Organizational leaders as behavioural economists? (Part II)

Leaders shape culture through the choices they make… and that is a matter of (behavioural) economics

In his classic book, Organizational Culture and Leadership (1), Ed Schein proposes six mechanisms by which leaders can shape the culture in their organizations. The actions leaders take reveal the trade-offs they make, and make strong statements about what they think is important. Since trade-offs and choices are the subject of Behavioural Economics, what can we learn when we view them from that perspective?

In Part I we zoomed in on two of the mechanisms; this post focuses on the remaining four.

“How leaders allocate rewards and status”

Rewards are often equated with bonuses, or with other material benefits, like a nicer office or a better company car. In Predictably Irrational (2), Dan Ariely explains the difference between two worlds in which we simultaneously live. One is ruled by market norms, where we see interactions as transactions, with a cost that should be less than the corresponding benefit. In the other one we’re guided by social norms. Here, interactions are about ongoing relationships, and we don’t expect immediate or direct reciprocity. Instead we do what we believe is right, in the confidence that others will do the same.

(Source: Organizational Culture and Leadership, Edgar H. Schein)

Prominent use of material rewards makes the workplace into a place where market norms prevail. If that is not the kind of culture you want, then you need to think beyond using financial incentives.

What else is valuable to you that you could ‘allocate’ to your people? It’s your ultimate scarce resource: your time. A leader who spends time with people who perform well, helping them with her wisdom and her network sends a stronger message to her team about what is important than if she were simply to pay the better performers more. People see more significance in what is salient (like seeing the boss join in) than what they cannot see, even if they know it happens (like a money transfer in someone else’s account).

Furthermore, others will also see clearly what the leader regards as good performance. Should she reward results, or actions? Context can play a huge role in outcomes, and it is best to reflect this in what you reward. If you value collaboration, constructive criticism or curiosity, rewarding people purely on the basis of their achievements may not be the best approach.

What about status? You can also narrowly see this as a kind of reward: giving people more responsibility is a way of recognizing them (and taking it away is seen as a punishment). But a leader has a much richer grip on status. For example, how does she treat someone who has made a mistake? People are generally loss averse — and that includes averse to losing face and status. Publicly berating a team member who made an error may seem like a clear way of setting an example, but if instead, you treat them with genuine respect, separate the decision from the person and indeed recognize the opportunity to learn, you are not only creating a climate of psychological safety that protects people’s status. You also avoid being an asshole.

“What leaders pay attention to, measure and control on a regular basis”

Conventionally, leaders are expected to pay attention to achievements: cost and efficiency savings, winning a new customer, meeting milestones and so on. They often do so too. But that is not how leaders ought to shape culture (especially not if, heaven forbid, that’s what they do on a regular basis).

Through what they systematically pay attention to, leaders distinguish between what they find more important and what is less so. That, in turn, serves to form the habits that are the bedrock of the organization’s culture. Regular meetings are a great platform to do so. What is the first topic on the agenda? Is it the habitual review of business performance? Or is it devoted to discussing what team members have learned — for example about how their work affects or serves their colleagues elsewhere in the organization? What if, to kick off the weekly meeting, someone in the team were to give both a good and a bad example of applying the corporate values they recently experienced?

Even if such themes are put on the agenda, there is a world of difference between placing them at the end (like in ‘any other business’ bin), and moving them top of the bill. And if you want to amplify that further, consider the IKEA effect. People derive a personal sense of importance from investing their own time and effort in something. You could ask someone to talk about what they’ve learned in the last couple of weeks as a by-the-by at the end of the regular team meeting (if there’s time left of course). Or you could ask them on beforehand to prepare a short talk about it, and place that first on the agenda. You probably know which choice will have the biggest impact.

“How leaders react to critical incidents and organizational crises”

They say that in prosperity our friends know us, and in adversity we know our friends. It is the same in organizations: leader talk is cheap, and leader actions can still be cheap when the going is good, but it’s at crunch time that leaders really show their colours by the choices they make.

The trade-offs we make reveal a great deal about what we are really like, and high pressure situations accentuate this even more. So a crisis is a time to be wary of knee-jerk reactions. Hasty judgements will be with you for a long time.

Take the time to make decisions that will still stand up once the crisis is over. The process by which you respond can be as significant as the actual response itself, there are also trade-offs to be made. Determining a way forward on your solitary own is quick, and asserts your authority as a leader. But what if you traded some of that, and involved the team? Might take a bit more time, but it sends out a strong signal of inclusion and togetherness, and of respecting people’s insights and opinions (not to mention the fact that you can draw upon their collective wisdom and experience!)

Crises are not necessarily only those that befall the organization. What if one of the team members has a serious problem at home? A leader who considers this is nothing to do with work, and who leaves the colleague to his own devices sends out a rather different message than one who flexes the team to reassign the workload, perhaps even freeing up some time for direct support to the team member with the domestic crisis. In good times, principles can look self-evident and easy to get behind. But when they are suddenly placed in conflict with each other, all eyes are on the leader. How will she respond when a customer demand requires everyone rolling up their sleeves and burning the midnight oil, and at the same time a team member has a seriously sick child at home?

That’s when culture is really being shaped.

“How leaders recruit, select, promote and excommunicate”

New hires, and people who are promoted are beacons for ‘the kind of person that gets ahead in this place’. This is an area where leaders, more than elsewhere, tend to see themselves as rational, well-considered decision makers, relying on their unquestioned objective evaluation. Unfortunately, reality is different.

Unconscious bias in personnel decisions has been receiving quite a bit of attention lately. An HBR article (3) from June 2017 summarizes the problem and gives some tips to avoid the worst mistakes. These range from scrutinizing the wording in job descriptions for concealed stereotyping (for example, “competitive” puts women off from applying) to separating ‘likeability’ as a trait to be evaluated, rather than allowing it to dominate all other information and simply promoting the person we like best.

Being blind to all irrelevant characteristics of a candidate is almost impossibly hard, however — which is why the Behavioural Insights Team (formerly known as the UK’s Nudge Unit) developed a tool (4) to help anonymize and randomize recruitment.

But you cannot delegate all decisions to a piece of software: as a leader you must have the final word. Think about the message your choice will project into the organization. What trade-offs are you making in selecting a particular external candidate for filling a role, or preferring one colleague over another for a promotion? That’s what others will see and remember. Also be aware of the potential bias in people’s perception: you may have been meticulously objective, but they may still think you selected someone because you went to the same school.

So, do what you can to minimize bias, for sure, but also communicate your decision clearly and transparently — that is the best way to use hiring, promoting and firing as a mechanism for shaping the culture you want.

We make choices all the time, and these choices tell others what matters to us. That is the background against which Schein’s six mechanisms set out the kind of choices leaders make that shape culture. By deliberately adopting a (behavioural) economics viewpoint, you can make the choices that help deliver the culture you want.

(1) Edgar H Schein, Organizational Culture and Leadership, 3rd ed, Jossey Bass 2004

(2) Dan Ariely: Predictably Irrational, Harper 2009

(3) Rebecca Knight: 7 Practical Ways to Reduce Bias in Your Hiring Process, HBR June 2017

(4) Behavioural Insights Team: Applied,

This post was co-written with Paul Thoresen.

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(In case you’ve not yet read Part I, click below to go straight through.)