A company can hit every target on its dashboard and still be heading in the wrong direction. Revenue may rise while margins weaken. Costs may fall while customers leave. An executive team can even earn its bonuses while the business quietly loses ground to competitors. That is the problem with choosing the wrong performance metrics: people tend to manage toward whatever the scoreboard rewards.
Engaged Capital has spent more than a decade evaluating public companies through an ownership-focused investment approach. Founded in 2012, the firm focuses primarily on small- and mid-cap public companies and works constructively with boards and management teams on strategy, operations, governance, and long-term value creation. That experience gives the firm a useful perspective on how boards can determine whether executive performance measures actually support a stronger business.
A Good Scorecard Can Still Measure the Wrong Game
Executive performance metrics serve an important purpose. Boards need objective ways to evaluate management, and executives need clear goals. Problems arise when the chosen numbers are easy to measure but fail to capture what actually creates value.
Revenue growth is a simple example. A company might reward executives for increasing sales by 10 percent. Management hits the target, but the growth may have come from heavy discounting, an expensive acquisition, or sales to customers with poor retention. The headline number looks good. The economics underneath it may look much worse.
Engaged Capital recommends testing metrics against the behavior they encourage. “Before approving an incentive target, a board should ask what management might rationally do to maximize that number. If hitting the target could make the underlying business weaker, the metric needs another look.”
That question turns executive measurement into a strategic exercise rather than an accounting exercise.
Incentives Really Do Change Behavior
The stakes are significant because executive compensation is increasingly tied to performance.
Equilar’s 2024 CEO Pay Study found that median compensation among CEOs at the largest U.S. public companies reached approximately $16.3 million in 2023. A substantial portion of executive compensation at major public companies now comes through performance-linked equity and incentive awards rather than fixed salary.
That structure can align executives with shareholders when the targets are well designed. Poor targets can create the opposite effect.
Imagine that a CEO receives a large incentive for reaching a specific earnings-per-share target. Management suddenly has a strong reason to prioritize decisions that improve that figure within the measurement period. Some decisions may strengthen the business. Others may simply make the number look better.
The problem is not performance pay itself. The problem is assuming that any measurable target automatically represents good performance.
Revenue Growth Can Hide Expensive Problems
Growth metrics deserve particular scrutiny.
Boards naturally want companies to grow. Investors do too. Yet not all growth creates equal value.
A company can increase revenue by entering low-margin markets, spending aggressively to acquire customers, or buying another business at an unattractive price. Management technically delivers growth while shareholders inherit the bill.
Engaged Capital advises boards to examine the quality of growth alongside the quantity. “If revenue rises 15 percent but customer acquisition costs rise 30 percent and retention falls, celebrating the revenue number alone misses the story. The board needs to understand what the company spent to produce that growth and whether those customers are likely to stay.”
This is why performance measures work better in groups. Revenue growth becomes more useful when considered alongside margins, customer retention, returns on invested capital, and cash generation.
No single number should be allowed to tell the whole story.
Cost Cutting Can Become an Expensive Success
Cost reduction creates another measurement trap.
An executive can produce impressive short-term savings by reducing headcount, delaying maintenance, cutting research programs, or postponing investments. The expense target gets hit. The company may look more efficient.
Then the consequences arrive.
Equipment becomes less reliable. Product development slows. Experienced employees leave. Customer service suffers. The company eventually spends more repairing problems than it saved by avoiding them.
Engaged Capital puts the issue in practical terms: “A cost reduction should be judged partly by what happens after the savings appear. If the same decision creates larger expenses two years later, the company did not really save money. It moved the bill.”
Boards therefore need to distinguish between eliminating waste and removing capabilities the company will eventually need.
Short Measurement Periods Can Encourage Short Thinking
Time horizons matter as much as the metrics themselves.
Public companies report results every quarter, but many important investments take years to produce meaningful returns. Developing new products, building leadership teams, entering markets, and improving operations rarely fit neatly inside a 12-month compensation cycle.
If executives are measured mainly on immediate results, they may have little incentive to accept short-term costs for long-term benefits.
Research from FCLTGlobal has repeatedly examined the tension between short-term market pressures and long-term corporate decision-making. Its work argues that compensation structures can support longer-term thinking when performance periods and incentives better match the time required to execute strategy.
Boards should therefore ask whether the measurement period reflects the company’s actual business cycle.
A three-year strategy measured primarily through one-year targets contains an obvious mismatch.
Operational Metrics Can Reveal What Financial Results Miss
Financial measures tell boards what happened. Operational measures can help explain why.
Customer retention can reveal problems before they appear in revenue. Employee turnover can expose organizational weakness before productivity declines. Inventory levels can reveal demand or execution problems before margins suffer.
Engaged Capital recommends identifying a small set of operating measures directly connected to the company’s strategy. “The useful question is not how many KPIs management can report. It is which three or four operating measures would warn the board that the strategy was failing before the income statement made it obvious.”
That approach can help boards move from reviewing history to identifying problems earlier.
Boards Need to Watch for Metrics That Compete With Each Other
Executive scorecards can also become too complicated.
Adding more metrics does not automatically create better accountability. Ten competing targets may give management too many ways to claim success while obscuring which outcomes truly matter.
Metrics can even push executives in opposite directions. A growth target encourages investment while a cost target encourages reductions. A market-share target rewards aggressive pricing while a margin target discourages it.
Boards need to decide which trade-offs are acceptable.
The strongest performance frameworks make those priorities explicit rather than leaving executives to guess.
Measure Whether the Business Is Actually Getting Better
The purpose of executive measurement should not be to create a perfect spreadsheet. It should be to determine whether leadership is building a stronger company.
That requires boards to periodically reconsider the scorecard itself.
A metric that mattered five years ago may no longer reflect today’s strategy. A company entering a mature phase may need different measures from one pursuing rapid expansion. A business recovering from operational problems should not necessarily use the same targets it used during stable periods.
Engaged Capital encourages boards to approach performance measures with an owner’s perspective. If directors owned the entire company themselves, what results would convince them that management had genuinely improved the business?
That question moves the conversation beyond whether executives hit their targets.
The more important question is whether they hit the right ones.