Gaming Target's Incentive Compensation Scheme

Canadian Business has a long and thorough article about Target's failed entry into Canada. Highly recommended. Buried inside is this little vignette.

A small group of employees also made an alarming discovery that helped explain why certain items appeared to be in stock at headquarters but were actually missing from stores. Within the chain’s replenishment system was a feature that notified the distribution centres to ship more product when a store runs out. Some of the business analysts responsible for this function, however, were turning it off—purposely. Business analysts (who were young and fresh out of school, remember) were judged based on the percentage of their products that were in stock at any given time, and a low percentage would result in a phone call from a vice-president demanding an explanation. But by flipping the auto-replenishment switch off, the system wouldn’t report an item as out of stock, so the analyst’s numbers would look good on paper. “They figured out how to game the system,” says a former employee. “They didn’t want to get in trouble and they didn’t really understand the implications.” Two people involved in the discovery allow that human error may have been a component, too. Like SAP, the replenishment software was brand new to Target, and the company didn’t fully understand how to use it. When Schindele was told of the problem, he ordered the function to be fully activated, which revealed for the first time the company’s pitifully low in-stock percentages. From there, a team built a tool that reported when the system was turned on or off, and determined whether there was a legitimate reason for it to be turned off, such as if the item was seasonal. Access to the controls was taken away from the analysts, depending on the product.

Sometimes, it is difficult to get the metrics right.