The Dark Side Of Performance Management - Continued

The previous post triggered me to post something on the dark side of performance management. Something I should have been doing weeks ago, since we started this thread with Frank Buytendijk on his weblog.

The previous post suggests what we think is the right way to approach performance management: linking overall goals to what employees can understand and control, and rewarding them accordingly. However, as Frank so eloquently introduced, behavior may very well be influenced by performance management systems, but too often the behavior invoked is not in the best interest of the organization. We thought it might be interesting to make a small inventory of some of the flaws in performance management today.

We've all heard the stories about top executives earning huge bonuses. I'm not sure about other countries, but in The Netherlands this always leads to a lot of discussion in the media. Apparently, when bonuses are big enough, people will try whatever they can to earn their bonus. One of the problems I encountered with bonuses is that they often drive performance at the department or individual level, but tend to overlook performance of the organization as a whole. From my own experience in consulting I have seen this lead to situations where a project would be staffed with people from one group, where it might be better to use consultants from another group. Apparently, in this case the performance management system promotes high productivity instead of co-operation. It would however be in the best interest of the consulting firm to promote having the most qualified team, in order to serve the client the best way possible.

Please let us know your experience with the dark side of performance management. I'm passing this thread over to Tom Hudock, who commented on our previous post on his BI for Business People blog. Let's find out what dark side he has experienced. I hope it's not as bad as with Luke Skywalker...

Organizational alignment and accountability

A primary goal of performance management is getting people within the organization to do what they’re supposed to do. A number of “soft” techniques can help achieve this goal. Strong executive sponsorship. Communication. Training. Change management. But in the end, the key to success is aligning all aspects of performance management with things people can understand and personally control. Alignment is a simple concept, but making it work is the most challenging and enigmatic aspect of CPM.

Image: Statement of Qualifications

Linking people to performance measures
Many high-level performance measures are so abstract they don’t mean anything to the people who actually do the work. There’s nothing wrong with having a few key performance measures — in fact, they’re essential — but those high-level measures need to be broken down into a set of more focused measures that are meaningful to employees at every level. For example, net cash flow might be a critical performance measure for the CEO and the organization overall — but what does it mean to an Accounts Receivable clerk, and what can that person do to improve net cash flow performance?

CPM addresses the issue by translating each high-level target into a cascading series of focused performance measures, each designed to drive specific behavior at a particular level in the organization. Using our previous example, the CEO might focus on net cash flow while the CFO looks at debt-to-equity ratio. The controller might focus on liquidity ratio, while the accounts receivable manager looks at days sales outstanding, and the accounts receivable clerk worries about percent of collections over 30/60/90 days. With CPM, employees at every level are measured by something they understand and control, and that same measure is clearly linked to the goals of their direct supervisor and the organization as a whole.

CPM also provides shared performance measures that help align people across organizational boundaries. For instance, a performance measure that includes percent of collections over 30/60/90 days might be applied both to accounts receivables clerks and sales representatives. Shared and integrated performance measures encourage people to collaborate — boosting the organization’s overall performance.

Rewarding and recognizing people
The first step to alignment is creating performance measures that people can understand and control. The next step is linking those performance measures to compensation and other incentives that truly influence behavior.
Linking incentives to performance measures can be a real challenge, especially when the activities being measured are many levels removed from an organization’s overall financial performance. Safety programs, for example, often get a lot of executive attention and airtime — but the actual incentives tend to be pretty minimal because there isn’t a direct link to financial performance.
Similarly, many organizations are hesitant to reward employees when overall financial performance is poor — even when an individual does a great job. The thing to consider is how much worse the results would have been if people had not been motivated to perform well. Referring to our earlier example, although net cash flow might be disappointing, how much worse would it have been if the Accounts Receivable team had not performed well on collections? An organization’s overall performance is ultimately determined by the individual performance of each employee, and the best way to drive individual performance is to reward people for doing a great job — even when there isn’t a direct link to financial results.
CPM integrates incentive compensation, recognition, and rewards into the overall process of performance management. That holistic approach makes it easy to identify gaps and duplication. It also helps ensure employees are being motivated to do what you want them to do.

Corporate Performance Management: A call to action
Integrating the components of performance management isn’t easy. It requires collaboration, patience, and commitment across the entire organization. When CPM is first introduced, operating units and divisions often resist — viewing integration as a threat to their decision-making independence. But the vast majority eventually discover that CPM is an enabling process that helps improve their decision-making — laying the groundwork for the organization’s future success.
Today’s leading CFOs and finance organizations are implementing Integrated Performance Management to improve information quality and visibility — and to generate new business insights. They are also using CPM as a tool to meet the market’s increasing demands for transparency, reliability, timeliness, and accountability. With investor confidence at an all-time low and competition at an all-time high, the need for Integrated Performance Management is more critical than ever.

To end this blog I added a clip from YouTube. It deals with the relationship between communciation within the organization and the productivity of the organization. The case mentioned, the combat readiness of personnel on a marine vessel, is quite interesting.