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In Search of the Performance Management Holy GrailNewsletter, September 2006
When the question of what Performance
Management is and what it entails is asked in any organisation, there are as many answers and perceptions as there are people in the organisation. The Human Resources Department will tell you that Performance Management entails the training, mentoring and development of employees; the To complicate matters even further, numerous management methodologies have been introduced over the years, which all claim to be the silver bullet when managing performance. Concepts such as the Balanced Scorecard, Value Based Management, Total Quality Management and Six Sigma are commonplace in most managers’ vocabulary. A well-designed and implemented performance management system will ensure that there is open and honest communication between all layers of the organisation. It will ensure that managers have the authority to manage, while there is an assurance to their bosses that agreed levels of performance will be met. A good performance management system should focus not only on the achievement of a metric but also on the reasons behind the achievement or non-achievement of the metric in relation to a target. Unfortunately there is no magic formula for designing an effective performance management system, but there are a number of factors which differentiate between success and failure. Performance Management implementation either succeeds or fails, based on whether the management buys into the process. If a robust change management process does not run alongside the process of implementing performance management, it is bound to fail. Complete management buy-in at all levels is crucial to ensuring the success of the system. The change management process and associated training will ensure that a culture of value creation is instilled throughout the business. It is important for all employees to understand the concept of value creation as well as understanding how their decisions and actions influence value creation. This understanding can be achieved by top management members who consistently reinforce the importance of the value creation mindset in all their communication to the rest of the organisation. Ultimately the senior management must lead by example and walk the talk. Senior managers, who cut the budgets for employee development and training to meet short-term profit objectives, are unlikely to inspire a culture of long-term value creation among the members of their middle management team. Performance Management relies on measuring employee performance and on taking corrective action when the targets set for the performance metrics are not met. What is measured will ultimately impact on people’s behaviour, therefore it is important to ensure that due consideration is given to identifying the value drivers that define the short-term performance and long-term health of the business. It is important for managers to have a clear understanding about what the business’s value drivers are, as this will ensure that managers can understand and analyse the trade-offs required to balance short-term performance against long-term health. For example, reducing Research and Development costs may bolster short-term performance but could have disastrous consequences for the business in the long term. When identifying the priority value drivers, it is important to take the following into account:
Once these factors have been considered, the important value drivers can be ranked in order of priority, appropriate value metrics can be assigned to the drivers and they can be cascaded throughout the organisation. SMART target setting should ensure that the targets that are set are realistic but are also challenging. In short, targets should be specific, measurable, attainable, realistic and time-based. Targets must be based on the opportunities identified for improvement and any economic considerations. When setting targets, the following input should be borne in mind, namely the performance of similar companies in the same industry, the internal performance of business units, historical performance and blue-sky scenarios. Performance targets should include a base which should be regarded as the minimum level of acceptable performance, and a stretch target which should result in considerable rewards if it is met. Quarterly performance reviews should focus on the facts, using a scorecard as the basis for the discussion. Reviews should focus on the reasons for poor performance so that they do not recur, rather than on apportioning blame. Opportunities for employee development should be identified and implemented during the review process. The final consideration when designing and implementing an effective performance management system is to ensure that the top performers are adequately rewarded and recognised. Well-designed incentive schemes should differentiate between top performers and the rest of the organisation. Short-term rewards should be linked to the achievement of annual financial and non-financial measures, whereas long-term incentives should focus on rewarding long-term value creation and the long-term health of the business. The organisation’s top performers should also have abundant opportunities for non-financial rewards such as career advancement and development opportunities. Though employee performance management is an important tool for creating value in an organisation, its design and execution are complex and the best intentions are often shelved or sidelined. However, companies that are willing to invest in establishing a culture of value creation linked to effective targets, reviews and rewards, should definitely reap the rewards that a performance management system offers. It must however be reinforced that no matter how hard you look, there is no performance management silver bullet to be found. Leslie Yuill |