There's a smarter way to encourage better staff performance

I’ve tried reading a lot of books about management in my time, but the only one that made sense was called The Witch Doctors, by two whip-smart journos on The Economist magazine.

They argued that, for almost a century, management experts hadn’t been able to make up their minds between two polar opposite theories. That’s why there were so many fads in management practice. Managers kept flip-flopping from one extreme to the other.

The first theory was Frederick Taylor’s scientific management, which boiled down to a belief that workers were dumb and lazy. They needed to be closely supervised at all times and motivated to work by being paid piece rates.

The other theory came from Elton Mayo’s Hawthorne experiments, which amounted to a belief that the better you treated your workers the harder they’d work.

It’s the central question in management theory and practice: how do you get your staff to do a good job and keep getting better?

For big organisations – business and government – the latest management super fad, “metrics”, where everything the outfit does is measured and workers are urged on by means of “key performance indicators”, is clearly a flip in the direction of Taylorism.

You’ve seen me fulminating against the folly of KPIs, which are often used as a substitute for management mental effort, and are far too easily – and frequently – fudged.

Only last month it was reported that Victoria Police is investigating suggestions that thousands of random breath tests have been faked, with police complaining of being pressured to conduct unreasonable numbers of breath tests on a shift, along with all their other duties.

Now a University of Sydney study commissioned by the NSW Teachers Federation, based on survey responses from about 18,000 teachers, has found they are drowning under increasing amounts of paperwork. I dare say a few Victorian teachers know the problem.

While it’s the age of computers that’s powering the metrics craze, in practice people with real jobs to do are being required to spend a lot more time – often their own time – on data entry, as part of the demand for them to be more “accountable”.

This is a significant cost along with the assumed benefits of improved information, a cost often underestimated by the metrics enthusiasts because the time it takes is “outsourced” to lesser mortals.

But let’s be positive. If the obsession with KPIs is a folly that will be abandoned soon enough, what better ways are there to encourage staff to do a better job?

After all, there aren’t many outfits whose performance couldn’t be improved, certainly not our schools. The teachers’ unions hate admitting it, but international tests show our student performance is declining, too many students are leaving school ill-prepared for adult life, and the gap between our top and bottom students needs closing.

The move to needs-based funding is just a first step. If the additional funds aren’t directed towards the cost of helping teachers teach better, not much will change.

But if the schools’ version of KPIs – standardised testing via NAPLAN and “accountability and transparency” via the MySchool website – has been a failure, what’s a better way?

The key is that we’ve veered too far towards Taylorism and too far from the Mayo mentality. The metrics approach is too top-down.

Bosses decide what the problems are and how they can be fixed, then impose their solutions on underlings, using KPIs to keep it simple, stupid.

Fortunately, teaching – but not other parts of the public sector – has avoided business’s error of trying to motivate people with pay-for-performance. “Extrinsic” motivation – doing things for the money – is a poor substitute for “intrinsic” motivation: doing things well because it gives you a greater sense of achievement. Because it’s satisfying to know you’re giving customers a good deal.

The growing administrative burden being unthinkingly imposed on professional staff is symptomatic of the top-down mentality. “We need this information for our use; whether you know why we need it and what we use it for is of little consequence – as is the time it takes you to comply.”

Smart bosses keep administrative demands to a minimum, make sure people know why particular information is needed and share it with the data providers so they can use it to improve their own performance. They should even be consulted about which performance information would be most useful.

A chalkie complains that “we are not being trusted as teachers to make judgments”. True. The key to improving the performance of organisations is for bosses (and politicians) to stop thinking they know better than the professionals and telling them how to do their jobs, but to respect, enhance and exploit the professionalism of their people.

It’s about asking people at the coalface what needs to be done to improve performance and what extra help they need to do so, including information about that performance. More consultation and a two-way flow of information.

But professionalism is itself two-sided. With greater freedom in decision-making goes greater acceptance of individual responsibility for improved performance and when something goes wrong.

And greater consultation with teachers at the coalface doesn’t equal putting union leaders on departmental committees making decisions about “protocols for data collection” or anything else.

Professionalism is supposed to mean putting your client’s interests – the interests of students, in this case - ahead of your own. It doesn’t sit easily with militant unionism.

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What motivates decent bankers to rip off their customers

Amid all the reluctant truth-telling at the banking royal commission, one big lie has yet to be apprehended: shame-faced witnesses keep admitting they put their shareholders’ interests ahead of their customers’. Don’t believe it.

From the chief executives and company directors to those middling managers who seem to be the main ones being sent into the firing line, it’s not the shareholders’ pockets they’ve been so keen to line, it’s their own.

They’ve been jumping whatever hurdles they’ve had to clear to get the bonuses they were promised. Why would you rip off old people’s life savings for any lesser reason?

It’s a safe bet that everyone from the very top to well down has been “incentivised” with performance targets and bonuses. I reckon only the lowly would be lumbered with key performance indicators unattached to extra moolah.

It’s hard to imagine how so many seemingly ordinary, decent Australians were led to do so many unethical, dishonest, even illegal things for so many years without them convincing themselves it was normal bankerly behaviour – “everyone’s doing it; I don’t want to miss out” – and that by achieving the targets their bosses had set them, they were being diligent and loyal employees, worthy of reward.

But though the financial services industry must surely be the most egregious instance of the misuse of performance indicators and performance pay, let’s not forget “metrics” is one of the great curses of modern times.

It’s about computers, of course. They’ve made it much easier and cheaper to measure, record and look up the various dimensions of a big organisation’s performance, as well as generating far more measurable data about many aspects of that performance.

Which gave someone the bright idea that all this measurement could be used as an easy and simple way to manage big organisations and motivate people to improve their performance.

Setting people targets for particular aspects of their performance does that. And attaching the achievement of those targets to monetary rewards hyper-charges them.

Hence all the slogans about “what gets measured gets done” and “anything that can be measured can be improved”.

Thus have metrics been used to attempt to improve the performance of almost all the major institutions in our lives: not just big businesses, but primary, secondary and higher education, medicine and hospitals, policing, the public service – the Tax Office and Centrelink, for instance.

Trouble is, whenever we discover new and exciting ways of minimising mental effort, we run a great risk that, while we’re giving our brains a breather, the show will run off the rails in some unexpected way.

It took a while for someone to come up with the slogan antidote: “Not everything that can be counted counts, and not everything that counts can be counted”. Not everything that’s important is measurable, and much that is measurable is unimportant.

Trust, which the bankers had a lot of, is hugely valuable but hard to measure. They failed to notice the way their sharp practice – their attempt to “monetise” that trust – was eroding it.

And now they are reaping a whirlwind no KPI warned them was coming. If you work in financial services, don’t try measuring “esteem” or “reputation” any time soon.

I’ve long harboured doubts about the metric mania, but it’s all laid out in a new book, The Tyranny of Metrics, by Jerry Muller, a history professor at the Catholic University of America, in Washington DC.

Muller says we’ve been gripped by “metric fixation” which is “the seemingly irresistible pressure to measure performance, to publicise it, and to reward it, often in the face of evidence that this just doesn’t work very well”.

The glaring weakness of metrics and KPIs is how easily they can be fudged. Since most jobs are multifaceted, and you can’t slap a KPI on every facet, the simplest and least dishonest way to fudge is concentrate on those aspects of the job covered by a KPI, at the expense of those that aren’t.

Everyone from the chief executive to the lowliest clerk understands this. So why does the practice persist? Because bosses are just as busy fudging their targets as their underlings are. So long as your fudging helps your boss with their fudge, what’s the problem?

Schools fudge their performance on standardised tests by “teaching to the test” or even inviting poor performers to stay home on test day. Police services improve their serious crime clear-up rates by classing more crimes as less serious, or failing to record every crime reported to them.

Hospitals improve their performance by declining to admit people with complicated problems; surgeons improve their performance rates by refusing to treat tricky cases. Sometimes this means patients with big problems suffer delays in treatment, and maybe die. But this doesn’t show in the indicator.

Muller notes the obsession with measurement can get everyone focused on unimportant things that seem easy to measure and away from important things that can’t be measured. It can divert resources away from frontline producers towards managers, administrators and data handlers.

Worse, using money to motivate people tends to crowd out intrinsic motivation: taking a pride in doing your job well and giving customers or taxpayers value for money. It can distort an organisation’s goals and stifle creativity.

Measurement’s fine, so long as it’s used as an aid to human judgment, not a substitute for it.

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Metrics-obsessed managers must be careful what they wish for

In decades to come, when the history of business endeavour in the early part of the 21st century is written, I predict it won't be kind to the great management fad of "metrics".

When you look at the terrible mess the Commonwealth and the other big banks have got themselves into, it's hard not to suspect that misuse of KPIs – key performance indicators – and incentive pay do much to explain their predicament.

It's not that I'm against measuring what can be measured about the activities of businesses. As a lifelong bean-counter, I'm a great believer in measurement as an aid to decision-making and accountability.

And it's certainly true that the digital revolution has made it much easier and cheaper to measure multiple dimensions of a business's activities.

No, the problem is the naivety with which so many top executives have leapt into the metrics fashion, seeing it as a magic answer to their management task, a simple and easy way to incentivise their troops and ensure they're all working to further the company's greater good.

Their trouble is that their inexperience in the measurement business stops them understanding its awesome power. Measurement's immense power for good – or ill.

Its ability to keep the business surging forward, or running off the rails. Indeed, its ability to convince you you're going great guns until the very moment disaster looms.

Use metrics as a substitute for thought rather than as an aid to hard thinking and there's a high chance it'll bring you undone.

The slogans of the metrics brigade say "you can't manage what you don't measure" and "what gets measured gets done".

Trouble is, that latter slogan is more a warning than a promise. The psychologist Martin Seligman observes that "if you don't measure the right thing, you don't do the right thing".

The notion that you can't manage what you don't measure is a trap. A smarter conclusion is that "not everything that counts can be counted". Lose sight of that and you're headed for mediocrity at best.

Which brings us to the importance of motivation. Money-obsessed managers who see attaching money to performance indicators as the perfect way to ensure people are motivated to achieve the firm's goals have failed to think hard about motivation.

Like managers, staff have many motivations, only one of which is to make more money. But there's plenty of research evidence that money tends to overpower other motives – even such a worthy (and, to bosses, cheap) motive as taking pride in doing your job well.

Attach monetary rewards to some dimensions of a person's responsibilities but not others and just watch as the non-incentivated dimensions are pushed to back of mind.

Give a pep talk about how important those other aspects are, and you won't be believed. Money speaks louder than words.

Then watch as the extra-reward-for-effort mentality takes hold. I'll try harder for extra money but, if you're not offering extra, why would I bother? Do you take me for a mug?

Two academics at Macquarie University, Associate Professor Elizabeth Sheedy and Dr Lyla Zhang, conducted a lab simulation using 306 financial professionals recruited with help from an industry body.

Participants were asked to do some simple analysis and then make up to 60 decisions about buying securities, granting loans and underwriting insurance, all within company policies designed to control the amount of risk it took on.

These policies could mean that potentially profitable deals weren't pursued, or that time was "wasted" that could have been devoted to generating profits.

Participants were randomly assigned to five different groups, which varied according to how employees were paid – fixed, or variable according to profits generated – and whether managers emphasised making profits or controlling risks.

"We found that when people had variable payments that [were] linked to profits, their compliance with risk management was significantly reduced," the researchers found.

"When managers and co-workers were also profit-focused, compliance reduced even further. Interestingly, the variable payments did not produce significant increases in productivity" relative to participants on fixed pay.

"On the other hand, when participants were paid a fixed amount regardless of profit, compliance with risk management policies was higher, although still not perfect."

The researchers conclude that "since incentives structures that are profit-based have an adverse impact on risk compliance and do little for productivity, such remuneration programs should be reconsidered".

"Our research shows that it is difficult to have high rates of risk compliance in the presence of profit-based payments. Staff are likely to believe that profit-based payments signal the true priorities of the organisation and they modify their behaviour accordingly."

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How our penchant for magic numbers gets us into trouble

A lot of the problems we cause ourselves – whether as individuals or as a community – arise from the way we've evolved to economise on thinking time by taking mental shortcuts.

We are a thinking animal, but there are two problems. First, we have to make so many thousands of decisions in the course of a day – most of them trivial, such as whether to take another sip of coffee – that there simply isn't enough time to think about more than a few of them.

Second, using our brains to think requires energy, in the form of glucose. But glucose is not in infinite supply. So we've evolved to save energy by minimising the thinking we do.

As Daniel Kahneman​ – an Israeli-American psychologist who won the Nobel prize in economics for his work with the late Amos Tversky​ on decision-making – explains in his bestselling Thinking, Fast and Slow, our brains solve these two problems by making all but the biggest, non-urgent decisions unconsciously.

This is Thinking Fast. We don't think about taking another sip of coffee, we just notice ourselves reaching for the cup.

But even when we are Thinking Slow, carefully considering a big decision – such as which house to buy, or whether to marry the person we've been seeing – we still have a tendency to save glucose by relying on what Kahneman and Tversky dubbed "heuristics" – mental shortcuts.

They stressed that our use of such shortcuts is, in general, a good thing. We fall into the habit of jumping to certain conclusions because, most of the time, they give us the right answer while saving brain fuel.

But they don't give us the right answer in every circumstance, and it's the classes of cases where they lead us astray that are most interesting and worth knowing about.

Kahneman and Tversky kicked off a small industry of psychologists thinking up different potentially misleading mental shortcuts and giving them fancy names.

I have a couple of my own I'd like to add to the list.

I call the first one "box labelling" – saving thinking time by consigning things or people to boxes with particular labels.

For example: "I regularly vote Labor/Liberal, therefore I don't have to think about the rights and wrongs of all the policy issues the pollies argue over, but can get my opinion just by checking which side my party's on."

You can see how common this is if you look those media opinion polls that show you how many people support or oppose a particular policy – say, curbing negative gearing – then show you who those people would vote for in an election.

Much more often than not, people take their lead on an issue from the position their favoured party takes.

You also see it by watching what happens to the index of consumer confidence when there's a change of government. Almost all those who voted for the losing party switch from optimism to pessimism, while those who voted for the winner switch from pessimist to optimist.

My second mental shortcut is "magic numbers". Experts develop and carefully calculate some economic or financial indicator, based on various assumptions.

The indicator measures changes in something we know is important, so we get used to watching it closely for an indication of how things are going.

Trouble is, we end up putting too much reliance on the indicator, using it as a mental shortcut – a substitute for thinking hard about what's going on.

We turn it into a magic number – a single figure that tells us all we need to know. We use it to inform us about things it wasn't designed to measure.

But, above all, we forget about all the assumptions on which it's built, assumptions that can become inappropriate or misleading without us noticing. That's when our magic numbers hit us on the head.

The American economic historian Barry Eichengreen attributes part of the blame for the global financial crisis to Wall Street's excessive reliance on a financial indicator called "value at risk" or VaR.

As Wikipedia tells us, VaR "estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses."

Eichengreen tells of the banking boss who, late each afternoon, would call for the figure giving the investment bank's VaR. If it fell within a certain range, the banker would go home content. If it was outside the range, he'd stay until he'd done whatever was needed to get it back into range.

The problem was his neglect of the assumptions on which the calculation was based, in particular, "given normal market conditions". Conditions stopped being normal without him realising and – like all its competitors – his bank got into deep trouble.

But the most notorious magic number is gross domestic product, GDP. It was developed by economists after World War II to help them manage the macro economy, but has since been widely adopted as the single indicator of economic progress.

Economists know that GDP is good at what it measures, but was never designed to be a broader measure of wellbeing. This, however, doesn't stop them treating the ups and downs of GDP as the be-all and end-all of economics, as a substitute for thought.

Another word for this is "bottomlinism" – don't bother me with the details, just give me the bottom line.

But never inquiring beyond the bottom line will often end up misleading yourself or getting you into trouble. That's particularly true of people who hear the words "deficit" and "debt" and immediately assume the worst.

In business, however, the most dangerous magic numbers – the most egregious substitute for the effort of thought – are known as KPIs – key performance indicators.

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How to get more job satisfaction

How about we take a short break from worrying about the new job Donald Trump has lined up for himself and think about our own jobs.

It surprises me that we spend so much time working – many of us in jobs we don't much enjoy – but are more inclined to seek escape from our work in fiction, or by following the adventures of celebrities such as Trump, than to think about how we could get more satisfaction from all that heads-down time.

It's not a subject of interest to our politicians nor, I fear, many of the bosses we do the work for.

Yet the fact is that psychologists – and even the odd economist – know a lot about what makes some jobs more satisfying than others.

Research published in 2014 by the British Cabinet Office examined the life satisfaction of people working in 274 occupations.

The 10 occupations seeming to yield the greatest satisfaction were, from the top: clergy, chief executives, farm managers, company secretaries, quality assurance regulators, health care practice managers, doctors, farmers, owners and managers of hotels and accommodation, and skilled metal, electrical and electronic trade supervisors.

The 10 occupations seeming to yield the least satisfaction were, from the bottom: plastics process operatives, bar staff, care escorts, sports assistants, telephone sales people, floor and wall tilers, industrial cleaners, debt and rent collectors, low-skilled construction workers and pub owners and managers.

From a quick squiz, it seems the most satisfying jobs tend to be better paid than the least satisfying. (With clergy as an obvious exception. If my dad's pay was any guide, revs aren't rolling in it.)

But if you conclude from this that finding a high-paying job is the best path to a satisfying job you've got the wrong end of the stick.

No, the clearer distinction between the two groups is that the most satisfied tend to be more highly skilled than the least satisfied.

As a rule, work skills tend to be scarce, with employers' demand for them stronger than workers' ability to supply.

So it's reasonable to infer that acquiring skills for which there's strong employer demand is a safe path to a high-paid job.

But there's another distinction between the two groups that does most to explain the satisfaction difference: the most satisfied are nearer the top of the heap, whereas the least satisfied are near the bottom.

It's nice to have status – people treat you with more respect. And it's nicer to do the bossing than to be bossed.

The psychologists will tell you, however, that the most important thing in job satisfaction is personal autonomy: having a degree of freedom in the way you do your job.

Feeling that, at least to some extent, you're controlling the system rather than the system controlling you.

These things take you a long way towards having a sense that you're achieving something. And that's another characteristic of satisfying work the psychologists have identified.

A third characteristic is a degree of complexity and variety. It's obvious enough that we like a bit of variety in our jobs rather than repeating the same tasks day in, day out.

Less obvious is that we like jobs that present us with a challenge – provided it's a challenge we can meet. Jobs that demand the impossible aren't satisfying, but nor is a job that's so easy it's a bore.

One of my favourite websites, PsyBlog, run by the British psychologist Dr Jeremy Dean, nominates a fourth "key to job satisfaction": fair pay.

Note, not high pay, but fair pay. How much is fair? This is the bit so many employers don't get in their fashionable preoccupation with performance pay and bonuses linked to KPIs (if you don't know what those letters stand for, think yourself lucky).

Fair pay is pay that's the same as received by people you consider your equal. We accept that people with more responsibility than us should get more, but we get twitchy when we know or suspect the boss is playing favourites among our peers.

It's clear bosses could do a lot to improve the satisfaction of their troops by avoiding favouritism, giving people at every level a little more freedom and flexibility, treating people lower down with more consideration and respect, and doing more to get individuals into the jobs their personal characteristics make them more suited to.

Dumb bosses live in fear that treating their staff well would allow them to slacken off. The KPI craze is intended to oblige people to work harder, but also to control more narrowly the way they do their jobs.

KPIs should come with a safety warning: careful what you wish for. They invite staff to turn off their brains – just as soon as they've figured out what aspects of their job they can neglect so as to ensure they always hit their targets.

Smart bosses know that treating their workers well, giving them discretion and encouraging them to keep their brains on pays off in greater effort and loyalty, as well as reducing staff turnover, recruitment and initiation costs.

If you don't have the good fortune to work for a smart boss you can use what wriggle room you can manage to make your job more challenging and psychologically rewarding. Failing that, find a better boss.

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Why KPIs are a dangerous fad

You have heard of painting by numbers, but these days the great fad is management by numbers. I call it the metrification of business - although it's just as prevalent in the public sector. If you know what the initials KPI stand for, you'll know what I'm talking about.

I've been a bean-counter all my working life, first as an accountant, then as an economic journalist. So I've long believed in the importance of measurement, of getting the measurement as accurate as possible and of understanding the strengths and weaknesses of particular measures.

Much of my apprenticeship as an economic journalist was spent making sure I understood how all the economic statistics were put together. But as I've watched the enthusiasm for "key performance indicators" and other "metrics" grow, I've become increasingly sceptical about their usefulness.

The rise of metrification has been built on repetition of the seeming truism that what gets measured gets managed. It follows that what isn't measured isn't managed.

It's certainly true that what we measure affects what we do and the way we think about the phenomenon being measured. So in the drive to hold workers accountable - that is, to increase control over them - and improve their performance, it's become fashionable among managers - private and public sector - to measure key aspects of an organisation's performance.

It's only a small step to setting targets for the performance measures and, often, raising those targets from year to year. You might have targets for the performance of organisations, but also for the performance of individuals. And it's only another small step to link performance to remuneration. We pay for results - what could be fairer?

The rapid escalation of executive remuneration over the past 20 years has occurred not so much because of the rise in basic salaries as the proliferation of "performance pay". A study by Mihir Desai, of the Harvard Business School, found that, in America, the proportion of the total pay of senior managers that is based on share prices rose from 20 per cent in 1990 to 70 per cent in 2007.

But, as The Economist reported last year, Desai found this had warped incentives and fostered malfeasance. Managers had won huge payouts simply because the share market had gone up, regardless of whether they had personally added value.

"They have also gamed the system, sometimes illegally, to hit targets that put fat sums in their pockets," it said.

The trouble with this measurement approach to accountability and reward is that, as the American psychologist Martin Seligman has said, "If you don't measure the right thing, you don't get the right thing."

When the push for micro-economic reform was at its height, someone got the bright idea that if you calculated and made public the equivalent of key performance indicators for all the many responsibilities of the state governments, you'd encourage them to compete among themselves to improve their standing in the league tables.

The Productivity Commission has now compiled and published these indicators for many years. But someone who should know warned me they'd become completely unreliable. Why? Because managers in each state had manipulated their results to make them look good against the competition.

In 2005 the website Crikey.com.au ran a letter from an anonymous public servant reporting their experience with management by KPI.

"Early in June our manager discovered we were a few percentage points away from meeting operational requirements for the financial year. Rather than explain to his boss that staff cannot perform well when there are continual computer problems and weekly changes in procedures and priorities, he instituted a series of ludicrous schemes to improve the statistics," the person wrote.

"Any work that was already out of time was placed on the backburner, not to be touched until after July 1, when it would be counted in the next year's statistics. In other words, work that was overdue would not even be looked at for another fortnight.

"For two days staff did nothing but go through their files searching for cases that could be closed without further action or referred to another area. We achieved absolutely nothing in terms of genuine output for those two days, but our percentage of resolved cases sky-rocketed. We then started on the new work, but only worked on simple cases that could be closed well within the acceptable operational time frame...

"On June 30 our manager proudly announced that we had achieved operational requirements."

I've been around long enough to know that measurement can be a trap. People can be mesmerised by numbers. Because they're objective, people take them to be infallible. They forget (if they ever knew) the assumptions and other limitations on which they're based, they take them to be measuring something they're not and they forget how easily others can manipulate them for their own purposes.

It's easy to measure quantity, but much harder to measure quality. Most jobs are multi-dimensional, but you can't have a KPI covering every dimension. In which case, I can always meet my KPIs by cannibalising some dimension - some aspect of quality - not covered by a KPI.

Einstein said "not everything that counts can be counted". The modern preoccupation with metrics is an attempt to over-simplify the managerial task by confusing quantity with quality.

Sorry, life wasn't meant to be that easy.

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