Perverse Effects of Some Performance Measures [LO4]

There is often more than one way to improve a performance measure. Unfortunately, some of the actions taken by managers to make their performance look better may actually harm the organization.

For example, suppose the marketing department is held responsible only for increasing the performance measure “total revenues.” Increases in total revenues may be achieved by working harder and smarter, but they can also usually be achieved by simply cutting prices. The increase in volume from cutting prices almost always results in greater total revenues; however, it does not always lead to greater total profits. Those who design performance measurement systems need to keep in mind that managers who are under pressure to perform may take actions to improve performance measures that have negative consequences elsewhere.

Required:

For each of the following situations, describe actions that managers might take to show improvement in the performance measure but which do not actually lead to improvement in the organization’s overall performance.

1. Concerned with the slow rate at which new products are brought to market, top management of a consumer electronics company introduces a new performance measure—speed-to-market.

The research and development department is given responsibility for this performance measure, which measures the average amount of time a product is in development before it is released to the market for sale.

2. The CEO of a telephone company has been under public pressure from city officials to fix the large number of public pay phones that do not work. The company’s repair people complain that the problem is vandalism and damage caused by theft of coins from coin boxes—
particularly in high-crime areas in the city. The CEO says she wants the problem solved and has pledged to city officials that there will be substantial improvement by the end of the year.
To ensure that this is done, she makes the managers in charge of installing and maintaining pay phones responsible for increasing the percentage of public pay phones that are fully functional.
3. A manufacturing company has been plagued by the chronic failure to ship orders to customers by the promised date. To solve this problem, the production manager has been given the responsibility of increasing the percentage of orders shipped on time. When a customer calls in an order, the production manager and the customer agree to a delivery date. If the order is not completed by that date, it is counted as a late shipment.
4. Concerned with the productivity of employees, the board of directors of a large multinational corporation has dictated that the manager of each subsidiary will be held responsible for increasing the revenue per employee of his or her subsidiary.