Ongoing studies into factors that influence decision-making have revealed that humans are all prone to some sort of subconscious bias. Confirmation bias, for example, is the tendency to filter and interpret information in such a way as to support an existing position or strongly held belief, even if there is evidence supporting an opposing view. The ‘illusory truth effect’ can lead some people to believe false information as being true simply because it has been heard repeatedly and they have not made the effort to fact check, while the ‘bandwagon effect’ is a tendency to follow what the majority are doing, even if it means suppressing niggling doubts about the direction that the bandwagon is heading in.
So, it should come as no surprise that researchers have found that, when dealing with strategies and metrics, a subconscious bias toward metrics is not uncommon. Performance metrics are tangible and generally easily understood, while strategy is abstract and may be difficult to grasp, or misconstrued. This could lead to strategy being replaced, albeit subconsciously, by metrics, eventually resulting in the metrics becoming the goal, often to the detriment of the company.
The propensity toward surrogation* – the replacement of the strategy by metrics – can be intensified by incentive-based compensation models and/or by real or perceived pressure to achieve goals in order to retain a certain position in the company, or help someone higher up in the hierarchy retain their position.
The case of the Wells Fargo cross-selling scandal is often quoted as a prime example of surrogation influenced by incentive-based compensation. The banking giant had a sterling reputation for sound management, with both the company and its executives winning numerous awards, including ranking 7th on Barron’s 2015 list of “Most Respected Companies”. Their Vision statement, in part, says that it has “nothing to do with transactions, pushing products, or getting bigger for the sake of bigness. It’s about building lifelong relationships one customer at a time.” It goes on to say that their goal was “setting the standard among the world’s greatest companies for integrity and principled performance. This is more than just doing the right thing. We also have to do it the right way.” Wells Fargo established multiple controls to prevent abuse of financial incentives, had an ethics program for bank employees and a whistle-blower hotline for reporting violations.
Yet, in 2013, a group of Wells Fargo employees in Southern California completely lost sight of the company’s stated strategy and acted directly against ‘building lifelong relationships’ and ‘doing the right thing’ by promoting ‘cross-selling’ – opening thousands of new accounts and issuing credit and debit cards for existing customers without their knowledge – all in an effort to meet daily sales targets and reap the rewards of financial compensation. These employees reportedly saw cross-selling as an official Wells Fargo strategy, when, in fact it was not. The metrics had replaced the strategy. (https://corpgov.law.harvard.edu/2019/02/06/the-wells-fargo-cross-selling-scandal-2/)
Surveys have become a popular way of gauging customer satisfaction, but are often subject to surrogation. In their Harvard Business Review article “Don’t Let Metrics Undermine Your Business” authors Michael Harris and Bill Tayler use a common scenario of a company utilising customer survey scores to measure whether they are living up to their strategic objective of “delighting the customer”. Employees responsible for ensuring that the customer is delighted, may start seeing the maximising of survey scores as the strategy and resort to pressuring customers in some way to give a high score, thereby leaving them far from delighted. The metric has replaced the strategy.
Another example of poorly aligned metric and strategy put forward in the above-mentioned article is that of using the number of customer returns as a measure for quality standards when the strategic objective is to produce high-quality products. It’s suggested that, in this scenario, the production manager may find various ways to avoid having a product registered as a return, rather than addressing the quality of the product.
So, how can one avoid surrogation?
When formulating strategy, it is important to include key personnel in the process who are responsible for implementing said strategy and communicating it to other staff members. Simply telling employees what the strategy is, or including it in a mission statement or slogan, does not have the same impact as being involved in the development process does.
Be aware that compensation-based metrics are particularly vulnerable to surrogation and ensure the checks and balances are in place.
Using multiple metrics to realise the strategy, rather than implementing just one, has proven to be an effective method of avoiding surrogation, as people are more likely to consciously think through what they are trying to achieve, which tends to lead back to focusing on the strategy.
CoAcumen are committed to helping businesses overcome the challenges posed by surrogation. By utilising the Raykis platform as a central hub for defining, challenging and tracking the strategy and its associated metrics, the potential for surrogation becomes more visible, and steps can be taken to mitigate it by defining a balanced set of high-quality outcomes which are more reflective of the spirit of the strategy. Through our Common Strategic Context playbook rituals, we can assist your organisation in making this process of challenging, refining and tracking your strategy an embedded cultural practice, leading to sustained transparency and alignment, and ultimately, overcoming the challenges of surrogation.
* “Surrogation” is a term coined by Willie Choi, Gary Hecht and Bill Tayler in their paper “Lost in Translation: The Effects of Incentive compensation on Strategy Surrogation”. Their work was reportedly inspired by renowned accounting researcher and educator Yuji Ijiri (24 February 1935 – 18 January 2017), author of 25 books, more than 200 published papers and an inductee of the Accounting Hall of Fame in 1989.