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Incentives and Consequences

Peter Drucker famously wrote, “What gets measured, gets managed.” A less noticed corollary is that, as Dr. Deming pointed out, what gets measured can drive unintended consequences.

This came to mind recently when several small business clients within a few weeks asked me how to reorganize as woman-owned businesses. It seems that the government, as part of a policy to encourage women entrepreneurship, incents them to form businesses by setting aside a percentage of some contracts for small companies that are 51% or more owned by women.

The policy has been apparently successful. From 1997 to 2006, the number of women-owned service businesses increased by 69% and retail businesses by 130%.

Only one problem. The numbers are suspect.

I do not doubt that there has been substantial growth. However, I believe these government statistics are overstated because businesses have reason to overstate. My sample of clients is admittedly small. But in every case, husbands were simply listing their wives as 51% owners and giving them the title of CEO or President. In no case did these changes impact the management of the business. It simply allowed existing businesses to qualify for contracts they might otherwise miss. So has the policy really worked, or is it simply driving metrics with no real impact?

I encountered similar unintended consequences this summer when I offered my daughter, a voracious reader of fantasy novels, a reward for reading nonfiction. When the prizes ended, so did her reading. Not just of nonfiction, but of everything. When I asked why, she said it wasn’t worth it if she wasn’t getting anything. (Somewhere, Daniel Pink is nodding and smiling).

Does your organization create similar distortions with well-intentioned incentives? For example, do you have managers decrease annual profits because they are incented to hit quarterly goals? In big companies and small, I have seen salespeople offer discounts to accelerate orders that would have come in anyway but not in time to make the quarterly number. Revenues inevitably dip after quarter end, suggesting that nothing was gained while unnecessary discounts depressed profits.

Or are your managers evaluated by 360 degree feedback systems that encourage them not to risk making enemies? If so, are crucial confrontations avoided which hurt company performance?

Or are your managers rewarded for activity – collecting checkmarks on their hyperactive to-do lists – rather than on results achieved?

You get the idea. Watch for unintended consequences. Consider whether attempting to modify behavior with incentives is causing more harm than good. Would it be more productive to simply increase engagement by allowing more autonomy, empowering the pursuit of personal excellence, and helping workers connect their efforts to a higher purpose?

Bad managers may think that feels like not managing. Good managers are already doing it.

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2 Responses to “Incentives and Consequences”

  1. Bing Chou says:

    Mark -

    I’ve recently been taken on by a small web based business that has not been metrics driven in some time. It’s been interesting reviewing what they used to track as well as trying to develop the key metrics for the company as we get back into the metrics groove.

    The company has been tracking what is easy to track (pageviews and other default reports), rather than tracking what drives revenue and profits. We’ll be investing significant time into developing metrics for the outcomes we want (better customer experience, more revenue, more profits)and developing mechanisms to test improvements over time.

    A thought provoking post, especially in light of the fact that so many metrics are available to business owners these days.

  2. mpfriedman says:

    Bing – I think you nailed it – metrics are often not calibrated to results, but rather chosen for expediency. This is further complicated in a fast-moving arena like social media, where a metric that correlates with success one week may be obsolete by the next. And then further complicated, as we recently blogged, by the long cycle of relationship marketing, where some efforts (e.g., tweeting) may not bare fruit for months or years, and where a complex stew of variables drives the final result.

    In the end, leaders must stay involved with their dashboards and not put them on cruise control. Do you still need this report? Is this still a useful metric? Judgment required, here as in all things related to business and organizations.

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