It triggers an arms race of workers seeking ways to mask their activities and management building ever-more elaborate and invasive metrics to capture them. The end result is that everyone spends so much time and energy on administration that the output of real work actually falls - along with both employee morale and management confidence.
I found myself nodding my head in recognition when I read the excellent essay on lesswrong.com about spammers trying to game PageRank. http://news.ycombinator.com/item?id=1339704
Unfortunately, that kind of approach doesn't lend itself to a productivity measurement team seeking a high profile for its activities. Nor does ostensibly objective, non-punitive measurement stay that way - it's just too tempting for managers to use it as a stick.
I've been working on different projects for the past couple of years, and frankly I'm glad to be out of the productivity game.
Productivity is not = hours worked.
How do you measure a programmer's productivity when you can't estimate exactly (and sometimes not even close) how much work something should take?
What I've found useful, and which worked reasonably well for teams which have been working over a period of time together is to collectively estimate complexity of tasks that must be completed.Say on a scale of 1-5. That gives you a reasonably agreeable scale of measurement (not a universal scale, but the one that the team accepts). As time progresses, you see how many such tasks are completed by any person in a given time frame.
Not that this is foolproof, or that it works right from the beginning of a project, but over a period of time, you tend to get a good sense of how productive each member is.
[Edit: Typo fixed]