I recently read "Freakonomics," by Steven Leavitt and Stephen Dubner. The theme of the book is the way that people respond to incentives, and the importance of determining what kind of behavior you are actually promoting through your incentive system.
One of the examples given in the book, which in my mind is a great example of misalignment, is the case of teachers in the Chicago school system who were evaluated based on standardized test scores.
The public school system in Chicago had been struggling for years, with high drop-out rates, students testing way below national averages on standardized tests, and few students going to college. As part of their efforts to improve the situation, the school board tried to create more of an incentive for teachers to better prepare their students. They wanted a fair, measurable, objective way to determine which teachers were doing the best job with their students, and one of the clearest, most objective measures they could think of was to tie the teachers pay raises and promotions to how well the students did on their standardized tests.
However, the teachers were left to administer the tests themselves. As a result, the school board's strategy to get the teachers to work harder to prepare their students created a perverse incentive for the teachers: they could cheat on behalf of their students in order to get raises.
It was eventually discovered that some of the teachers, after the students had taken the tests, would secretly erase some of their wrong answers and put in the correct ones, thereby boosting their students scores and making themselves more likely to get raises.
The school board has since created a system where independent administrators administer the standardized tests that are used to evaluate the teachers' performance, thereby better aligning incentives with strategy.
