In today’s article, I am going to discuss a critical issue when evaluating a decision (regardless of its nature). Is it such a big deal? It is indeed, because it seems that there are plenty of experienced CFOs that still don’t know how to evaluate a decision properly. Don’t get me wrong here; it is something that was literally said by my Financial Management teacher, who by the way is an assistant professor at IESE so he often deals with those kinds of CFO’s. Anyway, after I heard such a strong claim in class I couldn’t resist the urge to go beyond his words. Then I realized that you only have to grab a couple of copies of “Businessweek” or “BusinessInsider” in order to notice that mistakes in the evaluation of a decision are very common, even among the most laureate CFOs.
Let’s imagine we are one of the most reputed CFOs in London. Why should we be such a stunning CFO? Actually, it doesn’t matter but it sounds sexier that way. As I was saying, we are an important CFO and we are in charge of a gifted minded, promising, fresh and young team of analysts in our company. Our company is right in the middle of a unique opportunity which implies deciding whether to enter market A or market B.
Our team is going to make an exhaustive analysis of both markets and then they are going to come up with a final decision. The potential outcome could be: on the one hand, our team nailed it and chose the market which turned out to be the one with more potential growth or, on the other hand, they chose the wrong market and we lost all our investment and our competitors laugh at us while having dinner in the Ritz Hotel (Still trying to make the story sexier).
At this point my question is: would it be fair to decide whether our team deserves the bonus or not basing our decision on the final outcome? What if the market that our team chose was hit by an unexpected hurricane and turned out to be not the least profitable option? It is something very extreme, of course, but I only want to show you what could happen when the outcome is not totally correlated with the effort of the team. Would it be fair to keep the bonus instead of giving it to them in that situation?
What really matters is something that those stubborn CFOs haven’t taken into account, which is to evaluate if the team did its best or not in the decision-making process. What a rational CFO should consider would be the effort that the team has put on the analysis of a decision. If the team has worked hard and every single analyst has done his/her best, then they should be rewarded regardless of the final outcome.
What could happen if a CFO evaluates a team based only on the final outcome? If the team has done its best and they end up without a reward because of random factors or the always present likelihood of failure, then the team is no longer incentivized to work on risky projects even if they have a perfect work methodology. It means that the company is less likely to come up with disruptive innovations which are the kind of projects which, despite the huge risk they hold, are the ones that can help the company reach success. Therefore, if we want to prevent our company from intentionally avoiding risky projects, then we should take into consideration the work done throughout the whole analysis of the projects.
Moreover, we can also take a different perspective on the same situation. Let’s suppose that our team has done a poor analysis because they had more projects at the same time, but the outcome has been positive. Should we reward them? Not at all! If we do so, then they are going to make the same poor analysis for the following projects until they fail.