Incentive Mapping
Predict behavior by tracing the rewards and consequences shaping each actor
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 7
- Confidence
- 96%
Incentive Mapping begins by identifying the people who determine an outcome and asking what each person gains, loses, or receives approval for through different behaviors. Those incentives may include compensation, status, career advancement, feedback, reputation, or the possibility of personal punishment. The method then compares those immediate pressures with the system's intended long-term outcome. Misconduct becomes predictable when profitable behavior is rewarded while harmful consequences remain distant, collective, or unlikely to affect the decision-maker personally. Rather than responding only with additional rules, the framework redesigns rewards and consequences so prudent behavior becomes individually rational. Its output is a practical map of motivational forces, predictable failure modes, and targeted changes capable of altering behavior.
Origin
Extracted from Masters in Business during David Enrich's explanation of how incentives drove Libor manipulation, regulatory behavior, and excessive risk-taking across financial institutions.
Core principles
- 01People respond rationally to the incentives they perceive
- 02Compensation and approval can outweigh formal rules
- 03Positive and negative consequences both shape behavior
- 04Regulation fails when it ignores underlying motivations
- 05Short-term rewards can create long-term systemic risk
How to run it
- 1
Define the outcome
State the behavior or recurring failure you want to understand. Separate the intended institutional outcome from what actually happens.
Pro tip Describe observable behavior rather than assigning motives.
Watch out A vague problem definition will produce a vague incentive map.
- 2
Identify the actors
List everyone with meaningful control over the outcome, including frontline workers, managers, intermediaries, regulators, customers, and shareholders.
Pro tip Include actors who influence decisions indirectly through targets, ratings, or information.
Watch out Do not focus only on the person most visibly associated with the failure.
- 3
Inventory rewards
For each actor, record financial rewards, status, approval, convenience, and career benefits associated with available choices.
Pro tip Give special attention to rewards delivered immediately or measured frequently.
Watch out Formal job descriptions may not reflect what the organization truly rewards.
- 4
Inventory consequences
Record the credible personal costs of each choice, including lost compensation, damaged reputation, dismissal, or legal consequences.
Pro tip Evaluate the perceived likelihood of a consequence, not merely its theoretical severity.
Watch out Institutional fines may have little deterrent effect when individuals keep their earnings and jobs.
- 5
Find the dominant incentive
Compare the rewards and consequences to predict the behavior that is individually rational under the current system.
Pro tip Look for short-term rewards paired with delayed or socialized losses.
Watch out Do not assume stated values will overpower concrete incentives.
- 6
Realign the system
Change compensation, feedback, accountability, or decision rights so the desired behavior becomes the rational choice.
Pro tip Use both positive incentives and credible negative consequences.
Watch out Adding rules without changing motivation may only create more compliance theater.
- 7
Test behavior
Track whether the targeted behavior changes and examine any new workarounds or unintended incentives.
Pro tip Review leading behavioral indicators before waiting for another major failure.
Watch out Actors may optimize against the new measurement rather than the intended outcome.
In the wild
A bank sees repeated unsuitable product sales despite adding compliance training. An incentive map shows that salespeople receive quarterly bonuses for volume, managers gain status from team rankings, and customer harm rarely creates personal consequences. The bank shifts bonuses toward verified customer outcomes, introduces clawbacks for misconduct, and rewards managers for complaint reduction as well as revenue.
→ The desired customer behavior becomes more compatible with employees' personal incentives.
Traders stood to gain from tiny movements in Libor, while low-level submitters and brokers were encouraged to help profitable desks. Weak oversight and limited individual consequences made manipulation rational within the prevailing system, even though it damaged market integrity.
→ Mapping incentives reveals why a formally simple benchmark became vulnerable to coordinated abuse.
Common mistakes
Adding rules without changing rewards
People will continue pursuing rewarded outcomes and may simply find new ways to satisfy or evade additional rules.
Blaming only the visible offender
Focusing on one participant conceals the managers, intermediaries, and institutional pressures that made the behavior advantageous.
Treating fines as personal deterrents
A corporate penalty may not change behavior when responsible individuals retain compensation, status, and employment.
Is it for you?
Best for
Leaders, regulators, and strategists diagnosing repeated misconduct or excessive risk-taking.
Not ideal for
Situations driven mainly by missing skills, accidental errors, or constraints actors cannot influence.
From the transcript
“most of the things on Wall Street and in the financial world, and I think in politics too, it boils down to incentives.”
“people's people are actually pretty rational actors if you can figure out what's motivating them to do what they're doing.”
“they're not actually looking very closely at what motivates people to behave the way that they do.”
From the episode
David Enrich Discusses the Libor Scandal
David Enrich