Curbing fraudulent behaviour requires both wise remuneration policies and a rational basis for rewards.
When Ran Qiu, a student of Confucius and a steward of the exceedingly rich Ji family, increased taxes by over exploiting the citizens, further enriching the Ji family, Confucius openly denounced and disowned his student, urging his other students to criticize and vilipend Ran Qiu.
But Ran Qiu gained the favour of his employer by collecting unfair and excessive taxes from the common citizens, in the hope that it would result in his receiving bountiful rewards and increase his prospects of promotion.
Confucius' warning against corrupt civil servants who serve not the citizens but their own interests is a timely reminder that superiors must set a firm tone when it comes to measuring rewards.
Said another way, should rewards be based on outputs or outcomes? To illustrate the difference, how should success be measured in running a hospital? Is it measured by the output, i.e. the number of admissions and number of nights patients spend in the hospital, or outcomes i.e. how quickly the patients recover and are discharged, which would instead be reflected in a decrease in nights spent at the hospital per stay?
Rewarding outputs would send the wrong message to employees, whose primary mission should be expediting the recovery of patients.
Another illustration is bankers. Should they earn commissions based on outputs e.g. every transaction that passes through their hands, or on outcomes, i.e. the benefit to their clients they are meant to serve?
Choosing the wrong aims has led to the collapse of many banking institutions.
Rewards and bonuses pegged to outputs abet unethical behaviour. The question to ask in differentiating output from outcome is: Whose interests are we here to serve? Officials and civil servants or citizens, administrators or patients, bankers or clients?
Dr. Henry Wong Meng Yeong is a contributing editor of the FCPA Blog.