Academic references to outcomes theory
Where indicators are able to be manipulated, there is a trade-off between using an indicator for incentivization and using it to gain an accurate picture of what is occurring in reality.
Many indicators are able to be manipulated. Where this is the case, using an indicator as the basis for providing incentives is likely to end up in the indicator being manipulated so that it looks better than it is in reality. This means that the indicator is not longer an accurate measure of what it was originally set up to measure. A particular problem arises where those who are in higher levels of management within an organization also benefit from the particular indicator looking good (in terms of bonuses and kudos). In such a case higher management has little incentive to ensure that those they manage do not game the indicator.
1. Where indicators are manipulable, measures should be put in place to ensure that they will not be manipulated.
2. If an indicator is manipulable and the cost, or feasibility, of putting in place measures to prevent manipulation is too great, then it should not be used for incentivization. This does not mean that it cannot be used as part of performance improvement to work out ways of improving performance and informal benchmarking.
In many corporate settings, performance management systems are distorted by the fact that they are used as incentive systems. Wells Fargo, for instance, provided incentives for staff who got their customers to open additional accounts (called ‘upselling’). In due course, after one and a half million false accounts where set up and 5000 needed to be fired, presumably they learnt the importance of the ‘putting a gloss on it’ outcomes theory principle.
Other statements of the principle
Also known as Campbell’s Law ‘The more any quantitative social indicator is used for decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.’ And Goodhart’s Law ‘When a measure becomes a target, it ceases to be a good measure.’ Also Dukenfield’s (W.C. Fields’ real name) Law of Incentive Management "If a thing is worth winning, it's worth cheating for.”