Controls are frequently categorised by how they are operated, e.g. reconciliation, monitoring, supervision, or by what they do e.g. preventive, detective, corrective. An important control type that is often missed out is incentives. Incentive controls generally act on the basis of economic, social or moral persuasion.
Incentives have been described as the corner-stones of modern life, and behavioural economics has brought that into policy-making (“the nudge” to get people to act or behave in a certain way, usually to do more of a good thing and less of a bad thing). But in risk management this control type is often ignored, even though it can often be the most effective type of control. And because incentive controls are very powerful, they need to be implemented with care.
An experiment was carried out on ten day-nurseries for pre-school children in the city of Haifa in Israel. A problem existed that parents kept coming late to pick up their kids which was awkward for the nursery because staff had to stay behind and wait, and it was not very nice for the kids who were left sitting and waiting. The average number of kids left waiting each day at each nursery was eight.
A fine equivalent to $3 per child per day was imposed for late pick-up. The daily fines were added to the parents’ bills which were usually (before these new fines) around $380 per month per child. At the end of the test period it was found that the number of late pick-ups per day per nursery had………increased to 20. As far as parents were concerned, it seemed that the extra time before picking up was well worth $3 a day, and what is more, it relieved them of the guilt of the late pick-up. So it not only failed to disincentivise late pick-up, it actually encouraged it. The trick would then have been to work out at what level the fine would work without causing ill-will among the nurseries’ customers.
So, does you organisation consciously use incentive controls? and do they achieve the result they are intended to?
Data Source: “Freakonomics”, Steven D. Levitt & Stephen J. Dubner