How do wrong incentives kill creativity in organizations? Wrong incentives kill creativity by making collaboration structurally irrational. When a system rewards individual or divisional performance and penalizes cross-unit work — through cost allocation, narrow P&Ls, or bureaucratic overhead — people stop collaborating, even when they want to. Creativity depends on the intersection of disciplines, perspectives, and teams. When the incentive structure taxes that intersection, creative work quietly disappears — not because people stopped caring, but because the system made caring too costly. The organizations that sustain creativity over time are the ones that design incentives to match the behavior they actually want, not just the language they use to describe it.
At lunch, just before going on stage at LABEST – the biotech and medtech conference in Los Angeles, where I was speaking about leadership and creativity – a colleague said something I haven’t been able to stop thinking about.
At a large American research university, two departments wanted to work together on a project. It made sense. The potential was clear. But before any work could start, one question had to be resolved: which department would pay for benefiting from the other’s contribution?
In other words, collaboration had a tax. And when collaboration has a tax, the rational response is not to collaborate.
The fastest way to kill creativity isn’t cutting the budget. It’s building systems that punish the behavior you’re asking people to perform.
What You Reward Is Your Real Strategy
Most organizations have two strategies. The first is the official one — written into values statements, repeated in leadership meetings, posted on the wall. The second is the one embedded in the incentive structure. That second strategy is what people actually respond to every day.
When the two conflict, there is no contest. The incentive structure wins.
Leaders are often surprised when a culture initiative fails. People agreed in the room. They nodded. And then they went back to working in silos. So the leader diagnoses the problem as resistance, or inertia, or the wrong people.
But the real problem is simpler. The system is telling people that the behavior you want comes at a personal cost. And people respond to systems. That is not a character flaw. It is how organizations work.
The Tax on Collaboration
The university example is common precisely because it looks innocent. Nobody designed it to block collaboration. The policy existed for a legitimate reason — cost accounting, resource allocation, departmental budgets. But the effect was a tax on working together. And as a result, people stopped.
Sony’s decline in the early 2000s tells the same story at scale. Sony had invented the Walkman, the Trinitron, the PlayStation. It owned a major music library and a leading hardware business. It had everything needed to build a digital music player. However, it couldn’t pull it together. Apple could.
Morten Hansen, a professor at UC Berkeley, spent fifteen years studying how large companies collaborate. He used Sony as a central case study. His finding was direct: unit-level incentives, built without any reference to shared goals, created silos. And those silos produced the exact opposite of what the company said it wanted.
Each Sony division was measured on its own results. So the music division had more reason to protect its assets than share them. Electronics had more reason to build alone than wait for a cross-divisional process. As a result, Apple — without Sony’s music library or hardware legacy — built the iPod and iTunes faster and more cleanly than Sony ever could.
Sony had the pieces. The incentives made them impossible to connect.
The Problem Nobody Measures
What makes incentive misalignment so hard to fix is that it rarely shows up in the data leaders look at. Culture surveys measure engagement. Performance reviews track individual output. Financial reports show divisional results.
None of them ask: what did people stop doing because the system made it too costly?
The behaviors that disappear are the ones nobody formally required. Nobody measures how often an engineer reaches out to a colleague in another division before going to an outside vendor. Nobody tracks the ideas that died because the person who had them knew — correctly — that sharing them would cost more than it returned.
This is what I mean by Business Artistry: the most important work is often invisible. What gets done when nobody is watching tells you everything about what a culture actually values.
An incentive structure is exactly that. It runs in the background. It shapes decisions nobody formally makes. When it punishes collaboration, creativity doesn’t get killed in a meeting. It gets quietly abandoned.
What This Looks Like in Practice
The patterns are consistent across industries.
The P&L silo. Every division is accountable for its own numbers. Sharing resources with another team doesn’t help your numbers — it may hurt them. So people stop sharing.
The recognition gap. Individual contributors are rewarded for visible, individual output. Cross-team work is harder to measure and harder to promote. So people do less of it.
The overhead of asking. In some companies, working with another internal division costs more than going outside. A manager once told me that at his company, the approvals, cost allocations, and scheduling required to access an internal capability were more expensive than buying the same thing from a vendor. The engineers knew it. They chose the path that made sense. And as a result, the organization became more fragmented — not less.
None of these behaviors are irrational. They are the logical response to a system built for something other than what it claims to want.
The Design Question Leaders Rarely Ask
Most leadership conversations about creativity focus on behavior — the manager who shuts down ideas, the culture of criticism, the fear of risk. Those things matter. However, they are symptoms.
The deeper question is structural: does your system make it easier to collaborate and create, or harder?
Hansen identified narrow incentives as one of the main barriers to collaboration. The more you reward people only for their own results, the less motivated they are to share or build on each other’s work. His solution wasn’t to remove individual accountability. It was to add a second layer — rewarding both unit performance and the act of working across teams.
So the question for leaders isn’t: are my people collaborative enough? It is: have I built a system that makes collaboration worth doing?
Before your next culture initiative, ask a more specific question: what does your incentive structure actually reward? And what does it quietly punish?
The Bigger Question
There is a deeper version of this problem.
It is the belief that creativity can be fixed with encouragement. That if you say often enough that you value new ideas — that you celebrate risk, that you welcome failure — the culture will follow.
It won’t. Not if the system is running a different program underneath.
Josef Albers, one of the great artist-teachers of the last century, believed that the most important creative decisions happen before the work begins. The choice of materials. The constraints you accept. The frame you set. Everything that follows grows inside that frame.
The same is true for organizations. The incentive structure you build is the frame. It decides what grows inside it — and what doesn’t survive.
If you want creativity to grow, the frame has to allow it. Not in the culture statement. In the system.
I write regularly about creative leadership and the structural conditions that enable – or prevent – creative work inside organizations. Follow me on LinkedIn to continue the conversation.
If you lead an organization and want to bring these ideas into a keynote or leadership program, you can explore what that looks like at creative leadership keynote page.
Photo by Hannah Coward.
