Frequent readers of this forum know that government policies often fail because of unintended consequences. Those unintended consequences are linked in many cases to “perverse incentives” that steer people toward actions that cause more harm than good.
This phenomenon can cause problems in the business world as well, as Geoff Colvin notes in a column for Fortune (not yet posted online). Colvin outlines something called “EVA momentum” and explains why it might work better than other indicators in telling how well a business is performing.
EVA momentum is economic value added (“essentially profit after deducting an appropriate charge for all the capital in the business”) divided by the prior period’s sales.
The key insight is that achieving high EVA momentum requires a business to do two difficult things at once. It must grow while at the same time maintaining healthy EVA profit margins or improving poor ones. … That combination of increasing sales and an excellent or improving EVA is the extremely rare basis of great financial performance.
Colvin is quick to point out that this measure is new and unproven, but he also notes that it’s hard to see how wily executives could game the numbers successfully.
If only government leaders felt compelled to find ways to measure the success or failure of their various policies and programs. But as John Hood discussed in a recent column, “they don’t want to know.”
