The Art of Managing by Incentives & Metrics

Knowing how to drive business performance by managing through metrics & incentives is critical in running a successful business.

I’ve been experimenting and learning about these two interrelated topics in various businesses, at all organisational levels, for twenty years. I’ve tried lots of different things, had many successes, and enjoyed lots and lots and lots of errors along the way.

In this article, I’ve tried to distill what I’ve learned into some practical insights and advice to help you effectively harness metrics and incentives to drive performance, engage your team, and achieve your organisation’s objectives.

1. Expecting What You Inspect

As Edward Demming, whose teaching are the principles that the Toyota Production System and Lean philosophy are based on, once said, "You can expect what you inspect."

Incentives provide the roadmap for your team, cutting through the noise and focusing their efforts on what matters. By setting clear expectations through metrics and diving into the detail surrounding those, you empower your team to align their actions with organizational goals.

There’s a direct correlation between the time leaders spend on incentives and metrics, and the focus employees apply to those areas. So, if you want to drive behaviour, apply your own time and energy consistently.

2. Metrics Communicate What’s Important

Metrics serve as more than just numbers; they're powerful messages that communicate what management values, sometimes unintentionally. Even if there is no financial reward attached to the metrics, simply monitoring them and motivating people to achieve them will send signals to your staff about what you and the company value most. So, choose wisely.

What you don’t focus on says as much as what you do focus on.

If you only measure sales, it's communicating that you don’t care about selling to the right profile of clients who will give good reviews and become repeat customers, then don’t be surprised that your team hard sells to the wrong people who return the products a few days later or cancel the service in the first few weeks.

If you only measure keeping the cost of producing a product as low as possible, then don’t be surprised when the quality is poor and customer reviews go to hell.

3. Beyond Financial Rewards

Be aware that incentives are more than just financial rewards. Praise, recognition, and even avoidance of criticism or punishment are all very strong incentives.

4. The Dilution Dilemma

Beware the trap of metric overload! You can’t have a clear path when your map tells you to go in multiple different directions. The more metrics you measure, the more diluted your team's focus becomes.

Instead, zero in on two to three key metrics that align closely with your strategic objectives, any more will just lead to half-baked results across all the metrics. Remember, quality trumps quantity in terms of successful metrics.

5. Lead vs Lag Measures

While lag measures reflect past performance and are often only available a month, or many months later. Think, value of sales in the month, or quarter.

Lead measures, on the other hand, guide future outcomes and can be managed proactively day to day ensuring that everyone is doing what they are on track to achieve their goals and indicate potential problems early. Think, number of sales calls made, or RFPs submitted.

Measure the daily, key activities (lead) and they will lead to the end results that you want (lag).

6. Leveraging Key Levers

Choosing the right activities to measure is like identifying the gears that drive your organization forward, but you have to have found the right ones for them to be effective metrics. You want the small activities that lead to big results. You’re going for the biggest bang for buck.

Review historic performance, study top performers, and identify commonalities that consistently lead to success. Narrow the behaviours down to the key ones.

But beware of correlation vs. causation—just because something correlates with success doesn't mean it directly causes it.

7.  The Power of Simplicity

Keep metrics easy to understand and simple.

If it requires mental gymnastics to grasp or if people need to calculate things, it will be ignored by staff.

Simplify your metrics to ensure clarity and alignment with organizational goals.

Everyone, from the newest team member to the oldest hand, to the highest manager should be able to see how everyone is performing to the metrics at a glance.

8. Quality checks

We’ve all read about horror stories where companies have spent billions in product recalls or lawsuits because an incentive caused bad behaviour.

Think of the Wells Fargo fraudulent account scandal where staff created thousands of fake new accounts to hit targets for opening new accounts. No quality checks were in place, all that was measured was a quantitative target; number of accounts opened. Period. Bad behaviour ensued.

Be aware of unintended consequences—incentives that drive the wrong behaviours will undermine what you intend and can derail the whole organisation. Read up on Incentive Caused Bias sometime; it's pretty terrifying what poorly planned incentives can lead to!

Always have qualitative checks and balances to ensure the incentives are not being achieved through means that are counterproductive. Trial and error is needed to dial in what works.

9. Self and social pressure

Two incredibly powerful types of incentives are what we think of ourselves and what our peer group thinks of us. You can structure the metrics and therefore the incentives to tap into these to drive sustained performance and engagement among your team.

Example: people in South Africa and the United Kingdom donate blood regularly because they come to view themselves positively as blood donors. It forms part of their self-image and people want to be consistent with their self-image. If you wanted to increase donations by paying for each donation, as they do in some countries, the current donors would likely stop as the behaviour wouldn’t link to their self-image any more. Donating would become something you do for money, not because you are a good person.

Always consider how the metrics and incentives you are planning will be viewed from the self-image and peer opinion lenses. Often that is enough, and no monetary component is needed.

10. Dashboards

Dashboards, dashboards, dashboards! I can’t say it enough. Make it public. Make it part of the daily workflows for people to review. Make it part of planning sessions. Make it part of every team meeting and review. You can only expect what you inspect. So, inspect it a lot!

If it's never looked at and never discussed it's not going to do anything.

11. Driving Peer Accountability

Publicize metrics to promote peer accountability and transparency. Encourage staff to explain their performance to their peers, fostering a culture of accountability and continuous improvement.

Peer pressure is a wonderful tool when harnessed to drive the right behaviour.

One tactic I have found works well is to get team members to publicly commit to their activities for the week, to their peers, and then report back the next week on a team update call. A fundamental psychological drive is one to be consistent with past commitments. Use it.

These public commitments and feedback sessions are especially powerful when combined with coaching skills as you can help your team learn to plan their activities correctly to achieve the needed results and help them realise any flaws in their approach and the whole team learns from each other at the same time.

12. Thank You Social Media

Take a page from social media's playbook and incorporate elements like badges, stickers, and visual indicators into your metric framework. Small gestures of recognition can have a profound impact on motivation and performance.

People are driven to gain status. Visual indicators like these are a very simple way to give status.

This is one of those things that you will be sure won’t be effective when you read this article, but you will be amazed at the impact when you try it.

I often will have green smiley faces, or red sad faces, on my teams’ dashboard. One of my top people once said to me, “I really hate those red, sad face and work hard to not have to see them.”

Have a three-month achievement award. Or an “Elite Tracker” symbol for someone who has successfully tracked their goals everyday in the month. Or better yet, have a tiered badge structure so the longer a person achieves the metrics consistently, the more elite they are shown to be.

Have these displayed prominently in whatever forum you review team performance and, on the dashboards, and even if you never speak about them directly, it will significantly impact performance.

13. Align culture and incentives

I’ll give you a common example of a misalignment between culture and incentives. Most companies say they prize innovation and yet they punish failure. Yet, most innovation fails; it’s unavoidable. Just take Thomas Edison and his 3000 attempts to make a light bulb as an example. As I mentioned earlier, a strong negative incentive is to avoid punishment or failure. So, if you say you want innovation but punish failure then no one is going to try to innovate very hard.

The only way to fix this is to align incentives and culture.

Staying with the idea to drive innovation, we would need to build a culture that celebrates failed attempts. Instead of punishing failure, recognize and reward it publicly. Have a “Best Fail” award. Publicly praise the failed innovations at town halls. Even think of payment in some form of bonus for when the plug is pulled on an unsuccessful project (obviously not the same amount you’d pay for success or people will simply kill good innovations to get paid, remember incentive caused bias!)

14. Embrace Experimentation

Perfecting your metrics and incentives, and the quality checks around them will take time. Hopefully, this article has helped you realise all the moving parts and you are starting to see the opportunities but also how many unintended consequences and manipulations can sneak in. Getting it right is an iterative process and will take much trial and error. Embrace that.

Communicate this fact to the team so they know that the metrics and incentives will keep changing as you iron everything out. Experimenting should be part of every organisation’s DNA, so start bringing it into each team via the daily incentives that dictate how they work.

In conclusion, mastering management by incentives and metrics requires a delicate balance of focus, transparency, and adaptability. By implementing the principles outlined in this article, you'll navigate the complexities of managing with metrics with confidence and drive your organization toward greater success. Remember, the journey is as important as the destination—so embrace experimentation, learn from failures, and celebrate each step forward.

Regards

Clive