Read my article on the patient ownership of Warren Buffett, FT Business Education,13 May 2013, here.

Ever come across ‘confusion marketing’? I bet you have, even if you didn’t realise it at the time. It’s when products or services are bundled in such a way that you can’t make meaningful comparisons, as in energy and phone tariffs for example. Travel fares, where there’s no way of establishing what a ‘normal’ fare is, are another.

In a world where the customer really was king, an oxymoron such as confusion marketing couldn’t exist. In fact, it is only one of a disturbing number of examples where what you’d think ought to be the normal aim of management – in this case giving people what they want – has been stood on its head, becoming in the process its own opposite.

The gulf between business hype and reality is of course nothing new. But this is something darker, more sinister, and much bigger. The first time I became aware of the phenomenon was talking to a young woman who worked in the HR department of a large French utility which had suffered a spate of staff suicides. She explained that instead of being deployed to keep staff happy, the department’s creativity was now being used to devise ways of making their lives so difficult that they would leave without the need to pay redundancy. Transferring people from one end of the country to another or sending office staff to work as call-centre agents were two favourite ploys.

Other parts of the HR repertoire have undergone a similar reverse metamorphosis, like a butterfly reverting to grub. Both appraisal and performance management were originally touted – and in the official literature still are – as benign means for enlightened companies to make sure that the interests of employees and company are shared. Now, however, they have become anti-HR – simple means of coercion. As a paper by the Scottish TUC, self-explanatorily entitled ‘Performance Management and the New Workforce Tyranny’, put its, performance management has become synonymous ‘not with developmental HRM and agreed objectives but with a claustrophobically monitored experience of top-down target driven work’.

The language of management rings hollow. ‘Consultation’ doesn’t mean listening but the reverse, telling you what’s going to happen anyway; while the only thing that ‘enhancement’ applies to is the convenience of the supplier, as with self-service checkouts at supermarkets. Curiously, enhancements of corporate computer systems always require more and less convenient effort by the user; in newspaper offices, for instance, new systems invariably move copy deadlines forward, not back. In the same way, somewhere along the line ‘synergy’ lost its positive-sum connotation and is now just a fancy term for cost-cutting.

Writing on farming minister David Heath’s attack on farm wages last year, Polly Toynbee noted: ‘These days certain killer words flash out instant red alerts: ‘reform’, ‘flexible’, ‘harmonise’ and ‘modernise’ all signify their opposites. Heath’s ‘plans to modernise the agricultural labour market’ mean taking farm workers back in time. His plan for them to be ‘harmonised with the rest of the economy’ won’t feel harmonious when it ‘leads to a more flexible labour market’ to ‘end an anomaly requiring farmers to follow outdated and bureaucratic rules’.

Interviewed on local radio last week, Keith McNeil, the chief executive of Addenbrookes hospital, Cambridge, confirmed that the trust was offering incentives to wards to discharge two patients a day by 10am. A ward managing two discharges a day for a week will get £1000, while perfect performance for a month will attract £5000, with the dubious additional bonus of having the chief executive spending a day on the ward doing whatever it wants him to. Wards are also being encouraged to compete for the awards.

Why would he want to incentivise people to get rid of two patients a morning? Let’s look at what’s really going on here. The background is that like all NHS trusts, Addenbrookes needs to be financially as well as clinically sound. Under a regime of payment by results it gets paid for what it does, so it needs to maximise throughput, keeping keeping patients in for as little time as possible consistent with their clinical needs. If patients ‘block’ beds by staying longer than necessary, often because they are thought to be too infirm to return safely to their own homes, then tightly scheduled elective surgery may have to be postponed, or admission of acute cases may be delayed for lack of beds.

So at first sight, getting people ‘to do their discharge planning pre-emptively, so that when patients are ready to go, they can be moved efficiently and quickly from those beds, so that other patients who need those beds can be moved into them’, sounds sensible.

But hang on: given that pressure to get patients out of the door is already heavy enough that no one can be unaware of it, what does McNeil want clinical staff to do differently? Of course, he says, ‘all of my clinical colleagues know that patient safety comes first’, so that no one will be put at danger. The whole point of incentives is to indicate management priorities: so the introduction of at least the shadow of a conflict of interests, at a time when the whole medical profession, and nursing in particular, are coming in for heavy chastisement for lack of care in the wake of Mid Staffs, seems questionable to say the the least.

Over the last 30 years, employers have jettisoned one by one all their original social obligations: first career, then pensions, and now even the promise of rising living standards – by 2020 an ordinary family will be bringing in 15 per cent less than in 2012, according to the Resolution Foundation. Completing the offload of responsibility to employees, employers are now busily abandoning the job, as they increasingly sign their workers up to euphemistically named zero-hours contracts.

The ultimate flexible labour arrangement, zero-hours deals hold workers on standby but offer no guarantee of work, pay, holiday or sick pay, or education and training. Such contracts originated in traditionally low-paying sectors such as retail, bars and restaurants and call-centres, but surveys show they are now making inroads into white-collar domains like journalism, the law and university teaching, where the number of establishments using them increased tenfold from 2004 to 2011. Although numbers are small, they are increasing fast, rising 25 per cent in 2012 and more than 150 per cent since the autumn of 2005, according to the British Labour Force Survey. In the NHS alone there are now 200,000 such contracts, up 24 per cent in the last two years. Up to one quarter of employers are using them.

Contracts like these of course represent the antithesis of traditional employer-employee relationships, and of official HR rhetoric – as with performance management, this is another example of apparently benign HR morphing into its evil opposite. Although the arrangement may suit some people who might otherwise be unemployed, the advantages are clearly on the side of employers, enabling them to switch between quiet and busy periods without the cost penalty of carrying full-time employees to cover the difference.

But the cost to the latter in terms of, unpredictable working patterns, up-and-down earnings and general insecurity is heavy. Although earnings are often low, claiming benefits is a nightmare when they and hours are so erratic, while being on constant standby makes it impossible to supplement meagre pay by taking a second job. The consequence, according to labour expert Guy Standing, is a burgeoning ‘precariat’: ‘It is induced inertia, an impediment to social mobility and in most cases it is degrading’ – the resulting stress and demoralisation a reminder that, as New Scientist has put it, austerity is not just an experiment with the wealth of nations but their health too.

The phenomenon ought to be just as worrying for policymakers, not to mention sensible employers, as for workers.

Pay, both low and high, is a sore that is always about to erupt into an open wound. Last week it did once more, and rarely have its complaints and lessons been so clear: an object lesson in the destructive power of financial incentives.

‘High pay fed ethical “vacuum” at Barclays,’ shouted the FT’s splash on 4 April over an article on lawyer Anthony Salz’s report on the bank, commissioned after its three senior managers had resigned in the wake of the Libor fixing scandal. The report detailed how ‘warped pay levels’ at the top led to an ‘entitlement culture’ that twisted the bank’s entire approach to business, favouring ‘transactions over relationships, the short term over sustainability and financial over other business purposes.’ Salz noted that the bank’s 70 top managers earned well above the industry average and in 2010 pocketed 35 per cent more than peers at other banks – a wholly unjustifiable premium in an already overpaid industry. ‘Some bankers have appeared oblivious to reality,’ says the report, adding: ‘Elevated pay levels inevitably distort culture, tending to attract people who measure their personal success principally on compensation.’

Just the day before, there were equally indignant headlines over the £10.5m fine imposed by Ofgem, its largest ever, on energy supplier SSE for ‘prolonged and extensive’ mis-selling in which many customers who were told they would save money by switching ended up with more expensive contracts. Customers were exposed to misleading statements, inaccurate and misleading information on SSE’s charges, and misleading comparisons between SSE’s charges and costs of other suppliers, Ofgem said. A former SSE salesman told the BBC that colleagues ‘would do almost anything’ to meet their targets and make their commission, including scouring local obituaries in order to sign up the recently deceased on fake contracts. Since sales auditors were on commission too, they had no incentive to stamp down on bad behaviour. It wasn’t just doorstep and telesales that failed customers, concluded Ofgem in justifying the record fine, but a management that had no effective control over its sales effort.

Salz’s 244-page report apparently cost a truly staggering £17m. Yet like all the others it signally fails to draw the only conclusion possible from the evidence so expensively collected. Despite the clear evidence of guilt, no one is ever actually found to blame and the authors are reduced to impotent scolding of the ‘culture’ of entitlement, greed or making the numbers which has swept everything else aside.

Well, you can read the missing bits here for (almost) free.

The guilty parties are those at the very top that have put in place and maintain a self-serving pay and performance system that might have been designed to produce perverse if not criminal results. And they are still doing it. The problem with incentives is not execution – the way they are done – they are the problem.

Ironically, it’s all there in the reports which spell out in black and white everything you need to know about why. It’s simple. Incentives change behaviour – as they are supposed to. They motivate people to think about the money and do what it takes to make it. It’s no use managers (or ministers) saying, ‘Yes, but of course they have to think about the job too’. Incentives both legitimatising and demanding self-interest, systematic self-interest is unsurprisingly what you get. You can either use incentives or not. You can’t switch them off for part of the time (which part?) and on again for the rest.

Incentives vampirise the organisation’s purpose, sucking the heart and soul out of it and leaving the shell of the numbers. Making the numbers (meeting the incentives) becomes the de facto purpose, which is why it produces perverse results, in turn giving rise to a whole industry of remuneration consultants and business academics dedicated to devising new and better ways of implementing them. But the perverse results are inherent, and the more complex the scheme, the perverser they become.

Again, the reports spell it out. Incentives don’t attract the best; they attract people who measure their success by what they are paid and will do anything to get it. How much more evidence of their effects do we need? Bending purpose grotesquely out of shape, they have palyed an increasing role in every scandal of modern times, culminating in the wholesale corruption of the financial sector which almost brought down the global economy in 2008 and with whose effects we are still ineffectually struggling.

As John Kay puts it: ‘We have dysfunctional structures that give rise to behaviour that we don’t want. We respond to these structures by identifying the undesirable behaviour and telling people to stop.’ The only way of making bankers and salespeople stop putting their own interests before those of their customers is to get rid of what caused them to do it: incentives – all of them, commissions and all.

This is the scariest chart in the NHS. It may be the scariest chart in the UK, scarier even than George Osborne’s growth and debt projections. It’s a chart of hospital accident and emergency (A&E) admissions and it shows that in three NHS hospitals studied five per cent of patients consume almost half the resource.

The urgent question is: who are these needy patients? Sufferers from chronic cancer or other serious conditions? Accident or violence victims needing extensive reconstruction? Diabetes or obesity sufferers? Nope. Four out of five of them are people with chaotic lives – homeless, drug or alcohol users, or any combination of the above – who shouldn’t be in A&E at all but constantly re-present for minor ailments because their problem hasn’t been solved elsewhere. The buck stops at the NHS – which picks it up, assesses it and spits it out again and again, learning nothing in the process.

In other words, 40 per cent of the entire A&E resource goes up in failure demand – demand created by a failure to do something or do something properly the first time round; demand that shouldn’t be there.

What we have here therefore is not a health but a management problem.

Scary as it is in its own right, there are several other scary things about this graph. One is that neither the NHS or the government realise that the problem is a management issue, because amazing as it seems, these are not the kind of things that they measure. The data was collected and the graph plotted by the consultancy Vanguard, not the NHS.

If ministers or NHS managers knew what kind of problem they were dealing with they would also understand that the efficiency and productivity measures they have adopted to cope with apparently inexorably rising demand – such as 10-minute limits on GP appointments and the four-hour wait limit in A&E – are actually the cause of it. So they would stop them. But they don’t.

Why does the four-hour A&E target make things worse? Here’s another Vanguard chart. It shows that the nearer patients get to the four-hour limit, the more likely they are to be admitted to hospital, until at the four-hour cut-off point, everyone is. This is not primarily because they need to be admitted, although they might, but so as not to breach the target.

Read my article for The Foundation on Marks & Spencer’s Plan A here

When something goes wrong the knee-jerk reaction is to demand tighter rules to stop it happening again. Whether it is children at risk, NHS hospitals, banks, MPs’ expenses or bankers’ pay, as night follows day the enquiry set up to investigate the scandal/tragedy/accident at one point recommends stricter rules and regulation to corral behaviour into ever narrower channels of compliance.

The regulatory reflex is understandable. Dating in its present form to the wave of privatisations in the 1980s, regulation seems to offer a pain-free means of taking the edge off market excess on one hand and monopoly public-sector indifference on the other. In that sense, regulation is an attempt to find a middle way between the two extremes.

It is true that a framework of ground rules is essential for both a functioning market and functioning public services. As Michael Porter showed in an important HBR essay in 1995, positive regulation that frames broad objectives but crucially leaves method open to experiment can be a powerful incentive for innovation. But good regulation is rare. As is becoming increasingly clear the other kind – prescriptive rules that specify method and detail what is and isn’t permissible – is deeply problematic. And there is now so much of it about that the problems it has thrown up are as bad as, or in some cases worse than, the ills it was expected to cure

Leave aside for a moment the ever-present issues of information asymmetry and potential regulatory capture. The bottom line is that the regulatory reflex drives a dynamic which makes it ever more intrusive, ineffective and costly.

Regulation is a substitute for trust. We apply it to the private sector because we don’t trust companies not to extract rents from customers, suppliers and society to transfer to shareholders (and executives). We use it in the public sector when we don’t trust managers and civil servants not to put the producer interest first.

Mid Staffs and horseburgers show that the cynicism is understandable. But here’s the thing. Regulation does nothing to solve the underlying problem. Rather, it makes it worse, systematically manufacturing and amplifying the mistrust so that it becomes self-defeating.

Like targets and inspection, regulation focuses attention on what’s being regulated, to the exclusion of what isn’t. It thereby sets up an arms race between regulator and regulated that, as Said Business School’s Colin Mayer points out in his provocative new book, Firm Commitment, turns compliance and risk departments into their mirror-image – compliance-avoidance and risk-augmentation units.

Given the aforementioned information asymmetries and the impossibility of foreseeing all available avoidance ploys in advance, it’s not surprising that regulators are usually one if not two steps behind. By the time new regulation comes into force the horse has long departed to another unlocked stable. Sarbanes-Oxley, passed in the wake of the Enron and WorldCom scandals, was perfectly impotent to prevent the dotcom rip-offs and even less the 2008 financial crisis. In the same way the 2010 Dodd-Frank Act is fit for the purpose of preventing the 2008 crash but not the next crisis that is even now gathering in the wings.

The enquiry into Mid Staffs is a good example of the regulatory ratchet in action. As Nicholas Timmins noted in the FT, ‘Too much of the Francis report… works on the assumption that the answer to failed regulation… is yet more regulation.’ Doctors and nurses are already regulated. The beneficiaries of additional rule-making will be the parasite parallel industries that always spring up to exploit them, in this case ambulance-chasing lawyers. And the threat of criminal sanctions will not only make life even more difficult for whistle-blowers (who will understandably hesitate to put colleagues behind bars) but may well also deter potential board members from coming forward to do what is already a thankless job.

Much though one sympathises with MEPs who want to curb bankers’ bonuses and Swiss voters who have backed tough restraints on all high pay, it’s the same with pay. The case against regulation is not that overpaid chief executives don’t deserve to be cut down to size – they do – but that by deflecting attention from the real issue regulation will make matters worse. Focusing managers’ and HR departments’ attention on pay rather than the job will do nothing to benefit customers, and with their inbuilt information advantage they will surely drive a a phalanx of Rolls Royces through the rules.

In the meantime the real debate – not about the size of bonuses but about the flawed and deeply unscientific payment-by-results mentality that creates the perceived need for executive incentives in the first place – will not take place. In the same way, the crisis of the meat-processing industry of which uninvited horsemeat is the symptom is not poor regulation but the non-existent trust and excessively transactional relationships in the UK supply chain, something that is outside the ability of regulation to fix.

It’s often forgotten that all regulation carries costs both direct (the cost of employing regulators, inspectors and data-processors) and indirect (the cost and opportunity costs of gathering information and of doing the things that regulation demands even when they’re useless) and those costs rise dramatically the more the bureaucratic friction intensifies. As LSE’s Michael Power notes in his book The Audit Society, the societies that have attempted to insitutionalise checking in the shape of regulation, inspection and audit on a grand scale ‘have slowly crumbled because of the weight of their information demands, the senseless allocation of scarce resources to surveillance activities and the sheer human exhaustion of existing under such conditions, both for those who check and those who are checked’. That’s seems like a pretty good description of what’s happening to the NHS right now.

Is there an alternative to that depressing prospect? Yes, there is. It consists of managing properly, that is, using measures related to purpose to gather evidence of what works and then use it to improve, in the way scientists do. More on that next time.