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The best-laid incentive plans.

¹Goldman Sachs, New York, USA.

Harvard Business Review

|January 28, 2003

Summary

Implementing a new performance management system at Rainbarrel Products led to cost reductions but also demoralized employees and service issues. The company must revisit its performance management approach for balanced success.

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Area of Science:

Business Administration
Organizational Behavior
Management Science

Background:

A diversified consumer-durables manufacturer implemented a new performance management system.
Initial results indicated improvements in cost reduction and operating efficiencies.

Purpose of the Study:

To evaluate the overall impact of a new performance management system on a company.
To identify unintended negative consequences of performance metrics and incentives.

Main Methods:

A fictional case study analyzing a company's performance management changes.
Incorporation of expert commentary from business and management consultants.

Main Results:

The new system improved financial metrics but negatively impacted R&D timelines, employee morale, and customer service.
Unintended consequences arose from inflexible budgeting and misaligned incentives.

Conclusions:

The case study suggests that a holistic review of performance management strategies is crucial.
Companies should consider the broader organizational impact beyond financial indicators.

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