satisfied, any benefit associated with satisfying it will not be credible and will therefore not be useful, as it will not influence the behavior of the decision maker.