Imperfections in Performance management

Misalignment

Values are based on both quality and quantity

If reward based more on quantity – So people will lead to maximize their incentives. This is also
called as tunnelled vision - Distorted or perverse behaviour

As a result, the total value will go down.

Cases:

Safelite and

Citibank – If you are focusing on CSAT, means other investments. If people don’t focus on CSAT,
people focus excessively on financials. In long-run it will bring down financials.

Causes for misalignment:

It’s difficult to translate everything in the organization to measurable metric.

There are some activities which are important, but are difficult to measure.

Eg: Heart surgery. Measuring success of heart surgery depends on enormous amount of information
and collecting and analysing that information is costly. We will be able to convert qualitative
measures into metrics, and will end up in objective metrics but we spend a lot of time in it.

If its difficult to measure quality metrics which are important, then it’s better not to incentivise
quantity.

Interdependency
Case: Safelite – Team vs individual incentives.

Individual contribution is difficult to identify. If the task is essentially interdependent in nature and
what is exact contribution of each team member in the overall contribution of the team is called as
interdependent tasks.

• Its not a good idea to incentivise individuals and not have relative grading system. Case:
Jack welch vs Microsoft.
Relative performance evaluation or Forced distribution creates competition and lack of
interdependency.
• If we bring up team incentives, there is cooperation but individual accountability goes down.
Eg: Free riding in group projects and assignments. (Controllability)

Controllability

• We cannot say whether success is due to individual or external factors or due to team
players.
• Some amount of uncontrollability is unavoidable. Because the moment you are working in
an organization, there are other people who are working and there are external factors.
• Maybe we can influence uncontrollability by using persuasion power to people.
• When there are qualitative metrics and lot of discretion involved (managerial discretion)
then we have the issue of lack of controllability.
• If we reward team and not individuals, it creates lack of controllability.

There is a relationship between three imperfections.

We cannot minimize all three errors at the same time. If we minimize two errors, the other error will
go up.

To manage all three, we have to do it with the recruitment system.

Controllability can also be read as Accountability
Controllability → How much control do you have on how much income you will get at the end of the
month