A couple of weeks back, I stumbled upon the concept of Goodhart’s Law and I can’t help wondering if the same is true of corporate performance indicators. Perhaps the case is weaker for corporate performance indicators but the idea may still hold some truth.
The Law based on Goodhart’s formulation in 1975 is “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes“
It is initially more or less based on the conduct of monetary policy and has much to do with statistics. But in the corporate setting, tying CEO’s financial rewards to share prices has somewhat the same sort of effect. Without the coupling of the 2 variables – share prices and CEO financial compensation, the share prices would ordinarily reflect the performance of the company, which is a proxy for the outcome of the management of the firm under the CEO (although people might argue that it is inaccurate, but in business, outcome is still the most important). When they are linked, CEOs might become obsessed with raising share prices of the firm and neglecting the core management of the firm.
The same applies for lower level sort of work. For example, if the waiting time at the government clinic is used as a measure for performance then doctors and nurses might quickly try to go through the patients and speed up consultation to hit their performance target rather than provide quality care and service. Likewise, if too much emphasis is on delivering good food at a local restaurant, service might be compromised, which explains why the boss of the pizzeria down the street has real bad attitude. Perhaps this is just part of human nature, the narrow focus of our minds.