Why did they do it? That is the question that springs to mind when trying to explain systematically bad behaviour.
It was asked when recently it emerged Commonwealth Bank staff were inappropriately setting up bank accounts for children. Victoria Police pondered the same thing when its officers were found to be inflating breath test bags themselves.
Both problems were so widespread that individual staff could not reasonably be punished. There are many more examples both here and overseas not least exposed at the banking royal commission.
A common element, say experts, is a"set and forget" approach to key performance indicators (KPIs).
There is a sense that businesses, amidst an unrivalled quantity of data, have lost the ability to count what really matters when it comes to getting the best out of their staff and businesses.
KPIs have helped manage large organisations, track unusual trends and give staff more autonomy and direct them towards a common goal. But when those targets are unrealistic and beyond reach, the temptation to cut corners becomes pervasive.
American academic and author of The Tyranny of Metrics, Professor Jerry Muller says the Commonwealth Bank and Victorian police scandals involve the type of gaming behaviour he identifies in his own country. He calls it "metric fixation - using standardized measures of performance, and tying rewards and penalties to them”.
The Commonwealth Bank's Dollarmites problem echoes the Wells Fargo scandal where the American bank set aggressive performance targets and tied them to rewards and punishment in 2011. As Muller explains, the quotas were set too high relative to the number of bank customers, which led to thousands of staff opening accounts for customers - without telling them.
Wells Fargo fired 5,300 employees, but Muller says the spate of fraud was a predictable response to the performance quotas that the company’s managers set for their employees.
Those perverse outcomes are not restricted to the banking sector, but extend to healthcare, education, the military and even sport. Teachers and students have been known to cheat on high- stakes standardised tests including NAPLAN. Hospitals have compromised patient care by keeping patients in ambulances or at home for longer to stop them driving up mortality rates and waiting times.
Academics have complained about pressure to "publish or die" as universities compete for valuable research funding. Australian gold medallist swimmer Ian Thorpe recently called for an end to medal counts because they put too much pressure on athletes.
Constant downsizing and restructuring of government agencies and private companies has made it more difficult to achieve high targets.
“You are increasing the risk of failure, whether it is the police or the banks because they are putting these high targets in without the experience of having noticed what performance is in that environment for long enough to set [standards] people can achieve,” says Australian Human Resources Institute chairman Peter Wilson.
University of Technology Sydney human resources management expert Sarah Kaine says the behaviour of frontline workers was more likely to have been motivated by a desire for job security.
Setting goals can help motivate staff, but when high targets are tied to incentive schemes within an unsupportive corporate culture, they can prompt anxiety and fraudulent conduct.
A bank teller setting up a fraudulent savings account is unlikely to have been motived entirely by money because the financial rewards for the specific act were likely small.
“It was about feeling insecure if they didn’t meet targets imposed on them,” she says.
University of Sydney Professor of Accounting Wai Fong Chua recalls that senior and middle-level managers at the Finnish multinational Nokia were so fearful of not meeting performance targets that they withheld vital information about the viability of smartphone technology which resulted in the company having to exit the market temporarily.
You shouldn’t hang people for things they can’t controlWai Fong Chua
To avoid having perverse outcomes, she says individual performance measures should not include activities that cannot be controlled. For example, assessing the performance of medical staff on the number of emergency patients who walk into the emergency department.
“You shouldn’t hang people for things they can’t control,” Professor Chua says.
It is also important to recognise that assessing individuals may not be appropriate when outcomes are produced by groups.
Professor Chua recommends combining behavioural as well as financial KPIs in ‘balanced scorecards’. “I think it is about having a combination of KPIs and not just focusing on how profitable you are,” she said.
Being an ethical person should be the first KPI when talking about police and banks, according to Karen Sanders, Professor of Organisational Behaviour and Human Resource Management at School of Management at the University of NSW.
“You should have targets, but it should be a negotiation about what is important to achieve,” she says.
“In jobs where you need to work together, you should never have individual KPIs. People want harmony around them and don’t want to be fighting with colleagues to open a bank account.”
Similarly, retail shop staff can benefit from sharing rewards. Individual fashion retail staff often get credit for a customer sale even though customers may seek advice from several staff members before handing over their cash.
Nicole Sutton, a lecturer in accounting at the UTS business school says that KPIs are an often necessary and efficient way of managing large organisations. With the qualification, that if you measure the wrong thing, you can get the wrong sort of behaviour.
“Just because you can measure something doesn’t mean you can manage it and there are going to be pretty systematic unpredictable problems if performance measures are poorly designed or used inappropriately,” she says.
“There’s an adage - 'what gets measured gets done'. But if you are measuring the wrong thing, it can lead to perverse outcomes.”
A blunt example she shares with her undergraduate students at the UTS business school is America’s use of the body count as a measure of success during the Vietnam War.
“It created incentives for military personnel to misreport the number of casualties ...[and] for combat strategies that were indiscriminate in the harm they inflicted on civilians,” she says.
Strict measures can also lead to shifting goal posts. Sutton recalls a state government commitment to running trains on time which led to the definition of “on time” being changed to allow for a five- minute delay. When safety is introduced as a performance measure in mining and construction, it can encourage people to avoid reporting accidents and injuries.
Sutton says some universities who measure the performance of academics based on the number of peer-reviewed articles they publish now include a more “fuzzy” measure of the "impact" of their research. “And it’s good that it’s fuzzy because you can’t really game that,” she says.
The appropriateness of KPIs travels all the way to the C-suite and boards are wrestling with how to ensure their leadership have the correct incentives.
At the executive level, companies are now being urged to stop looking at the past performance of potential recruits and to look outside their own industries for new leaders. The obsession with financial targets is giving way to a search for future executives who are humble enough to accept advice and brave enough to disrupt their own industries.
Headhunter Peter O’Brien, as managing director of Russell Reynolds Associates, helps some of Australia's biggest companies in the financial services, retail, technology and healthcare find new chief executives and set new priorities for their performance.
The global leadership advisery and executive search firm takes a counter-intuitive approach to hiring leaders in avoiding candidates with years of experience in the same sector. It could mean people with a background in manufacturing or IT end up heading a retail corporation.
O'Brien assesses the ability of leaders to deal with a changing economy according to personality traits that include heroism balanced with vulnerability, to prevent fortitude turning into self-delusion. Leaders need to take risks, but be able to see if a business is headed for a cliff.
"The softer issues are becoming much more important in assessing people on their performance,' he says. "The traditional leader is no longer the solution for the future."
The Australian Prudential Regulation Authority's recent explosive review of CBA recommended the use of non-financial KPIs at about the same time the banking royal commission exposed indefensible behaviour partly linked to the way staff were assessed and rewarded.
Australian Intitute of Company Directors chief executive Angus Armour says "there is nothing in a KPI that can justify misbehaviour or the responsibility of any individual to do the right thing".
“Boards will be giving greater weight to non-financial risk indicators in KPIs, including metrics on risk, culture and behaviours, diversity and customer outcomes," Armour says. "These are lead indicators on culture and investors and analysts will need to decide whether they now support the value in having these measures. Given non-financial KPIs are often lead indicators, it’s also in the long-term interest of a company for boards to take a balanced scorecard approach when setting KPIs."
But fuzzy measures are not always welcome as Commonwealth Bank's shareholders demonstrated two years ago when they slapped down a move to link chief executive Ian Narev’s bonus to "soft" non-financial social and ethical goals.
NAB Chairman Ken Henry last month admitted there was a lack of transparency around executive remuneration, and performance incentive schemes. He said the NAB Board was focused on the structure of remuneration and "how this drives behaviours, at every level of the organisation".
"[I]t is clear that ‘behaviours’ need to be considered alongside ‘financial performance’," he said. The bank's reform of executive pay would, among other things, "incentivise the right behaviours, especially with respect to the treatment of customers".
Westpac's executives have one third of their pay fixed and the remaining two thirds determined by measures including behaviour, values, customer satisfaction, risk and compliance, as well as company performance.
At a shop floor level the banks have moved to also take away sales targets from their tellers in response to an industry commissioned review by Stephen Sedgwick.
Late last year, the Commonwealth Bank announced it would abolish financial metrics and measure the performance of tellers based on their customer service. The bank now assures customers they can be confident “our tellers are not being paid to sell them products”.
Bruno Cecchini from Ernst and Young says organisations, including his, are increasingly concerned about non-financial measures of performance including the conduct of staff to ensure values and standards are not compromised.
"You can't just set and forget KPIs," Cecchini says. "They need constant review. We are seeing a number of organisations including our own moving into much more flexible approaches."
There is nothing in a KPI that can justify misbehaviour or the responsibility of any individual to do the right thingAICD's Angus Armour
Ernst and Young has moved away from annual staff reviews and rigid financial measures. Its managers sit down with staff every three months to reassess goals for their development and outcomes expected from each new project.
The goals are a mix of financial and non-financial measures and feedback comes from a range of people.
"It's not just about the financials. It is balanced with a range of other measures so that you can get a holistic view of someone's performance," says Cecchini. Non-financial measures including team effort, customer service, people management skills, collegiality and staff turnover are increasingly in focus.
Richard Holden, a Professor of Economics at the University of NSW Business School has conducted research to be published in an economics journal later this year which found that less transparent performance measures can result in a more balanced approach to the job at hand.
“If people know exactly what they are going to be paid on and they know more than the person setting the tasks about which are easier for them to do, then they are going to shift their effort towards the easier task. That may not be what the principal wants them to do,” he says.
“If you make it opaque, if they don’t know exactly which KPI they are going to get paid on, they hedge and self insure by balancing their efforts.”
Professor Holden found this effective in school education, hospital performance and the finance sector. “You may not want school teachers just teaching to the test – you want them teaching overall skills or higher learning skills and a love of learning,” he says.
“You don’t want them only teaching mathematics at the exclusion of English and if you provide very clear transparent incentives and the person getting the incentives knows more about the economic environment, then it is going to lead to gaming. Opaqueness helps deter gaming.”
While there is nothing wrong with measuring the average time it takes a hospital to treat most of its patients, when cash rewards are tied to meeting waiting-time targets, the outcomes can become perverse.
Reports of patients being kept in the back of ambulances to delay the start of the waiting time clock from ticking can put patient care and lives at risk. The same can be said of measuring mortality rates. When a hospital’s patient death rates become a measure of its performance more patients are likely to die in ambulances or at home.
Professor Holden said the Blair government’s approach to long hospital waiting times backfired when it made hospital payments contingent on getting people treated within a four-hour window. This he said led to patients waiting in an ambulance in the car park so the clock on the four hours didn’t start ticking till they entered the doors.
The focus then shifted to ensuring people were checked in and the time it took for them to be treated which led to patients being rushed out of hospital prematurely. Finally, a more balanced set of measures were used but hospitals were not told what they were until the end of the year. “That led the hospitals to be more balanced and that was better for patients and that was the outcome the government was trying to get,” Professor Holden says.
In his experiment with US school children, students and parents were paid for doing maths homework. This resulted in higher maths scores, but reading scores went down by the same amount.
“They just shifted their effort away from the unincentivised task to the incentivised task," he says. “Then in Washington DC we paid based on a more balanced set of measures – six different measures across all things – and that led them to put in a lot more balanced effort and led to much better outcomes across the board."
PwC Partner in Performance and Reward Emma Grogan says there is no ideal measure - financial or non-financial.
"I think the way to get around that is to ensure there is a combination of measures," she says. And a dose of human discretion will always be needed to make a final judgement.
“Organisations that do it well always employ some kind of discretionary judgement at the end of the day because no set of measures is going to fully represent the whole raft of human behaviours that you want some to draw on in a job."
Anna Patty is Workplace Editor for The Sydney Morning Herald. She is a former Education Editor, State Political Reporter and Health Reporter. Her reports on inequity in schools funding led to the Gonski reforms and won her national awards. Her coverage of health exposed unnecessary patient deaths at Campbelltown Hospital and led to judicial and parliamentary inquiries. At The Times of London, she exposed flaws in international medical trials.
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