Tuesday, March 5, 2013

"You are what you measure"

Thus spoke Michael Corbat, new CEO of Citigroup Inc.  (WSJ article)
Mr. Corbat is expected to unveil quantifiable targets that will allow analysts and investors to more-easily gauge the company's performance, said the people familiar with the plan. Those goals are expected to be similar to ones outlined in a new executive compensation plan that grades performance based on return on assets and tangible common equity, the people said.

Mr. Corbat is correct, in theory.  As we note in our textbook, the only problem of management is how to align employee incentives with company goals.  By this we mean how do you design an organization so that employees (i) have enough information to make good decisions, and (ii) the incentive to do so.

And of course, incentives have two pieces:  (1) a performance evaluation metric; and (2) a compensation scheme that rewards good performance, or punishes bad performance.  Mr. Corbat correctly focuses on the most difficult piece of management, measuring performance.  He promised to
...instill the right incentives through the use of score cards that will grade the 50 or so top executives based on a set of weighted goals from five categories: capital, clients, costs, culture and controls. The highest score is 100%; the lowest is minus 40%, said people familiar with the plan.

In practice, it is easy to predict that Mr. Corbat will run into trouble.  There are a myriad of decisions that employees are expected to make, and designing incentives to make sure they make good decisions for each one is a difficult task.  Objective performance evaluation works best for employees like sales people who have a single objective metric that reflects their individual decisions.

With five potentially conflicting categories (how do you measure "culture"), there is a danger that the performance evaluation exercise becomes an exercise in subjectivity--exactly what the quantitative targets are designed to replace.

If he had asked me, I would have suggested company profit or division profit, and grant stock bonuses based on these metrics that could not be exercised for at least five years. 

We will be following Citigroup's performance. 

1 comment:

  1. Measuring job performance and incentives for good performance can be the difference between employees doing “just enough” and excelling in their work for the benefit of the firm. Too often, however, companies have performance reviews but fail to compensate the employees for a job well done. This is typical in medium size non-profit organizations. ($10-$50mil).

    Why go through the exercise of having HR create a performance measuring evaluation if the organization is not going to act on the findings. This type of exercise only demoralizes employees who realize they had a great review but are not getting promoted or compensated for their work. Those who do not receive great reviews, still maintain their positions with no downsize to their monetary or professional situation.

    While some might argue that paying employees based on their performance review is archaic, one can argue that individuals are not only driven by their salaries to take an initial position, but employment progressive individuals measure their own performance through outcomes and the corporations acknowledgement through their salaries.

    In article in Forbes entitled “Top Five Reasons Employees Will Quit in 2013,” author Meghan Casserly (Forbes.com, January 1, 2013) states the following:

    1. Stability
    2. Compensation
    3. Respect
    4. Health Benefits
    5. Work-Life Balance

    Stability can refer to ones standing in the company hierarchy, feelings of comfort and the company’s financial position. But the number two reason is compensation. The costs of losing top employees and searching and retraining new talent are staggering. It boggles my mind to see how these organizations, for just a modest raise in most cases, can keep an employee feeling valued and on the job, but refuse to see beyond what benefits giving this compensation means to their bottom line in the long run.

    How do you give someone and performance appraisal, tell them they are a wonderful, valued employee and then tell them there are no raises this year? No compensation (compensation can be given in many ways) at all and expect them to be satisfied? Especially, if they know there value somewhere else.