Pay People to Avoid Risky Behavior

CEOs are worrying about risky behavior by employees at the front lines of the business. Nobody wants to wind up like Jamie Dimon, head of JPMorgan Chase, whose cherished legacy has been pickled by what Dimon himself called "egregious mistakes" by an obscure group of bond traders at the firm.

But how can the CEO influence far-flung staff to do the right thing consistently? The answer is found in a sound risk management program that trains, equips, monitors, measures and rewards people for avoiding mistakes and making good decisions. You start by training people properly. That means identifying and reinforcing behavior you want to see. Then, you have to be visible and consistent in holding managers accountable.

A terrific example comes from Safeway, Inc., the giant grocery chain based in California. The company employs more than 200,000 full-time people, many of whom serve customers in retail stores. Others work in food manufacturing facilities while others operate an enormous trucking fleet. I came across the Safeway story while conducting a recent research program on best practices in enterprise risk management.

Ward Ching, vice president of risk management operations at Safeway, told me about one behaviorally-based incentive program focused on safety within the retail stores. It started with a push to reduce operating costs by reducing on-the-job injuries. Given that Safeway is self-insured in most states and has a big workforce, the financial risk posed by unwieldy levels of workers' compensation claims is significant. But there's more going on here than cost management. Buried deep in Safeway's competitive strategy is a determination to provide customers with an excellent experience. In effect, promoting a safe work environment translates into happy customers.

Ward Ching put it this way: "We do a tremendous job of serving customers and our "Culture of Safety" program is an essential ingredient of that. The message is that if a worker is injured, he or she cannot contribute to our promise to customers."

For example, one person on a deli crew is out with a back problem because he lifted something that should have been moved only by trolley. As a result, service slows and customers grumble. In a snowball effect, the people working the meat slicers might get stressed and make mistakes with terrible consequences.

The essential message at Safeway is that each individual has a responsibility to recognize the behaviors that help teammates work safely and stay healthy. And if something is not going well, background training kicks in. People know to escalate issues to prevent problems. "We bake into the culture the idea that being proactive about safety has implications that go far beyond the amount of claims we must pay," says Ching.

Safeway's risk management team developed insurance incentive programs that reinforce safe behaviors. Ching describes it as "an insurance-premium incentive program designed around clear performance expectations." It underscores the KPIs that managers can control and the behaviors they can influence on the store floor. The Safeway method sets and monitors targets for the frequency and safety behaviors through a positive observation process. An example: every department manager in every store must make observations about workplace safety each week. Individual employees also make positive observations during the week. Those who make and record the best observations are rewarded with a sandwich and acknowledgment within the store. Ching uses systems controls analysis, behavioral observation techniques, and other measurement tools to drive the bus.

If a division is able to meet its quarterly targets and adheres to the risk awareness and prevention process, the division receives a predetermined insurance premium return. If they don't, then they don't get the financial return. For many divisions, that financial reward can mean the difference between profit and loss. Hence, the acute attention paid to recognizing and reinforcing the right behaviors that contribute to a safe and productive work and shopping environment.

The lesson is two-fold. First, a CEO can and should hire a brain like Ching who can figure out how to influence behavior by manipulating the price of bad decisions. Second, risk management must be embraced as part of the company's DNA to be truly effective.