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Metrics-obsessed managers should be careful


what they wish for, unlike the banks
Ross Gittins

Published: August 21 2017 - 6:04AM

In decades to come, when the history of business endeavour in the early part of the 21st century is
written, I predict it won't be kind to the great management fad of "metrics".

When you look at the terrible mess the Commonwealth and the other big banks have got themselves
into, it's hard not to suspect that misuse of KPIs key performance indicators and incentive pay do
much to explain their predicament.

It's not that I'm against measuring what can be measured about the activities of businesses. As a
lifelong bean-counter, I'm a great believer in measurement as an aid to decision-making and
accountability.

And it's certainly true that the digital revolution has made it much easier and cheaper to measure
multiple dimensions of a business's activities.

No, the problem is the naivety with which so many top executives have leapt into the metrics fashion,
seeing it as a magic answer to their management task, a simple and easy way to incentivise their
troops and ensure they're all working to further the company's greater good.

Their trouble is that their inexperience in the measurement business stops them understanding its
awesome power. Measurement's immense power for good or ill.

Its ability to keep the business surging forward, or running off the rails. Indeed, its ability to convince
you you're going great guns until the very moment disaster looms.

Use metrics as a substitute for thought rather than as an aid to hard thinking and there's a high chance
it'll bring you undone.

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Metrics-obsessed managers should be careful what they wish for, unlike the banks Page 2 of 4

The slogans of the metrics brigade say "you can't manage what you don't measure" and "what gets
measured gets done".

Trouble is, that latter slogan is more a warning than a promise. The psychologist Martin Seligman
observes that "if you don't measure the right thing, you don't do the right thing".

The notion that you can't manage what you don't measure is a trap. A smarter conclusion is that "not
everything that counts can be counted". Lose sight of that and you're headed for mediocrity at best.

Which brings us to the importance of motivation. Money-obsessed managers who see attaching
money to performance indicators as the perfect way to ensure people are motivated to achieve the
firm's goals have failed to think hard about motivation.

Like managers, staff have many motivations, only one of which is to make more money. But there's
plenty of research evidence that money tends to overpower other motives even such a worthy (and,
to bosses, cheap) motive as taking pride in doing your job well.

Attach monetary rewards to some dimensions of a person's responsibilities but not others and just
watch as the non-incentivated dimensions are pushed to back of mind.

Give a pep talk about how important those other aspects are, and you won't be believed. Money
speaks louder than words.

Then watch as the extra-reward-for-effort mentality takes hold. I'll try harder for extra money but, if
you're not offering extra, why would I bother? Do you take me for a mug?

Two academics at Macquarie University, Associate Professor Elizabeth Sheedy and Dr Lyla Zhang,
conducted a lab simulation using 306 financial professionals recruited with help from an industry
body.

Participants were asked to do some simple analysis and then make up to 60 decisions about buying
securities, granting loans and underwriting insurance, all within company policies designed to control
the amount of risk it took on.

These policies could mean that potentially profitable deals weren't pursued, or that time was "wasted"
that could have been devoted to generating profits.

Participants were randomly assigned to five different groups, which varied according to how
employees were paid fixed, or variable according to profits generated and whether managers
emphasised making profits or controlling risks.

"We found that when people had variable payments that [were] linked to profits, their compliance
with risk management was significantly reduced," the researchers found.

"When managers and co-workers were also profit-focused, compliance reduced even further.
Interestingly, the variable payments did not produce significant increases in productivity" relative to
participants on fixed pay.

"On the other hand, when participants were paid a fixed amount regardless of profit, compliance with
risk management policies was higher, although still not perfect."

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The researchers conclude that "since incentives structures that are profit-based have an adverse impact
on risk compliance and do little for productivity, such remuneration programs should be
reconsidered".

"Our research shows that it is difficult to have high rates of risk compliance in the presence of profit-
based payments. Staff are likely to believe that profit-based payments signal the true priorities of the
organisation and they modify their behaviour accordingly."

Ross Gittins is the Herald's economics editor.

This story was found at: http://www.theage.com.au/business/comment-and-analysis/metrics-


obsessed-managers-should-be-careful-what-they-wish-for-unlike-the-banks-20170820-gy03je.html

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