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Changing Your Thinking About Performance Management: Start to Work with a Hierarchy of Performance Indicators!
published by , on 17/04/2012

Advocates of goal setting argue that for goals to be successful, they should be specific and challenging. Countless studies have found that specific, challenging goals motivate performance far better than do your best exhortations. According to these findings, specific goals provide clear, unambiguous, and objective means for evaluating employee performance. Specific goals focus people’s attention. Lacking a specific goal, employee attention may be dispersed across too many possible objectives. It is also believed that challenging goals, or stretch goals, create a discrepancy between one’s current and expected output, and motivate greater effort and persistence. Although I agree that specific, challenging goals can produce positive results, I think neglecting to take into account on-the- hand the organization design and on the-other-hand the personal knowledge system of staff members can cause a lot of harm.

Are the performance indicators of a role aligned with the level of work complexity in that role?

Unfortunately, goals can focus attention so narrowly that people overlook other important features of a role. For instance, an intense focus on quality can blind people to important issues that appear unrelated to their goal (e.g., changing expectations of customers). The tendency to focus too narrowly on goals is compounded when managers chart the wrong course by setting the wrong goal. If one has a cross-divisional responsibility, and the objectives are set on quality improvements within one’s own department, the manager will probably fail to focus on the broader processes needed to increase the collaboration among different divisions. Goals inform the individual about what behavior is valued and appropriate. The very presence of goals may lead employees to focus myopically on short-term gains linked with a too low level of added value; and, pushes them to lose sight of the long-term effects on the organization. This may prove to be devastating.

How an individual’s mindset can limit the individuals capability to go beyond the defined objectives.

A related problem occurs when employees pursue multiple goals at one time. Individuals with multiple goals are prone to concentrate on only one goal. One’s mental model will determine the scope and the variety of the goals that can be managed. We all know the story of inappropriateness of quarterly reporting. Goals that emphasize immediate performance (this quarter’s profits) prompt managers to engage in constraining short-term behavior that harms the organization in the long run. Research showed that firms that frequently issue quarterly earnings reports, compared to firms that report earnings less frequently, tended to meet or beat analyst expectations, but also tended to invest less in research and development. The effort to meet short-term targets occurred at the expense of long-term growth. Shouldn’t we interpret this obsession with quarterly results as the fossilization of a short-term time horizon shared by the management committees with too narrow ‘frames of references’?

Many believe that the time horizon problem is related to the notion that goals can lead people to perceive their goals as ceilings rather than floors for performance purposes. For example, a salesperson, after meeting her monthly sales quota, may spend the rest of the month playing golf rather than working on new sales leads. The technician who reads lab results and is paid by the piece may perform this task as quickly as possible, and without secondary or tertiary measures, will do so at the health risk of the end user client.

Goal-setting may also distort risk preferences. It has been found that goals harm negotiation performance by increasing risky behavior and objectivity. Negotiators with narrowly defined goals are more likely to reach an impasse than negotiators who have broad goals and mandates. It is also quite easy to imagine that in a very different context, a negotiator who has obtained concessions sufficient to reach his goal, will prematurely accept the agreement on the table, even if the value maximizing strategy would be to continue the negotiation process. Clearly, in some domains, goal setting can significantly harm outcomes.

Goal setting can become problematic when the same goal is applied to many different people and/or roles. Given the variability of performance on any given task, any standard goal set for a group of people will vary in difficulty for individual members; thus, the goal will simultaneously be too easy for some and too difficult for others.

As reaching pre-set goals increasingly matters more than absolute performance, self-interested individuals can strategically set (or guide their managers to set) easy-to-meet goals. By lowering the bar, they procure for themselves valuable rewards and accolades; and, increase expense without optimizing value for the company. Many company executives often choose to manage expectations rather than maximize earnings – popularly known as sandbagging. In some cases,managers set a combination of goals that, in aggregate, appears rational, but is in fact not constructive. For example, consider a self-interested CEO who receives a bonus for hitting board-established targets. This CEO may heavily influence the setting of a mix of easy-to-reach goals and what-the-hell difficult goals. On average, the goal levels may seem appropriate, but this mix of goals may generously reward the CEO (when she meets the easy goals) without motivating any additional effort when the goals are difficult. In reality, many  CEOs face asymmetric rewards—a large bonus and stock options for meeting the goal in one year, but no fear of having to return a large bonus the following year for underperforming. Additionally the mix of too easy and too hard blurs the picture of the correct level of goal complexity at which the manager should operate.
Some core insights from the Work Levels approach.

The core insight from the angle of Work Levels methodology is that each level of work complexity has its own performance logic. This is summarized in the table below. Optimal performance design will be about assessing: a) the person size (this is about building a view on the mindset through which an individual shapes his/her reality), b) matching this with the respective role size, and c) defining the right performance indicators – at the corresponding work level.

It appears that amongst people accountable for breakthrough innovation (this is work where the results can be observed over a period longer than three years and the value add comes from how the role incumbent builds future value through e.g. innovation, growth and return from breakthrough new products), a huge gap exists between the complexity level of the performance indicators and the required added value of managerial roles.  Ninety percent of the Standard & Poor’s 500 companies do not have assessment instruments to measure CEO and business performance beyond a three-year period. Respected compensation consultancies do not use methodologies to calibrate CEO role complexity and the related meaningful performance indicators. This inevitably leads to situations where subordinates’ performance objectives are very similar to those of their bosses creating excessive overlap. A consequence of these practices is a high risk of not feeling responsible for executing the longer term, more complex and interrelated performance objectives. Instead of these inferior practices, it makes sense to consider something like this:

Table: Basic performance metrics and performance horizon at the different levels of work complexity

Levels of work complexity Quality and service delivery Service differentiation and optimisation Rethinking operational flows & value streams Creating breakthroughs, reshaping profitability New business model, reshaping relative competitive position Governance & business portfolio
Performance Metrics Task/Job concrete efficiency measures including Quantity, Quality and Service Excellence to customers (single performance indicators).

 

Effectiveness measures for current processes to respond to customer needs (combined performance measures)

 

° End-to-end process and value stream indicators,

° Yearly revenue – expense and/or profit, year over year value creation (profit and loss).

 

° Future value creation to meet future Customers’/ Shareholders’ Needs,

° Development of viable new products, new services, new markets,

° Return on new capital investments.

° Future value creation to meet future stakeholders’ needs.

Growth, profit and return from existing and new business models.

° Intrinsic and Extrinsic Shareholder value (enterprise value)

° Corporate responsibility to Societies and the common good.

° Global enterprise sustainability.

° Investments and milestones to seed new businesses and/or industries.

 

Performance horizon Up to six months Annual operational plan: Up to one year Rolling eight quarter plan : annual + next year’s annual plan. Mid-term plan – up to three years Strategic plan  – up to five years Strategic plan – integration of regional and international plans.

Another consequence for non-alignment of performance indicators with accountability is that preparing a company for the future seems not as important as good results today. This leads to under-investment. We tend to discount the future at such a rate that we penalize the person who plans for a rainy day if the rainy day does not arrive. We tend to reward the person who does not plan for a rainy day so long as it does not rain or; when it does, everyone else is rained on too. Since returns are directly related to risks, should exceptional returns not be presumed to entail higher risks and, therefore, the payout of incentives spread over longer periods?

The importance of the manager-direct report relationship

Another insight from work complexity theory is that the employee-direct manager relationship is essential. In this relationship, the manager adds value because he/she does the task setting, monitors progress and provides feedback. Judging employee effectiveness is at the heart of managerial leadership. The key for effective discernment will be in taking into account in what way the personal knowledge system or mindset of the manager is broader than that of the direct report. When the individual mindset of the manager is equal to or narrower than the one of their direct report, that manager will have difficulties in adding value to the subordinate. There is a risk that the manager simply does not see how the subordinate integrates different perspectives, may view the entire value chain (and not one sub process) or may approach decision making in the search and solution space in innovative ways. It is interesting to observe how managers focus on the content of goals, without giving attention to the necessary decision processes.

A performance dialogue should not be restricted to the required outputs/results at the corresponding added-value level, desired behavior and attitude alone. The manager must get at the root causes of behavior and attitudes. For example, this can be seen in the way a subordinate thinks before he/she acts. Greater understanding requires a discussion of the individual’s personal knowledge system (the thinking tools and stance which produce skilled awareness, and result in the kind of decision making matched with the expected level of added value.) Success is both related to subordinates’ behavior, and the ability of managers to bring this behavior in synch with the required mental map to successfully perform the individuals’ role assignment.

It is not possible to achieve a performance objective without involving reflective processes on how to generate more effective problem-solving and decision making capability. Success is mediated by the causal specifications of what actions are required in order to produce the intended consequences.  Simply stated, these are our theories-in-use. Managers should be stimulated to read their staff’s role descriptions, evaluations, and attributions in ways that facilitate inquiring and refine or broaden their subordinates thinking tools.
Improving the goal setting process.

The most effective way to improve the process is to frame goal setting from a hierarchy of performance indicators perspective and reflect upon which performance indicator best fits the complexity of the targeted role. In doing so, we must also be aware that the success of a performance management system is not assessed by measuring the outcomes alone. Managers must also pay close attention to the level of thinking skills required to achieve the agreed upon goals. Upgrading the goal setting process has developmental opportunities and consequences. Managers whose staff has realized their upgraded objectives and changed their reasoning and their theories-in-use should receive the highest rewards.

Jan De Visch currently works as Managing Director at Connect & Transform and Managing Partner of Making Strategy Deliver and Executive Professor HRM at the Flanders Business School’s. He also is the author of ‘The Vertical Dimension. Blueprint to Align Business and Talent Development.’

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