What is the value of performance measures over time?

As time goes by, measures improve but performance doesn’t. People get better at improving the measures but no performance. Why is that?

We had a discussion about this paradoxical phenomenon recently at the CBP. Monica Franco-Santos, one of the members of the CBP, neatly summarizes the reasons in a book she co-authored with Luis Gomez-Mejia & Pascual Berrone.

Here’s her explanation:

“The usefulness of performance measures decays over time due to their loss in variability (Meyer and Gupta, 1994). In other words, the diminished variance of performance measures reduces their ability to differentiate “good” from “bad” performance as time goes by, which in turn reduces its validity (Franco-Santos, 2008). For instance, Earnings per Share (EPS) was a performance measure commonly used in executive incentive systems in the early 1970s. This measure soon became irrelevant as it was no longer effective in driving the expected behavior. Executives found a way of getting the expected EPS results. High levels of EPS were achieved but this measure no longer differentiated good performing companies from bad performing companies. Although the measure was appropriate when first used, it became distorted as time went by (Meyer and Gupta, 1994).

Meyer and Gupta (1994) suggest that the usefulness of performance measures decays over time due to four causes: positive learning, perverse learning, selection or suppression. Positive learning refers to the fact that, over time, people learn how to improve their performance in whatever they are being measured on. Perverse learning or gaming refers to the idea that people learn how to meet the specific requirements of a performance measure without improving the performance that is sought. Selection refers to the fact that organizations learn over time, either positively or perversely, how their employees perform and decide to replace low performers with high performers. Finally, suppression refers to the indication that performance measures are suppressed when performance differences cannot be diminished by either improvement, the appearance of improvement, or selection.”

From the book “Compensation and Organizational Performance: Theory, Research, and Practice”, by Luis Gomez-Mejia, Pascual Berrone, & Monica Franco-Santos, written in 2010.

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