07/08/2014 03:35 pm ET | Updated Aug 19, 2014

Learn From Sears: Don't Make This Monumental Mistake

Years ago, I worked for a company that had an issue with tardiness. People were always coming in late -- It was a monumental problem. As a result, management intervened with a solution: Going forward, only three incidents of tardiness would be tolerated each year for an employee. On the fourth incident, they would be terminated -- no exceptions.

You might be able to guess what happened. After several months, the rate of tardiness dropped dramatically. Obviously the new policy worked. However, during the same period, the amount of absenteeism doubled. The unintended consequence of the policy was to force people to miss work. Here's why: Imagine that you are an employee with three incidents of tardiness already on your record, and you suddenly find yourself stuck in traffic on your way to work, or one of your kids is late getting dressed for school in the morning, and you are now faced with a fourth incident, and termination. What do you do? You simply call in sick, or you just don't show up. Problem solved. No fourth incident of tardiness. No termination. Of course, this is not what the company expected.

Are you rewarding the wrong behavior?

This phenomenon is known as goal displacement. In this case, the personal goal of not being terminated, replaced the corporate goal of reducing people showing up late for work.

In goal displacement, we find that people lose sight of the true organizational goals because we have set up a situation where the wrong behavior is encouraged or even rewarded. Employees may begin to engage in unethical behavior to satisfy the wrong goals. One of the best examples of goal displacement occurring on a large scale was the case of Sears, Roebuck & Company.

In 1991, Sears, Roebuck & Company -- faced with severe financial pressure -- decided to revamp its compensation plan for mechanics in its Sears Auto Centers. Previously, mechanics were simply paid an hourly wage. Sears' management wanted to increase productivity and profits, so it devised an incentive system that would supposedly pay mechanics a smaller hourly wage, but provide them with a performance bonus using quotas and commissions. Also, so much pressure was applied to the workforce, that many were directly or indirectly told they would lose their jobs if they did not achieve their repair sales quotas. Soon, mechanics found out that the only way to achieve their goals and make money was to concentrate on selling more work rather than servicing the customer. The new program resulted in mechanics and service managers over-billing customers, charging for work that wasn't performed and charging for work that wasn't needed.

The California Department of Consumer Affairs (DCA) conducted an undercover operation during 1991 and found 34 of 38 instances where Sears' employees had recommended repairs or services that were unnecessary or where they had charged for services that were not performed. When word of the results came out, New Jersey, Florida, New York, Illinois and several other states decided to investigate Sears Automotive Centers for consumer fraud. The scandal rocked Sears. Its reputation was severely tarnished, and it ended up costing Sears $60 million in legal fees, restitution and lost sales. Many consumers stayed away from Sears Auto Centers for years.

The phenomenon that took place at Sears Auto Centers is an excellent example of goal displacement. In goal displacement, the means are confused with the ends. It is commonly characterized when the activities that are intended to help achieve corporate objectives actually have the opposite effect. What happened at Sears is a form of goal displacement known as behavior substitution. Behavior substitution is a phenomenon where employees substitute activities that do not lead to accomplishing their assigned goals for activities that do lead to accomplishing those goals. They do this because management is rewarding the wrong activities. Employees will work for the rewards, not for the real objectives, which in Sears' case, was to properly service their customers. What management was measuring and rewarding had little to do with servicing the customer efficiently. Sears' management set up a program that they thought would increase productivity, but by establishing the wrong incentives, they inadvertently rewarded unethical behavior. As one of the deputy attorney generals for California stated, "There was a deliberate decision by Sears management to set up a structure that made it totally inevitable that the consumer would be oversold."

Another way to look at it is that goals that are easily measured and rewarded will cause employees to substitute behaviors that meet the measurements and achieve the rewards. They will tend to ignore those behaviors that are not as easily measured or do not result in rewards, even if those behaviors would help achieve the corporation's goals. This is why management must be careful to set up programs that actually reward the desired behavior. Otherwise, management pressures employees to behave in an unethical manner in order to achieve their rewards.

Take a look around in your own company. Are you encouraging the wrong behaviors? As a CEO, you must always ensure that your corporate goals and objectives, as well as your policies and procedures, encourage and reward the behaviors you want from your employees. Great CEOs think through the possible unintended consequences of their goal incentives, and limit their ability to encourage the wrong behaviors.