How Well-Designed Monetary Metrics Can Motivate

The power of monetary metrics to motivate performance is huge when properly focused and, unfortunately, even when poorly focused. Accounting is called “the language of business” because it places a standard measure—money—on otherwise incomparable resources and activities. Most manufacturers have seen this effect, but often the results can appear confusing. Examples include product costs that fluctuate with volume and mix, illogical allocations of overhead, fixed budget targets that impair operational flexibility, bizarre return on investment calculations and so on. Let’s examine two scenarios where well-designed monetary metrics take performance to an improved level.

Scenario one presents poorly designed monetary metrics. Let’s say a factory has two production lines that make the same products. One line is 20 years old and fully depreciated. The second line is new, and depreciation is charged at an accelerated rate to match the tax depreciation. The new line is more labor efficient and higher quality. These factors lead sales personnel—who are compensated based on order profit margin—to jockey to have...