measure outcomes or the means?

Reading an article on the HBR site triggered many nascent thoughts. The article argues that some CEO decisions are based on the fact that their compensation is solely linked to the share price of the firm. You can view the article here- http://hbr.org/2010/06/column-you-are-what-you-measure/ar/1

Share price is the outcome of the current and the expected future performance of a firm. This, also only in an ideal situation where there is no price manipulation. The current and the future expected performance comes from a series of decisions. The decisions could be about sources of funds, types of markets, manufacturing facilities, etc. So, the share price is essentially an outcome of a series of decisions.

About 50 years back process control ideas rocked the manufacturing industry. Instead of accepting or rejecting a product at the end of manufacturing cycle, effort was focused on ensuring the right set up, right tools, right trained operators, etc. to ensure a correct product. Process control advocated strengthening the process to ensure good products. The focus of measurements were process parameters and not end product features.

Till the product reaches the end of the line, it is subjected to significant additional work. In this sense, the finished product is more expensive than the raw material. When significant amount of finished products are found to be defective it causes high rework cost. In some cases managers dilute the quality guidelines to ensure the product is accepted. In still some other cases, sometimes, managers cheat to show that the products are as per norm. This is because with the end of pipe measurement, the cost and stake of having a rejected product is just too high.

This is what precisely happens in one number outcome based measurements. CEOs would do almost anything to ensure that this number stays up. Such measurements are the root of many corporate scams. The process shifts from ensuring good processes to ensuring good results. Just like in a shop floor, good results can rarely come from weak processes.

The people to blame in most such cases are those who set and reward on the basis of such measures. It is definitely easy to use the stock price for CEO incentive, but it is definitely not a good measure. For one, it is merely a measure of outcome and not about the method or process strength in the organisation. Two, the stock price is a lagging indicator. The price goes down after the performance is reported as poor. In some cases it could be too late to affect an improvement. Three, it is not very difficult to manipulate stock price movement over a short term without a change or performance. This incentives short term behaviour among executives who might want to cash in and move out.

This idea is not limited to CEO measurement alone. It can easily be expanded to measure every professional in every area. The key is to measure the means of doing work. Good outcome is a function of good means and vice versa is not necessarily true.