Performance Management: Incenting Performance both up and down

A recent article (Rail’s risky business) by Mary-Jane Bennett got me thinking about how we typically approach performance management (PM). The article discusses how railways are exposed to the risks of carrying dangerous materials on their systems.

For this post I want to examine as a thinking piece how we might want to incent important roles (roles that have a dramatic/significant impact on others for their actions and/or performance outcomes).

It is common to invent achievement of targets and goals such as financial returns, projects brought in on time and budget, sales, [production goals, etc. These are about reaching “positive” targets. How do we invent negative issues? This is about how we can invent these roles from taking undue risks. How would we even observe for these? Mostly by their absence of having occurred. If something did not occur, how do we know how the role “managed” that non-observable occurrence?

One way is of course is to put sufficient “skin in the game” (SIG). Apparently the Romans did this with their bridge builders by making them sit under the bridge when a legion of troops and related equipment and gear followed. If the bridge failed, the bridge builder obviously was prevented from practicing his craft in the future. But how do we apply the SIG principle more generally, especially to executives, and other leaders? How do we do this so “rogue” traders become unlikely to engage in trading behaviour that destroys banks, and their depositors futures?

I propose, that though it may not be so obvious up front (because we don’t have a lot precedent to look to?) it may still be worth doing.

One approach that does this in a somewhat oblique way is the famous goals and values performance assessment that came out of General Electric some years ago. This approach balanced between practicing corporate values while achieving performance goals.

But as I understand it, Enron had similar practices (?) in place and if so, these did not suffice. I also observe where the President of the United States has announced temporary ad hoc measures to give the new healthcare system to get up and running successfully. Why is this germane here? Apparently, some people are concerned that it may leave private healthcare officers exposed to lawsuits and other forms of legal actions in the future. Let’s assume that this concern has some merit, I am not sure how a General Electric  approach to balancing achievement with risk would help here, as the implications are that the President’s failure to “lead” and important social policy matter would in part transfer the consequences of this failure onto others. This is the “find another sucker” gambit. Part of the problem in how we invent people in significant roles is we make it relatively easy for them to transfer the consequences of their failures onto others (public money bailouts for bank and auto manufacturing executives?).

Boards of Directors have a responsibility for ensuring the senior executives in the organization are properly compensated AND this includes being invented to be so. I personally had to laugh when I heard how much of his bonus Steve Ballmer lost because of miscues concerning Vista, Kin, and Surface. To me at least much working capital was squandered, while his “accountability” was very limited.

Managing risk while pursuing goals is an accountability issue. a PM system for major roles should have some form of symmetry regarding awards and SIG. I have little belief that this is a common practice. What does symmetry look like?

If you get it wrong you will pay a price proportional to other victims. If you get it right, you get proportional benefits.

But life is complex, cause and effect are opaque, I did my best, I was unlucky, etc. So what, you stepped up voluntarily to seek prominence, or whatever, Life isn’t fair in many cases. But where your actions contributed to the suffering of others, how should you share in this outcome (for others) too? If we take risks in our personal lives and we fail, we usually pay the price quite directly. Unfortunately there are often others close to us who get exposed too.

From now on I will be looking at all PM schemes as they pertain to important roles with the hope that they have some form of symmetry in them regarding achievement and failure.




About 123stilllearning456

As a management consultant I am passionately interested in talent management and risk/uncertainty issues. In the area of talent management I propose that we seek strategies that look beyond the staffing/employee centric frames of reference. I have been frustrated at the "closing down on possibilities" by these more conventional staffing/employee centric approaches. I have been impressed where people have found systematic solutions to their talent management issues by going beyond the conventional approaches. In the area of risk and uncertainty, I am interested in making this topic relevant to more normal decision making situations. My conceptual foundation is to use the micro-economist's fixed/variable cost theme. I also think it is important to look at these issues for people through their emotional and psychological lens. As a premise I think risk and uncertainty only exist where there is a person who cares about possible events and its consequences. Hence, risk and uncertainty are social based concepts (no sentience, no risk and uncertainty). A major influence on my thinking in this area is Nassim Taleb of "Black Swan" fame. This BLOG provides me with an opportunity to express my thoughts on topics that interest me. As this is an online diary, content is more important to me than polish. I apologize if this distracts from readers' enjoyment and learning. Still I find this a useful way to live up to my namesake, learn more from others and hopefully provoke creative thoughts and ideas in others.
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