June 19, 2025
The Illusion of "Good": Why Defining Performance is Surprisingly Contentious
The article was generated from the video transcript and edited by Dr. Hermann J. Stern.
We all like "performance," especially when linking it to executive pay. But what exactly is good performance? It sounds straightforward, doesn't it? “Just look at the numbers, right?” As it turns out, the answer is far more elusive than we might think.
In this thought-provoking segment from a recent lecture at the University of St. Gallen, Dr. Hermann J. Stern presented his students with a seemingly simple task: analyze a multi-year, simplified Profit and Loss (P&L) statement from a real company and identify the "best" performing year. The results were… illuminating, and perhaps a little unsettling.
What unfolded was not a unanimous agreement on a single standout year. Instead, a lively debate erupted, with compelling arguments made for multiple and different years. One student championed Year 6, pointing to its strong profit, healthy profit margin, and significant revenue growth, marking the company's largest size to date. Another passionately argued for Year 5, highlighting the dramatic turnaround in sales growth from negative to positive territory, showcasing impressive momentum. Yet another student offered an economic perspective, suggesting Year 4 boasted the highest absolute increase in profit, arguably the most direct driver of company value. Even Year 2 and the initial strong showing of Year 1 found their advocates.
The key takeaway from this exercise wasn't about which year was actually the best. It was the stark realization that even when presented with the most fundamental financial data, we struggle to reach a consensus on what constitutes "good" performance. Different metrics tell different stories, and individual perspectives and priorities inevitably shape our interpretation of the same numbers.
Think about the implications for pay-for-performance schemes. If we, even with a simplified scenario, can't agree on what good performance looks like in retrospect, how can we possibly define clear, unambiguous milestones and metrics to incentivize and reward performance prospectively?
Financial numbers, while seemingly objective, can be surprisingly treacherous as the sole indicators of success. Focusing too narrowly on maximizing one metric may lead to negative consequences in other crucial areas. The exercise underscores the inherent complexity in assessing performance and the dangers of relying solely on a limited set of financial figures to determine executive compensation.
This short video offers a powerful demonstration of the fundamental challenge of performance-based pay. Witness the debate unfold and understand why the seemingly simple question of "what is good performance?" has profound implications for how we design incentive systems. It's a crucial reminder that performance assessment is far more nuanced than simply reading the bottom line. Click play in the video above to see the discussion and perhaps reconsider your own assumptions about measuring success.