The Wrong Measuring Sticks

Employee performance metrics can seriously undermine a project team’s objectivity. Know how team members are evaluated and rewarded in their daily responsibilities and how to respond when those measures are misleading.

Does this sound familiar? You’re on a project team and have completed the analysis. You now begin ranking the ideas in order of attractiveness, but one or more team members take positions that contradict the analysis. They don’t directly dispute the valuations or risk analysis, they just prefer a different solution but can’t express why. A common culprit for this disconnect is our performance measures.

Retreating To My Comfort Zone
Let’s take a step back. It’s easy for a finance person to get comfortable with good NPV and IRR valuations – that’s our language. But, what about someone who isn’t a finance geek? Maybe they are a shift supervisor, an IT manager, a radiologist, or a marketing director; NPV and IRR are, at best, vague concepts.

So, what’s a non-finance person likely to do when NPV and IRR mean little to them? They usually default to using their performance metrics – the measures that their boss uses for bonuses, raises and promotions (e.g. cost per patient, headcount, cost per ton, % market share, etc.).
Don’t assume these folks are gaming the numbers to boost their bonuses; that’s almost never the case. If I was in their shoes, using my performance measures is very rational, moral behavior:

  • First, I am familiar with my performance metrics. They are my ‘comfort zone’.
  • Second, these metrics must be reliable… the business relies on them to motivate me!

Unfortunately, performance metrics expose us to a big problem. These measurement tools were never designed for evaluating individual capital investments. They will often give the wrong answer when ranking the attractiveness of potential solutions and result in proposing the wrong solution.

Antidotes
There are a few basic steps a team leader can take to counter the distraction of performance measures:

  1. Know Your Enemy: Identify the performance metrics and understand how they may bias the project. If public disclosure is unwise, gather this information from HR and even consider adding HR to the project team.
  2. Talk About It: Raise performance measure issue with the team early in the analysis and help them understand the proper methods for ranking potential solutions.
  3. Correct Injustices: Assure team members you will take steps with supervisors and HR to adjust individuals’ performance targets. Let’s admit it, it is unrealistic to expect even people with high ethical standards to avoid these powerful biases.

One very big caveat: Meddling with compensation programs isn’t realistic in some situations; so don’t promise what we cannot deliver.

Of course, monitor the situation, keeping the issue in mind as the team begins ranking the attractiveness of the possible solutions. If it appears a bias is affecting the work, revisit the issue with the team

All this sounds easier than it actually is. If I have had certain metrics drilled into me over many years, it is very difficult to fully break away in favor of less familiar measures of success.

Longer-Term
Ideally, if we have the time, we’ll equip people with a working understanding of financial valuation when we are asking them to make capital recommendations. It is a great investment in their skills that reaps better capital deployment over the long term.

© 2011 Verax Point Consulting, LLC


About Dave Wittenberg

I am all about equipping business teams to enjoy greater payoffs on their biggest bets. I bring a unique combination of evaluation expertise and behavioral insights developed over the course of more than 300 major strategic initiatives. Applying a highly effective, disciplined framework, teams unleash their full capabilities to generate better solutions, wring out hidden waste, and deliver superior returns. Specialties: Investment Evaluation, Decision Excellence, Strategic Analysis, Mergers and Acquisitions, Investor Relations, Leadership Development, Education & Training
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