ICHAK ADIZES reflects on why what matters most in leadership and organizations cannot always be captured by measurement.
Managing by results is one of the central pillars of management and leadership education. Peter Drucker, the guru of management, said that if you cannot measure something, it’s not important.
Management by results may apply to tasks where measurable output is the only factor that counts—such as sales, where commissions are tied to performance, or production work, where workers earn bonuses for beating their quota. But it’s wrong for managing the managers.
The most important asset a company can have does not appear on its balance sheet nor in the profit and loss statement. It is the company culture. If there is no mutual trust and respect, the company will suffer energy loss and not perform well. One of a leader’s most important roles is to build and nurture a constructive organizational culture. While it is possible to measure this through a survey, there is a danger if the measurement is the same variable used to determine rewards. The purpose of what is being measured can be lost, and the measurement itself becomes the organization's aim.
This issue extends to economic theory as well.
A company is established to satisfy specific market needs. The paying customers are the clients to focus on; the owners are stakeholders whose financial support is necessary for the company to operate. Owners need to be satisfied (otherwise, why would they provide financing?), but their satisfaction is not the purpose of the company’s existence; the company is established to satisfy, not to exploit the market.
Profit measurement was born to measure how well the company is doing, having more revenue than cost, and providing enough return to the owners to justify financing the company. But once profit is measured and made the goal to be surpassed, client satisfaction is forgotten or ignored. Profit measurement now becomes the goal and purpose for which the organization exists.
There is more to the danger of measuring.
When one sets measurable goals to award bonuses or other remuneration contingent on how well they are met, people tend to set goals low (goals they are sure they can achieve) to secure their bonus. The result is that people do not aim to excel—to try new things to stretch to their peak capabilities. Managing and rewarding by results produces mediocre managers.
An alternative way to manage is to disengage results measured from rewards granted. The company should set up aggressive goals. The rewards (the bonus or profit sharing) should be awarded strictly as a percentage of what was achieved in reality, independent of what was planned or budgeted. Thus, the better the results, the more rewards are shared.
The deviation (whether the actual is significantly higher or lower than planned) is a call to analyze the process for achieving the results: Where did we go wrong in our planning?
An analogy to explain this point: We want an organization of Olympic winners. They should always aim to improve their previous record. After the competition, we review the game to compare our plan with the actual result and analyze where the plan failed or why it could not be delivered, so that next time we can do better.
No deviation from the plan means no learning!
If there are no deviations from the plan, it was either not aggressive enough or too conservative. Neither is good management.
Manage the process.
Reward based on actual results.
The most important asset a company can have does
not appear on its balance sheet nor in the profit and
loss statement. It is the company culture. If there is no
mutual trust and respect, the company will suffer
energy loss and not perform well.
Ichak Adizes
Dr. Adizes is widely acknowledged as one of the world’s leading management experts. He has received 21 honorary doctorates and is the author of almost 30 books that have been translated into 36 languages. Dr. ... Read More
