concerns the way that organizations, operating within markets, tie rewards and punishments to individuals and team performance in order to motivate value-creating behavior.
management of incentives cannot be replaced with purely formulaic incentives that require no subjectivity
Objective performance measurement: Controllability Problem
it is difficult to know whether an outcome was the result of controllables (effort, wise decisions) or from uncontrollables (luck, chance)
Objective performance measurement: Alignment Problem
When a job requires multiple tasks, it is typically the case that performance regarding some tasks is easy to measure (e.g., on-time deliveries) relative to other tasks (e.g., courteous deliveries). Individual performance (e.g., on-time deliveries) measures are incomplete and therefore not perfectly aligned with value creation.
Objective performance measurement: Interdependency Problem
Value is often created by teams of individuals. When a given outcome is the result of the joint performance of many, it is difficult to determine the individual contributions of any team member.
Difficulties of Subjective performance measurement
harder-to-measure contributions to value creation are no less important than the "objectively measured" contributions; they are just more difficult to measure.
Requires substantial effort because it is so hard to do well. Even companies that believe they do it successfully find it to be difficult
The main problem of subjective performance evaluation is that most people dislike evaluating others, especially when performance is weak.
Folly of rewarding A while hoping for B
Also called "Kerr's Folly", this phenomenon promotes behavior different than what is desired. People react to what they are rewarded for, not what you want from them
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