Stupid Metrics Drive Out No Metrics At All
Apr 15, 2014
Developing scorekeeping metrics is a critically important yet undervalued role of the chief financial officer. CFOs ignore this role at their and their organizations’ peril, because if they don’t set the scorekeeping metrics, others will, and will make a mess of it.
All organizations crave metrics. We’re human, and that means we need to compare how we’re doing against our competitors, our peers, our commitments, or simply what we were hoping for. There are lots of possible metrics – business examples include revenues, profits, and dollar compensation. Metrics based on ratios make scoring less dependent on size and more memorable to the audience – e.g., margins, EPS, growth rates, percentage variances, market share, percent of new business, percentage raise. The art of all this lies in coming up with a small but meaningful number of the metrics that make the most sense for each organization.
Two recent stories in The Washington Post bring all this to mind. One reports that JPMorgan Chase’s 2013 proxy statement shows that CEO Jamie Dimon got either a huge pay cut in 2013 or a huge raise, depending on whether you look at the SEC-mandated disclosures (pay cut – see p. 47 of the proxy) or JPMC’s voluntary detailed disclosure (raise – p. 34). The other reports that the American Statistical Association has harshly criticized the “value-added method” (VAM), a highly quantitative method for evaluating teachers that depends heavily on standardized test score results. While VAM is gaining increasing traction in the U.S., it is extremely controversial.
In my opinion, both the SEC-mandated compensation disclosures and the VAM methodology are not only deeply flawed, but so complex that it’s hard to understand either the presentation of the results or the underlying methodology. Now, it’s easy to blame the regulators and politicians for both messes, but they were simply filling a void. That void was created by the decades-long reluctance – if not downright refusal – of U.S. public companies and the teaching profession, respectively, to comply with the public’s request for fuller self-evaluation. In other words, “If you won’t tell us how you’d like to be scored, we’ll decide for you.”
For any enterprise, scorekeeping takes on many dimensions – investor valuation, general performance assessment, sales compensation, employee performance reviews, just to name a few. But regardless of the reason for the scorekeeping, the CFO is the right person to take responsibility for the task, because he or she is the one most likely to:
- Be a neutral third party to all of the line functions in the enterprise,
- Know what data is available and how to retrieve it, and
- Have the necessary mathematical and analytical skills.
And if the CFO doesn’t determine the scorekeeping practices, someone else will serve your enterprise a fried telephone book.
“Painting with Numbers” is my effort to get people to focus on making numbers understandable. I welcome your feedback and your favorite examples. Follow me on twitter at @RandallBolten.