Companies with weak performance measurement systems create inhospitable corporate margins.
Author Daniel H. Pink, in his book Drive: The Surprising Truth About What Motivates Us, describes how poorly designed incentive structures can lead to destructive employee behavior. Personnel will seek to achieve their goals by the easiest and quickest means possible. This path is rarely through the corporate margin where significant longer-term value creation is realized.
Company incentives built exclusively on short-term metrics, such as revenue or sales targets, encourage a narrow-minded focus on achieving near-term ROI at the sacrifice of longer-term value development and client satisfaction. Managers will undermine long-term growth to achieve short-term internal performance targets.
Organizations should build incentive structures that provide rewards for intermediate actions which lead to the desired end-state objectives (e.g. revenue, profit, etc.). For example, rewards could be tied to customer satisfaction as measured by client feedback surveys, new client acquisition, and contracts gained in emerging market sectors. While these intermediate actions may not achieve much in terms of near-term bottom line results, their impact is critical for business success in the longer term. A small contract in an emerging market sector may be more strategically important for the firm than a large contract in an established market. Firms need to recognize and reward these results differently to reflect their strategic differences.
Providing incentives for intermediate actions is critical for encouraging behaviors that lead to long-term growth and value creation. Companies which provide these types of intermediate incentives create an environment which sustains positive margin initiative risk-taking. Without these incentives, few programs will be able to marshal the resources to maintain margin activities which require multiple business cycles to mature.
