A reporter once pointed out to Joe Paterno after a football game that the opposing team had out-played his Penn State in “every statistic of the game”. Joe, as only Joe could, responded, “yes, and we won”. That pretty much sums up the difference between scores and statistics. Statistics are interesting indicators, but it’s the score we take to the bank. The distinction is very clear in football… very cloudy in business. As I described in last week’s video blog, one company’s 80 page attempt to define performance, comprising 38 pages of statistics of the game, with absolutely no mention of the company being profitable (the score) or not…wow. Pieces, pounds, units, hours, on-time, widgets per day… none of these are mentioned on your scoreboard, your financial statement. They’re all statistics, not scores. And, most importantly, I can tell you, the vast majority of KPI’s have little or no correlation to profitability. They may in fact be inverse to profitability. That’s a scary thought. Great caution must be taken when determining measurements; it is not as self-evident as many think.
When designing variable, performance based compensation, gainsharing, or other reward systems, the million dollar question is always, “of all the things we could measure, what should we measure”? There are no shortage of candidates. Someone else described it better than I, when he said, “Enter through the narrow gate. For wide is the gate and broad is the road that leads to destruction, and many enter through it”. The corporate landscape is littered with the remains of failed pay-for-performance, incentive, bonus, and gainsharing systems. Typically for one or more of three reasons. Measuring the wrong thing(s) is always in the top three.
Remember, you will usually get what you asked for. The question is, did you ask for the right thing? Case in point. Every company has a pot of gold at the end of a 40 hour rainbow. It’s called overtime, the most abused incentive system yet created. Can’t do it in 40 hours? We’ll pay you a 50% bonus to do it in fifty. I have a pet theory. If we payed a 50% bonus for every hour less then forty worked… and met our business requirements, I bet we would all be working a 30 hour week. If hours worked drive compensation, then it is hours we’ll get. If organizational performance drives compensation, then it’s performance we’ll get. However, it is critical to define performance correctly.
The bottom-line, no pun intended…. you need metrics that have a proven correlation to profit or ebitda. Not “I think so”, or “I’m sure”, but proven. That takes study, analysis, and experience. As I said last week, quoting Vince Lombardi, what is “running, passing, blocking, and tackling”, in your business? What are the four fundamentals that are proven to drive profit? Once we know, then we’ll tie everyone’s pay to it and get their full attention.
In a couple of weeks, I will discuss how this may affect corporate support staff’s or shared services groups. On a separate note, I am off tomorrow for my annual summer motorcycle run up to northern Maine, via the Adirondack National Park, Vermont, and New Hampshire. The weather looks great for the trip and I look forward to posting some blogs from the road. Of course that’s after a Maine Lobster and a New Castle Brown Ale!