Corporate culture and misaligned metrics

When good goals go awry, the true test of corporate culture comes out

Quick summary:

• Corporate culture is a key foundational ingredient for organizational success

• Healthy cultures support employees, create safety, and spur innovation

• When times get tough, there is a temptation to take shortcuts to focus on results

• Difficult moments show which behaviors are tolerated and truly valued

• Measurable goals are necessary, but misaligned metrics can drive bad behavior

When good goals go bad: misaligned metrics

In the last edition of Forestview, I highlighted the importance of first impressions as a sign of how healthy your corporate culture is. I shared the story of my oldest daughter Felicity’s first weeks at her new job at GameStop in our local mall and how well her initial onboarding and employee experience has gone. I also shared how her experience as a new employee was refreshing to see given the challenges that GameStop as a company has been facing; the company has only recorded a positive quarterly net profit once since 2018.

Today’s edition will widen the lens a bit and share a more cautionary tale, as Felicity’s experience as a new employee is not a universal one. GameStop, like all retail stores, has a series of sales goals that managers and associates are responsible for hitting on a recurring basis. These goals are derived from the corporate goals set higher up and allocated down to each region and further on to each store. It is perhaps not surprising that, given GameStop’s current struggles, the goals set for each location are quite lofty - high enough (presumably) to see the company’s fortunes turn and achieve a positive profit. Aspirational goals are important: setting goals too low tends to have employees aim lower and not push as hard to achieve success.

However, aspirational goals become problematic when they are unrealistic. When goals are unattainable, they are de-motivating at best and drive negative behaviors at worse. One of the most infamous examples of this is Wells Fargo, which agreed to a $3 billion settlement with the Department of Justice in 2020 as part of practices that saw thousands of employees open millions of bank accounts for customers without their knowledge or authorization. (You can read an in-depth case study here on the Wells Fargo scandal and its implications for corporate governance.) But it does not take this size of scandal to test your corporate culture.

Goals should be customized, not simply cascaded

In our local district, virtually all of the GameStop stores are consistently in the red when it comes to their sales goals. Again, this fact by itself may not be surprising as the goals that were set are quite aggressive. However, there are two big problems inherent in setting the standards high enough to be virtually unattainable. First, the goals do not vary by location: all stores have the same sales goals. Premium is placed on selling the most profitable items: the PowerUp Rewards Memberships, warranties on games, and pre-ordering games. The problem lies in treating all stores the same: some stores are in strip malls which are more easily accessible than locations in large indoor shopping malls. GameStop locations in a traditional mall tend to get more “browsers”: more foot traffic walking in but fewer hard core gamers. Bringing in new customers that are less familiar with GameStop is a good thing; hopefully, some percentage of these people will become more regular customers. Locations in traditional malls tend to do well in terms of the number of transactions, but less well when it comes to the preferred mix of transactions. Hard core gamers are likely to buy the memberships and pre-order games and prefer the quick convenience of going in and out of a strip mall. These customers want to avoid navigating the parking garage and longer walk time needed to reach a location in the interior of a large mall.

A second issue is that the goals are not adjusted based on the tenure of the employee. New employees are expected to achieve the same sales goals as more tenured employees. By not adjusting their goals to account for their lack of work experience with the firm, this puts a lot of pressure immediately on new employees. Good managers recognize this and can influence to some degree the sales for their junior associates; for instance, the manager may be at the register when a customer asks to purchase a membership and then calls over a newer employee to “train” them on the process, and in so doing also giving them credit for the sale. The combination of exceedingly high targets and lack of differentiation of the sales goals by store location and employee tenure led to most stores being in the red across the range of metrics - except one single location which was well above their targets across the board.

Good outcomes from bad behavior: how to react?

Why was this one GameStop location well in the green while all others were struggling? The reasons are not clear but speculation is that it is the manager - but not in the way you might imagine. Contrary to the picture of a strong leader who takes responsibility for inspiring their employees to pull together and achieve a seemingly impossible goal, this manager allegedly does quite the opposite. When a customer requested to make a purchase that was not considered a “priority” based on GameStop’s metric (such as buying a charging cable for a game console), the manager would claim to “check the supply in the back”…then remain away from the customer long enough that they would get frustrated and leave the store. No sale was made, but the “non-preferred” purchase that was avoided kept the metrics high, most of which based on a sales mix measured as a percentage of total sales. Other times, the manager would go ahead and allow the customer to purchase a non-preferred item, but log into the register as a newer employee, worsening their sales mix metrics while keeping his own metrics well above goal. By penalizing unwitting new hires, the manager made himself look at the top of his peers, but quickly gained a bad reputation in the process as a boss nobody wanted to work for.

It turns out that Felicity’s positive experience as a new employee is not common across all locations, meaning that credit is due more to her leadership team rather than the company as a whole. Additionally, the other GameStop store managers in the district have a problem on their hands: what to do about the unscrupulous peer that looks like a superstar but is achieving results by undermining his employees and fellow managers in the process? Appeals were made to the district manager to investigate and take action. What happens next remains to be determined, but the odds do not look great for replacing the rogue manager: after all, having sterling sales metrics is what got them promoted in the first place.

This is the crux of the issue: when metrics are misaligned, it is demotivating at best and leads to unsavory behaviors at worst. Both go a long way towards undermining corporate culture. As mentioned in the previous edition, corporate culture is hard to define but matters a great deal. A big part of what determines corporate culture are the values you articulate, the behaviors you reward, and the gaps between the two. In setting objectives for your organization, be sure that the metrics you select are aspirational but achievable, the ability to “game the system” is minimized, and bad behaviors such as ignoring customers or undermining colleagues is not tolerated.

How does your organization set performance goals? What metrics are used and are they the right ones? Are you rewarding both the “what” and “how” or simply the what and ignoring the how? What do employees do when they see or experience babd behavior by a colleague? Do these incidents get reported up the chain or are they simply whispered about? If escalated, is action taken clearly and swiftly or left to languish? Where are the say-do gaps in your organization? Are goals customized to the circumstances of the firm or simply cascaded down?