The Carrot or the Stick

Aug. 1, 2005
Most people are uncomfortable with change. Like electricity, humans tend to follow the path of least resistance. What can motivate a person to change behaviors?

Perhaps a teacher, a parent or a mentor can provide the necessary push, but sometimes a person will change to earn a promised reward or to avoid a painful penalty.

Organizations, too, are often uncomfortable with change. Yet change they must, in response to market dynamics, cost drivers and evolving regulations. The strategies discussed in this issue—component traceability, data historians, radio frequency identification (RFID) and bar code sensing—can help organizations manage through times of change.

Many of the regulations put in place over the past decade—the Clean Air Act, the Transportation Recall, Enhancement, Accountability and Documentation Act (TREAD), 21 CFR Part 11 from the Food and Drug Administration, and the Sarbanes-Oxley Act, for example—rely on fines and penalties to achieve conformance. The government wields a big stick, and businesses must comply or face punishment.

With Wal-Mart and the U.S. Department of Defense requiring their suppliers to use RFID for traceability, companies have scurried to comply. The penalty—losing a lucrative contract—could put a small manufacturer out of business.

What if agencies used both rewards and punishments to influence organizational behavior? How would that impact compliance?

Punish + reward = cooperation

In 2002, three researchers—James Andreoni of the University of Wisconsin, William Harbaugh of the University of Oregon and Lise Vesterlund of the University of Pittsburgh—published a paper on how punishments and rewards effect cooperation in economic laboratory experiments.

Using business students, the researchers conducted a series of two-person games, in which one person proposes how much to share of a fixed pie, and the second person responds with one of four behaviors: Reward the proposer, called Carrot behavior; punish the proposer, called Stick; neither punish nor reward, called Dictator; and alternately reward or punish, called Carrot-Stick.

Wrote the researchers, “While more work clearly needs to be done, cooperation in our experiment is most successfully enforced in an environment in which both punishments and rewards are available…While rewards alone have little influence on cooperation, punishments have some. When the two are combined, the effect on cooperation is dramatic, suggesting that rewards and punishments are complements in producing cooperation.”

For regulatory compliance, the best possible outcomes would seem to come about with the combination of carrot and stick strategies. And there’s the catch—Congress is unlikely to approve economic rewards for conformance with regulatory legislation. Although that may make the most sense in the long-term, the short-term budget constraints and ever-expanding national debt will preclude reward funding from being a part of any bill.

It’s up to individual companies to find the rewards—their own carrots—in the costly compliance programs put in place in response to regulations. What is that carrot? For traceability and early detection programs, the carrots can be as dramatic as saving lives, saving dollars and protecting the brand.

AMR Research cites data that notes, “A lot of manufacturing happens before a problem is detected—on average, more than five years of it.” Five years of bad parts being made. Five years of data to wade through and compile. Five years of corrective action to take and litigation to navigate.

Companies need to look at compliance as more than just a way to avoid fines, but as a path to good manufacturing and smart business practices.

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