The Five Traps of Performance Measurement

Most of us find performance reviews intimidating and sometimes outright threatening. As a result a lot of us will find ourselves falling into one or all of these five traps.


Trap 1: Measuring Against Yourself

The papers for the next regular performance assessment are on your desk, their thicket of numbers awaiting you. What are those numbers? Most likely, comparisons of current results with a plan or a budget. If that’s the case, you’re at grave risk of falling into the first trap of performance measurement: looking only at your own company. You may be doing better than the plan, but are you beating the competition?

To measure how well you’re doing, you need information about the benchmarks that matter most—the ones outside the organization. They will help you define competitive priorities and connect executive compensation to relative rather than absolute performance.

The trouble is that comparisons with your competitors can’t easily be made in real time which is precisely why so many companies fall back on measurements against the previous year’s plans and budgets.

One way is to ask your customers. Of course you have to make sure you don’t annoy your customers as you gather data. Think about how restaurant managers seek feedback about the quality of their service: Most often they interrupt diners’ conversations to ask if everything is OK; sometimes they deliver a questionnaire with the bill. Either approach can be irritating. Danny Meyer, the founder of New York’s Union Square Hospitality Group, gets the information unobtrusively, through simple observation. If people dining together in one of his restaurants are looking at one another, the service is probably working. If they’re all looking around the room, they may be wowed by the architecture, but it’s far more likely that the service is slow.


Trap 2: Looking Backward

Along with budget figures, your performance assessment package almost certainly includes comparisons between this year and last. If so, watch out for the second trap, which is to focus on the past. Beating last year’s numbers is not the point; a performance measurement system needs to tell you whether the decisions you’re making now are going to help you in the coming months.

Look for measures that lead rather than lag the profits in your business. The U.S. health insurer Humana, recognizing that its most expensive patients are the really sick ones (a few years back the company found that the sickest 10% accounted for 80% of its costs), offers customers incentives for early screening. If it can get more customers into early or even preemptive treatment than other companies can, it will outperform rivals in the future.

The quality of managerial decision making is another leading indicator of success. Boards must assess top executives’ wisdom and willingness to listen. Qualitative, subjective judgments based on independent directors’ own experience with an executive are usually more revealing than a formal analysis of the executive’s track record (an unreliable predictor of success, especially for a CEO) or his or her division’s financial performance.

Finally, you need to look not only at what you and others are doing but also at what you aren’t doing.  Good management is about making choices, so a decision not to do something should be analyzed as closely as a decision to do something.


Trap 3: Putting Your Faith in Numbers
Good or bad, the metrics in your performance assessment package all come as numbers. The problem is that numbers-driven managers often end up producing reams of low-quality data. Think about how companies collect feed- back on service from their customers. It’s well known to statisticians that if you want evaluation forms to tell the real story, the anonymity of the respondents must be protected. Yet out of a desire to gather as much information turn out to be lemons, as possible at points of contact, companies managers have rejected those rejections count as successes. routinely ask customers to include personal data, and in many cases the employees who provided the service watch them fill out the forms. How surprised should you be if your employees hand in consistently favorable forms that they themselves collected? Bad assessments have a tendency to mysteriously disappear.

Numbers-driven companies also gravitate toward the most popular measures. If they’re looking to compare themselves with other companies, they feel they should use what ever measures others use. The question of what measure is the right one gets lost.

Similar issues arise about the much touted link between employee satisfaction and profitability. The Employee-Customer-Profit Chain pioneered by Sears suggests that more-satisfied employees produce more-satisfied customers, who in turn deliver higher profits. If that’s true, the path is clear: Keep your employees content and watch those profits soar. But employees may be satisfied mainly because they like their colleagues (think lawyers) or because they’re highly paid and deferred to (think investment bankers). Or they may actually enjoy what they do, but their customers value price above the quality of service (think budget airlines).

Trap 4: Gaming Your Metrics

In 2002 a leaked internal memo from associates at Clifford Chance, one of the world’s largest law firms, contended that pressure to deliver billable hours could encourage lawyers to pad their numbers and create an incentive to allocate to senior associates work that could be done by less expensive junior associates.

You can’t prevent people from gaming choose to manage by numbers, no matter how outstanding your organization. The moment you choose to manage by a metric, you invite your your managers to manipulate it.

Metrics are only proxies for performance. Someone who has learned how to optimize a metric without actually having to perform will often do just that. To create an effective performance measurement system, you have to work with that fact rather than resort to wishful thinking and denial.

You can also vary the boundaries of your measurement, by defining responsibility more narrowly or by broadening it. To reduce delays in gate-closing time, Southwest Airlines, which had traditionally applied a metric only to gate agents, extended it to include the whole ground team ticketing staff, gate staff, and loaders so that everyone had an incentive to cooperate.

Finally, you should loosen the link between meeting budgets and performance; far too many bonuses are awarded on that basis. Managers may either pad their budgets to make meeting them easier or pare them down too far to impress their bosses. Both practices can destroy value. Some companies get around the problem by giving managers leeway. The office supplier Staples, for example, lets them exceed their budgets if they can demonstrate that doing so will lead to improved service for customers.  Another way of providing budget flexibility is to set ranges rather than specific numbers as targets.


Trap 5: Sticking to Your Numbers Too Long
Smaller and growing companies are especially likely to fall into this trap. In the earliest stages, performance is all about survival, cash resources, and growth. Comparisons are to last week, last month, and last year. But as the business matures, the focus has to move to profit and the comparisons to competitors.

It’s easy to spot the need for change after things have gone wrong, but how can you evaluate your measures before they fail you? The answer is to be very precise about what you want to assess, be explicit about what metrics are assessing it, and make sure that everyone is clear about both.