See "The Problem With Satisfied Patients" wherein HHS was apparently shocked to learn an important economic idea: you get what you pay for but often not in the way you expect.
When Department of Health and Human Services administrators decided to base 30 percent of hospitals’ Medicare reimbursement on patient satisfaction survey scores, they likely figured that transparency and accountability would improve healthcare. The Centers for Medicare and Medicaid Services (CMS) officials wrote, rather reasonably, “Delivery of high-quality, patient-centered care requires us to carefully consider the patient’s experience in the hospital inpatient setting.” They probably had no idea that their methods could end up indirectly harming patients.
I used to regale my MBA students with examples of this. Here are a few of my favorites.
In its early years Gateway Computers needed to save money on customer telephone support, so it told its customer service reps they would lose bonuses if they averaged more than 13 minutes per call. Saved money, right? No: the reps starting doing things to get people off the phone quickly including pretending the line wasn’t working, hanging up, and quickly offering to send replacement parts or new machines for free. That last was expensive. And customer satisfaction fell. Friends and relatives stopped recommending Gateway: referrals fell from 50% of orders to 30%.
A large bank rewarded its branch managers based on customer satisfaction. But this encouraged branch managers to raise deposit interest rates and to make loans cheap Customers were the most satisfied at the least profitable branches. (Richard McKenzie and Dwight Lee.)
Lincoln Electric--a company renowned in MBA case studies for its management prowess--once decided to monitor the keystrokes of its typists and pay them per stroke. Result: secretaries typed meaningless output during lunch hours. (Richard McKenzie and Dwight Lee.)
L.A. city trash collectors were thought to be working too slowly, so their supervisors told them they could leave work as soon as they finished their designated routes. Two results ensued: 1) Collection sped up enormously, but 2) the trash collectors disabled the speed controls on the mechanical arms that lifted cans and dumpsters. The dumpsters were practically catapulted into the trucks, leading to much accelerated wear and higher repair costs.
"[S]ome companies have adopted a policy where at the end of some predetermined period each team evaluates everyone and drops the bottom 10% or 20%. In response to this policy, a smart manager who has a good team hires extra people who can be thrown overboard without damaging the team. I think I know someone to whom this happened at Novell. It's not a good policy; in fact it's abusive and eats away at company morale from within."
Finally, this one: Jack Welsh at G.E. was the greatest CEO of his generation, and supposedly one of the greatest ever. The foundation of his management philosophy: a firm should be first or second in the market or get out. But he revealed (NY Times, 3/18/01) that after 1995, he didn't really push this. Why? “What this bureaucracy of ours had been doing was simply redefining markets narrowly enough to make sure we came out No. 1 or No. 2.”
Four summary quotes:
Goodhart's Law: ". . . when you attempt to pick a few easily defined metrics as proxy measures for the success of any plan or policy, you immediately distract or bait people into pursuing the metrics, rather than pursuing the success of the policy itself. The mythical example is Soviet factories: 'When given targets on the basis of numbers of nails produced many tiny useless nails, when given targets on basis of weight produced a few giant nails.'"
Economist Glen Whitman: "With just an iota of economics training, most people catch on to the importance of incentives. . . . [But] [p]eople don’t always respond to the incentives in the ways you might predict. What distinguishes good economic thinking from bad is the recognition of the subtle, creative, and often unforeseen ways that people respond to incentives.”
Joel Spolsky, summarizing work by Harvard Business School professor Robert Austin: "His point is that incentive plans based on measuring performance always backfire. Not sometimes. Always. What you measure is inevitably a proxy for the outcome you want, and even though you may think that all you have to do is tweak the incentives to boost sales, you can't. It's not going to work. Because people have brains and are endlessly creative when it comes to improving their personal well-being at everyone else's expense.”
“I think it was Andy Grove who said that for every goal you put in front of someone, you should also put in place a counter-goal to restrict gaming of the first goal.”