Measure What’s Important
HOW Online contributor Steve Kerr definitely knows a thing or two about reward systems, as he previously led the leadership development centers for GE and Goldman Sachs when he served as chief learning officer. In his new book, “Reward Systems: Does Yours Measure Up?” (Harvard Business Press, 2009), the expert on leadership and management delves into how companies can realign reward systems to improve performance.
Now a senior advisor at Goldman Sachs, Kerr has also served on many prominent university business school faculties, including the University of Southern California, where he was dean of the faculty and director of the Ph.D. program.
In our continuing “First Person” series, where leaders give us their firsthand knowledge and experience on various issues, HOW Online asks Kerr: “How should companies put together reward systems during tough times?”
- Part 1 of the series
- Read Part 2 of the series
Kerr
Steve Kerr: One of the basic principles is that you should measure what’s important to measure, not what’s easy to measure. In many cases — especially in hard times — people decide what is important and then they over-simplify. For example, they may conclude that what’s important is top-line or bottom-line growth, or units sold or amounts loaned.
Then, people become fixated, and since the rewards can only be based on what you’re measuring, if your measurements are oversimplified, your rewards necessarily will be as well. What good organizations do is to continue to worry about all of their stakeholders. In hard times, you don’t just do what Congress wants or what your customer wants or what the union wants. You have to balance some very subtle shareholder relationships. For example, you don’t want the banks to stop worrying about their balance sheets, but neither do you want them to worry only about their balance sheets.
It’s comparatively easy to do this when times are good. In hard times, there’s a tendency to measure only a couple of things and then base the rewards on those things. So you’ll tend to see a big difference between well-managed and poorly managed organizations with respect to how thoroughly they provide measurements and rewards in tough times.
Adverse economic conditions should not necessarily change how companies put together their reward systems. One of the central premises of my book is that rewards have to be the third thing you do. Measurements have to come before rewards because you can’t reward anything you haven’t measured, but definition has to be the first thing you do. Definition includes being very clear about what it is you’re trying to do. You can’t catch up later. If you define something inadequately, your measurements and rewards will also be inadequate.
Another tendency of poorly run organizations is that when times get tough, the place gets very autocratic. Management stops listening to lower-level people. The boss takes over, and it becomes a command-and-control operation. In contrast, well-run organizations understand that participation works unusually well in cases where there are tough choices to be made. This is not because the subordinates are smarter. Often, when you look at the data, anybody would come up with the same solution that the boss came up with.
But although the quality of the decision doesn’t necessarily get better — it’s the same decision — people’s support for the selected course of action is much higher. The same idea that people will subvert and hate and oppose if it comes out of the boss’s office they will fight for if they had a hand in coming up with it because they identify with it as their own.
It takes courage to be participative in tough times because the choices are less fun, and some executives falsely assume that their subordinates lack the discipline to make tough choices. Alternatives — such as, “We can lay off people”; “We can cut down some product lines”; “We can make our benefit plan less attractive”; or, “We can reduce everyone’s bonus” — are really unattractive. It’s very different from when you’re growing and all of the alternatives are appealing.
Note that in these cases, you’re still not changing the fundamental paradigm of definition, measurement and reward, however, the way it plays out will feel very different and should be done differently in hard times.
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July 14th, 2009 at 11:11 am
[...] Read Part 1 of the series [...]