Ask any executive: “What percentage of your bonus depends on achieving your organization’s stated strategic priorities?” The answer is almost always less than 20%. The rest? Operational metrics, cost targets, and short-term financial performance – precisely the things that strategic transformation is meant to change. This is the incentive/strategy deficit: organizations reward people for optimizing the status quo while celebrating visions of transformation.
When Rewards Contradict Rhetoric
In boardrooms across the corporate landscape, executives craft inspiring visions of transformation, innovation, and customer-centricity. Strategic plans tout bold new directions. Annual reports celebrate paradigm shifts. Town halls buzz with talk of digital transformation, sustainability, and agile mindsets.
Then everyone returns to their desks and resumes pursuing the metrics that actually determine their bonuses, promotions, and professional survival-metrics that often directly contradict the celebrated strategy.
This is the incentive/strategy deficit: the gulf between what organizations say they want to achieve and what they actually reward people for doing. It’s not just a gap or a misalignment. It’s a fundamental system contradiction that quietly dooms strategic initiatives while maintaining the comforting illusion of progress.
The Anatomy of Disconnection
The pattern manifests with remarkable consistency:
The Board and C-Suite craft and communicate a forward-looking strategy. It emphasizes long-term growth, innovation, customer experience, digital transformation, or sustainability. The language is compelling, the slides are beautiful, and the intentions are genuine.
The P&L Owners and Department Heads receive this vision and sincerely affirm its importance. Then they open their quarterly targets, compensation structures, and performance metrics-and see a completely different set of priorities: cost reduction, utilization rates, short-term revenue, operational metrics, and risk minimization.
The Teams and Individual Contributors find themselves caught in the contradiction. The all-hands meetings tell them to innovate, collaborate across boundaries, and focus on customer outcomes. But their performance reviews measure them on speed, output volume, compliance with established processes, and staying within their lane.
When forced to choose between the inspired rhetoric of strategy and the concrete reality of incentives, humans behave predictably. They follow the money, the recognition, and the path to security-not the PowerPoint.
The Strategic Consequences
This deficit doesn’t just create cynicism (though it certainly does that). It actually prevents strategy execution in multiple ways:
Resources never align with rhetoric. The new strategic initiative receives enthusiastic verbal support but minimal budget, headcount, or executive attention-because those remain tied to traditional metrics and operations.
Risk calculus remains unchanged. While leadership celebrates bold thinking, the actual consequences for failure stay firmly in place. Career-preservation instincts trump strategic experimentation when incentives reward predictability over potential.
Collaboration remains aspirational. Cross-functional initiatives falter because individual leaders continue to be measured and rewarded primarily on their functional performance, not collective outcomes.
Short-term pressures overwhelm long-term investments. Quarterly targets drive daily decisions, while strategic horizons extend years into the future. Without incentives that bridge this gap, immediate pressures inevitably take precedence.
Accountability dissipates. When strategy and incentives conflict, responsibility for strategic outcomes becomes diffuse and deniable. Everyone can claim they supported the vision while simultaneously explaining why their particular circumstances required focusing elsewhere.
How This Happens: The Seven Deadly Disconnects
The incentive/strategy deficit rarely stems from malice or incompetence. Instead, it emerges from structural disconnects that few organizations actively manage:
1. The Planning Disconnect
Strategy development and compensation design happen in different departments, on different timelines, with different stakeholders. The left hand doesn’t just ignore the right hand-it operates in an entirely different planning cycle.
2. The Timescale Disconnect
Strategic objectives typically span years, while incentive structures operate quarterly or annually. This fundamental mismatch means that any strategic initiative requiring sustained investment across multiple performance periods faces headwinds from incentive systems.
3. The Measurement Disconnect
Strategic goals often involve qualitative changes or complex outcomes that resist simple metrics. Incentive systems, meanwhile, gravitate toward what’s easily measurable. The result? People optimize for what can be counted, not what actually counts.
4. The Inheritance Disconnect
New strategies get layered on top of existing incentive structures rather than triggering fundamental redesign. The organization announces a radical new direction but preserves reward systems designed for the previous journey.
5. The Accountability Disconnect
Those who create and communicate strategy (typically C-suite executives) aren’t the same people who design and implement incentive systems (typically HR and Finance functions). When strategy fails, this separation obscures whether the root cause was faulty strategy or misaligned incentives.
6. The Risk Disconnect
Strategic initiatives inherently involve uncertainty and require experimentation. Most incentive structures, however, reward predictable execution and penalize variance-even when that variance involves valuable learning.
7. The Cultural Disconnect
Executives often underestimate how loudly incentives speak in organizational culture. They believe that inspiring communication and leadership modelling will overcome misaligned rewards-but for most employees, incentives represent the organization’s true priorities more clearly than any town hall speech.
Recognition vs. Remediation
What makes this deficit particularly insidious is that many organizations recognize the problem but implement superficial solutions:
Adding strategic metrics to existing scorecards without changing their relative weight in compensation decisions
Creating small innovation budgets while keeping the bulk of resources tied to traditional allocation processes
Celebrating strategic projects symbolically while maintaining the primacy of operational metrics in promotion decisions
Adjusting language but not structures, rebranding existing incentives with strategic terminology without changing what they fundamentally reward
These approaches create the appearance of alignment without its substance. They allow leadership to claim the deficit has been addressed while preserving the very contradictions that undermine strategy execution.
Genuine Alignment: Engineering Incentives for Strategy
Organizations that successfully close the incentive/strategy deficit approach the challenge as a fundamental system redesign, not a communication exercise. They recognize that incentives aren’t merely one factor among many-they’re the primary translator between strategic intent and daily action.
Effective approaches include:
Zero-based incentive design. When strategy shifts significantly, these organizations rebuild incentive structures from zero rather than tweaking existing systems. They ask: “If we were creating compensation models specifically to deliver this strategy, what would they look like?”
Leading with incentives. Rather than treating incentive alignment as an implementation detail, they position it at the forefront of strategic planning. Leadership announcements include explicit details on how rewards and recognition will change to support new directions.
Creating strategic runways. They design transitional incentive structures that deliberately bridge old and new priorities, allowing people to shift focus without experiencing a cliff-edge change in performance evaluation.
Measuring what matters. They invest in developing sophisticated metrics for complex strategic goals rather than defaulting to what’s easily measured. When perfect metrics aren’t possible, they design proxy measures that at least point in the right strategic direction.
Aligning authority with incentives. They ensure that people have decision rights and resources proportional to what they’re being measured on, preventing situations where individuals are accountable for outcomes they can’t meaningfully influence.
Modelling from the top. Senior leaders subject themselves to the same incentive shifts they impose on others, demonstrating commitment by tying significant portions of their own compensation to strategic outcomes.
The Board’s Critical Role
Boards of directors occupy a unique position in addressing the incentive/strategy deficit. As the ultimate approvers of both strategy and executive compensation, they can either perpetuate or resolve the contradiction.
Effective boards:
- Require explicit articulation of how executive incentives align with strategic priorities
- Challenge compensation committees to design rewards that drive strategy, not just industry-standard packages
- Review incentive structures throughout the organization, not just at the executive level
- Hold CEOs accountable for creating systemic alignment between rewards and strategic goals
- Consider longer performance periods for strategic initiatives, breaking free from the tyranny of quarterly thinking
Boards that fail to actively manage this alignment implicitly endorse the deficit, regardless of their stated support for strategic initiatives.
Boards are the only entity that can fix this. They approve both strategy and executive compensation. If these contradict, the Board has explicitly chosen to fund failure. No amount of middle-management heroics can overcome incentives approved at Board level. Either the Board aligns them, or transformation fails. It’s that simple.
From Rhetoric to Reality
The incentive/strategy deficit isn’t inevitable. Organizations can achieve powerful alignment between what they say matters and what they actually reward. But doing so requires confronting uncomfortable truths:
- Strategic change that doesn’t include incentive redesign isn’t serious change
- Incentives speak louder than vision statements, values posters, or leadership exhortations
- The metrics you pay for are the outcomes you’ll get, regardless of what you claim to prioritize
- No amount of communication can overcome the gravitational pull of misaligned rewards
When organizations have the courage to acknowledge these realities and redesign their reward systems accordingly, something remarkable happens: strategy execution begins to feel less like pushing a boulder uphill and more like channelling a river that’s already flowing.
The question isn’t whether your organization has an incentive/strategy deficit. The question is whether you’re willing to admit it-and what you’re prepared to do about it.
The Incentive Inventory
If you suspect your organization suffers from an incentive/strategy deficit, consider conducting this simple inventory.
List your organization’s top three to five strategic priorities, for each priority, identify:
The formal incentives related to this priority (compensation, promotion criteria, etc.)
The informal incentives (recognition, influence, resource allocation)
The counter-incentives that might work against this priority
Ask these diagnostic questions:
What percentage of typical variable compensation is tied to strategic priorities versus operational metrics?
How long is the performance period for strategic incentives compared to the timeline of the strategy itself?
What happens to someone’s career if they excel at strategic priorities but underperform on traditional metrics?
Are incentives aligned across functions that need to collaborate on strategic initiatives?
Do resource allocation processes reflect the same priorities as the strategic plan?
Identify the most glaring disconnects between what’s rewarded and what’s strategically important
This inventory often reveals that less than 20% of actual incentives connect directly to stated strategic priorities-explaining why those priorities struggle to gain traction despite apparent consensus on their importance.
“We’re Agile!” (But Bonuses Are Tied to Throughput)
Perhaps no area reveals the incentive/strategy deficit more clearly than Agile transformations. Organizations proudly announce their Agile journey while preserving incentive structures that directly contradict Agile principles:
They celebrate cross-functional teams but continue to evaluate and reward people within functional silos
They emphasize customer value but compensate based on output volume or velocity
They promote experimentation and learning but penalize “failed” initiatives in performance reviews
They talk about product thinking but budget and measure in project terms
They advocate servant leadership but promote and compensate based on traditional command-and-control behaviours
This contradiction creates an environment where teams go through the motions of Agile practices (the standups, the sprints, the retrospectives) while preserving the underlying delivery mindset of traditional approaches.
The most successful Agile transformations recognize that changing methodologies without changing incentives produces the appearance of transformation without its substance. They redesign rewards to align with Agile values and principles-often finding that this reconceptualization of “what good looks like” is the most challenging but impactful aspect of the entire transformation.