The observation
A widely cited piece of research on reward systems offers one of the clearest explanations for why two teams doing recognisably similar work can produce visibly different results, even under a shared strategy and a shared set of stated priorities. Steven Kerr’s 1975 paper for the Academy of Management Journal, “On the Folly of Rewarding A, While Hoping for B,” examined reward structures across manufacturing, insurance, and settings well beyond business — politics, medicine, academia — and found a recurring pattern: organisations frequently state one priority while their actual reward mechanisms point toward another, and people, in Kerr’s words, “seek information concerning what activities are rewarded, and then seek to do… those things, often to the virtual exclusion of activities not rewarded.”
Applied to team-level performance variation, this reframes a common question. When two teams performing similar work produce different results, the instinctive question is usually about people or execution: is one team simply better, more capable, better led? Kerr’s research points toward a different and often more productive question: are these two teams actually being rewarded for the same thing, or does each team’s specific incentive structure point toward a subtly different outcome than the one leadership believes it is asking for? Teams tend to optimise for what they are measured and rewarded on, not for the general strategic intent hovering above the measurement — and where those two things diverge, even slightly, the resulting performance gap can look like a capability difference when it is, in fact, an incentive difference.
Why it happens
The mechanism compounds as organisations grow, because growth tends to multiply the number of distinct incentive structures operating simultaneously without multiplying the coordination needed to keep them pointed in a consistent direction. A small organisation typically has one sales structure, one delivery structure, one set of informal norms that everyone absorbs through proximity. A larger, more differentiated organisation has multiple compensation plans, multiple functional reporting lines, and multiple sets of locally sensible incentives — each individually designed with good intentions, each capable of pulling slightly differently from the others.
This produces a specific and under-examined risk: two numbers that are, in reality, the same underlying phenomenon viewed from different functional angles can be tracked, reported and discussed as though they were unrelated. Each function optimises its own measure faithfully. Nobody within either function is doing anything wrong by the standard they have been given. The disconnect exists not because either team is failing, but because the organisation has never built a view that puts both measures side by side and asks whether they are actually telling one story or two.
A further contributing factor is organisational design itself: functions that report through separate lines, with separate leadership, separate meeting cadences and separate metrics, structurally reduce the chance that anyone holds both halves of a connected picture at the same time. This is not a failure of any individual manager’s diligence. It is a predictable consequence of specialisation — the same division of labour that makes a large organisation efficient at each individual function also makes it structurally prone to losing the connections between functions, unless something is deliberately built to hold those connections visible.
What it looks like in practice
Consider an organisation where sales are reported up eleven per cent year on year — a genuinely strong headline number, celebrated appropriately. Margin, over the same period, is down. Leadership treats these as two separate issues: growth is a sales story, margin pressure is a cost story, and each is discussed in its own meeting, owned by its own function, with its own explanation offered independently of the other.
A closer look reveals the two numbers are more connected than either meeting assumes. The growth is concentrated in a specific product line that carries structurally lower margin than the rest of the portfolio, and that product line is sold predominantly by a team compensated primarily on revenue rather than on margin or profitability. Both trends — rising revenue, falling margin — are, in effect, the same underlying phenomenon described from two different vantage points. The sales team’s incentive structure is functioning exactly as designed and is producing, faithfully, more of exactly what it rewards. The organisation is simply reporting the two halves of that single story through separate functions, which report separately, with no single view that puts the two together.
This pattern recurs across many forms of team-to-team variation that get attributed, by default, to differences in people or leadership. A support function measured on ticket volume closed and a support function measured on customer-reported resolution quality will, over time, look like teams with different capabilities, when they may simply be teams optimising faithfully for different definitions of success. The diagnostic value of Kerr’s research is that it redirects the first question away from “who is better” and toward “what, specifically, is each team actually being rewarded for” — a question that is answerable, checkable, and frequently more revealing than a comparison of individual performance ever is.
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Questions worth considering
- Which numbers in this organisation are structurally never looked at together, because they belong to different functions that report separately?
- If two teams performing similar work are producing different results, are they actually being rewarded for the same outcome, or for two outcomes that only sound similar from a distance?
- Where a team’s results look surprisingly strong or weak, has anyone checked what that team’s specific incentive structure is actually optimised to produce?
This perspective is part of Performance.
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