Jerry's Blog

As everyone in business knows – if you don’t measure it, you can’t manage it. But what happens if you are measuring the wrong thing? Well obviously it can drive the wrong result. Worse still is that it may drive exactly the result you hoped it would, but it drives it way too far or drives other undesirable results along with it that are not seen until something hits the fan. In nearly every one of our consulting engagements we work with our clients to set up a set of metrics that can be measured directly on the floor in very short intervals, typically 1 to 2 hours. We do this to enable front line managers to drive barriers to performance to the surface so that they can be resolved on the fly instead of building up to unrecoverable levels. Often, probably more times than not, we discover after a few days that the measure that the client told us was the one to watch turns out to be the wrong metric. Either its focus is too narrow and other important metrics suffered (the old production vs. quality dilemma for example) or the focus of the metric is way too broad and we never achieve the intended result. I see the same thing on the verge of happening on a grand scale with a trend that is developing in the talent and performance management fields.

As global competition heats up corporate profits will get squeezed tighter and tighter. Furthermore we all know that the competition for top performers is becoming intense. Both of these trends are forcing companies to look for ways to both improve productivity and retain talent. This is driving industry of all types to adopt more and more aggressive pay-for-performance plans. I urge caution here. These plans must be thoroughly thought out from every angle to avoid unintended consequences from choosing the wrong metrics to drive the incentive program. Take for example Arthur Andersen and Enron. As Barbara Toffler points out in her book Final Accounting: Ambition, Greed and the Fall of Arthur Andersen no one in AA ever intentionally set out to take the company in that direction. In the beginning Andersen himself was as diametrically opposed to where AA ended up as possible. He was the great crusader for fiscal responsibility. However, over time the reward system that developed drove both the right and wrong behaviors.

Another example of how a system can go wrong with unintended consequences lies in the very heart of government oversight agencies - the SEC. In September an arbitrator ruled that the pay-for-performance system adopted by the SEC in 2003 was illegal because it discriminated against African-Americans and employees over the age of 40.

We also see these types of consequences with executive pay on a regular basis. Tie compensation strictly to some short term metric like share price and what do you get? Short term results, long term heart ache. How many companies can you name?

One could also make the case that the whole housing market collapse is due to the way loan officers and others in the loan approval process are compensated. If you are paid by the number (or dollars) of originations, then you are incentivized to take more risks.

So as we go about trying to improve our companies’ performance, let’s make sure we are picking the right metrics for the right reasons.