A tale from personal experience. Apologies for the length.
A few years ago our development group tried setting "proper" measurable objectives for individuals and team leaders. The experiment lasted for just one year, because hard metrics didn't really work very well for individual objectives (see my question on the subject for some links and further discussion).
Note that I was a team leader, and involved in planning it all with my technical boss and the other team leaders, so the objectives weren't something dictated from on high by clueless upper management -- at the time we really wanted them to work. It is also worth noting that the bonus structure inadvertently encouraged competition between developers. Here are my observations on the things we tried.
Customer-visible issues
In our case, we counted outages on the service we provided to customers. In a shrink-wrapped product it might be the number of bugs reported by customers.
Advantages: This was the only real measure that was visible to upper management. It was also the most objective, being measured outside the development group.
Disadvantages: There weren't that many outages -- just around one per developer for the whole year -- which meant that failing or exceeding the objective was a matter of "pinning blame" for the few outages that did occur in each team. This led to bad feeling and loss of morale.
Amount of work completed
Advantages: This was the only positive measure. Everything else was "we notice when bad things happen," which was demoralising. Its inclusion was also necessary because, without it, a developer who did nothing all year would exceed all the other objectives, which clearly wouldn't be in the interests of the company. Measuring the amount of work completed checked the natural optimism of developers when estimating task size, which was useful.
Disadvantages: The measure of "work completed" was based on estimates provided by the developers themselves (usually a good thing), but making it part of their objectives encouraged gaming of the system to inflate estimates. We had no other viable measure of work completed: I think the only possible valuable way of measuring productivity is "impact on the company bottom line," but most developers are so far removed from direct sales that this is rarely practical at an individual level.
Defects found in new production code
We measured defects introduced into new production code during the year, as it was felt that bugs from previous years should not count against any individual in this year's objectives. Defects spotted by internal quality teams were included in the count even if they didn't impact customers.
Advantages: Surprisingly few. The time lag between the introduction of a defect and its discovery meant that there was really no immediate feedback mechanism to improve code quality. Macro trends at a team level were more useful.
Disadvantages: There was a heavy focus on the negative, since this objective was only invoked when a defect was found and we needed someone to blame for it. Developers were reluctant to record defects they found themselves, and a simple count meant that minor bugs were as bad as severe problems. Since the number of defects per individual was still quite low, the number of minor and severe defects didn't even out as it might with a larger sample. Old defects were not included, so the group's reputation for code quality (based on all bugs found) did not always match the measurable introduced-this-year count.
Timeliness of project delivery
We measured timeliness as the percentage of work delivered to internal QA teams by the stated deadline.
Advantages: Unlike counting defects, this was a measure that was under immediate, direct control of the developers, as they effectively decided when the work was complete. The presence of the objective focused the mind on completing tasks. This helped the team commit to realistic amounts of work, and improved the perception by internal customers of the development group's ability to deliver on promises.
Disadvantages: As the only objective directly under the developers' control, it was maximised at the expense of code quality: on the day of a deadline, given the choice between saying a task is complete or doing further testing to improve confidence in its quality, the developer would choose to mark it complete and hope any resulting bugs never come to the surface.
Complaints from internal customers
To gauge how well developers communicated with internal customers during development and subsequent support of their software, we decided that the number of complaints received about each individual would be recorded. The complaints would be validated by the manager, to avoid any possible vindictiveness.
Advantages: Really nothing I can recall. Measured at a sufficiently large group level it becomes a more useful "customer satisfaction" score.
Disadvantages: Not only highly negative, but also a subjective measure. As with other objectives, the numbers for each individual were around the zero mark, which meant that a single comment about someone could mean the difference between "infinitely exceeded" and "did not meet".
General comments
Bureaucracy: While our task management tools held much of the data for these metrics, there was still quite a lot of manual effort involved to collate it all. The time spent obtaining all the numbers was not enjoyable, generally focused on negative aspects of our work and may not even have been reclaimed by increased productivity.
Morale: For the measures where individuals were blamed for problems, not only did those with "bad" scores feel demotivated, but so did those with "good" scores, as they didn't like the loss in team morale and sometimes felt they were ranked higher not because they were better but because they were luckier.
Summary
So what did we learn from the episode? In later years we tried to re-use some of the ideas but in a "softer" way, where there was less emphasis on individual blame and more on team improvement.
- It is impossible to define objectives for individual developers that are objectively measurable, add value to the company and cannot be gamed, so don't bother to try.
- Customer issues and defects can be counted at a wider team level, if the location of the defect is unequivocally the responsibility of that team -- that is, you don't ever have to play the "blame game".
- Once you measure defects only at the level of responsibility for a code module, you can (and should) measure old bugs as well as new ones, since it is in that group's interest to eliminate all defects.
- Measuring defect counts at a group level increases the sample size per group, and so anomalies between minor and severe defects are smoothed out and a simple "number of bugs" measure can mean something, such as to see if you are improving month-on-month.
- Include something that upper management care about, because keeping them happy is your primary purpose as a development group. In our case it was customer-visible outages, so even if the measure is sometimes arbitrary or seemingly unfair, if it's what the bosses are measuring then you need take notice too.
- Upper management don't need to see metrics they don't have in their own objectives. This way it avoids the temptation to blame individuals for errors.
- Measuring timeliness of project delivery did change developer behaviour and put a focus on completing tasks. It improved estimation and allowed the group to make realistic promises. If it were easy to collect the timeliness information then I would consider using it again at a team level to measure improvement over time.
All of this doesn't help when you are required to set measurable objectives for individual developers, but hopefully the ideas will be more useful for team improvement.