"The more any quantitative performance measure is used to determine a group or an individual's rewards and punishments, the more subject it will be to corruption pressures and the more apt it will be to distory and corrupt the action patterns and thoughts of the group or individual it is intended to monitor."

- Darley's Law, Professor John Darley, Princeton University

A ductile business aligns economic incentives and corporate authority structures with business and risk management objectives, simultaneously. Without the proper framing of both to the organization, the development of a risk-aware business will be stunted or even undermined.

Darley's Law (see quote in sidebar) is a good warning to organizations that employ overly objective incentive or valuation systems.  Humans are quite adept at manipulating rules to personal benefit.  Successfully recognizing this and aligning incentives with behavioral objectives means that incentives must be carefully crafted so that the mix of measurable and qualitative inputs to the award match the behavior desired from the individual being incented.  We must, as a first root, understand how humans respond to incentives and controls before we are able to build structures to match desired behaviors with compensation.

There are ample cases in which the misalignment of compensation and incentive schemes with business and risk management objectives led to significant losses. Modern work on compensation and incentives incorporates human factors and stimulates behavior in the best interest of the firm and its owners.

 Generalized Problems with Metric-Based Incentives

 Dynamics of Authority Influence and the Impact on Risk

 Case Study: National Australia Bank

 Case Study: Nick Leeson and Barings Bank

 Case Study: Joseph Jett and Kidder Peabody

 Learn more about the proper design of incentives and compensation

You can also download a chapter entitled  Aligning Compensation Systems with Risk Management Objectives which was published as part of a book Risk Management: A Modern Perspective in 2006.