How do you respond when your KPIs are being gamed?

Over the past 3+ years, economic news has appeared to be stellar. The stock market has grown beyond belief, unemployment has dropped and stayed low, consumer confidence has been high, and corporations have been doing well. All our key economic metrics have been solidly in the green. But wouldn’t this be the case if the structure of the economy was weak but the metrics were being gamed? I’m not saying this is the case, but it might be a question worth asking.

Another example of this phenomenon is commission structures for salespeople. Many a company has put in place commission structures that incentivize their sales teams to hit certain targets. Maybe they get a higher commission rate the higher their revenues. Maybe they get a cut of the profits. Maybe it varies product to product. The details may change but the process stays the same. Some of the companies that implement these policies get burned badly. The classic example is a company puts in place commissions based on revenue targets – the more revenue a salesperson brings in, the higher their commission. Separately, the company decides to price a couple of products as loss leaders (no profits from the sale) to encourage buyers to look at associated products. Salespeople then begin to sell an inordinate amount of the loss leader products without any of the associated products that would bring in profit. Revenues soar but costs skyrocket and profits disappear. The salespeople make out like bandits because they did what they were incentivized to do.

Most managers hear these stories of incentives gone wrong and believe it would never happen with their team. Their team cares about the company and doing the right thing. But these situations can arise anywhere. They come out of a pressurized environment to perform at all costs. Decisions that do not align start being made independently in different areas because everyone is trying to make their own world work within the pressure. These decisions then create unintended consequences. Given enough time and lack of attention on the big picture, bad things happen.

People often wonder why people fall for Ponzi schemes. The reasons are easy –

1. Have a great salesperson at the top who get people to buy into their personality.
2. Show the early adopters some good profits and returns.
3. Get the adopters to sell for you.
4. Build a pool of money off the new investors and continue to show returns.
5. Keep it going as long as possible.

Those on the inside will tend to believe what they are shown. Humans tend to believe others, especially when they are part of a group in their belief. The metrics are all shown green, it must be good. But time is the great equalizer.

Truth always comes out given enough time. Either you catch that your KPIs and metrics are being gamed, or the game catches up to you and runs you over.