Measuring employee performance based on targets achieved can be highly flawed.
Managements have installed sophisticated systems and processes to measure, differentiate and reward performance. Management by objectives, the balanced scorecard, key result areas, performance-linked rewards and so on are the stuff of modern performance management. Much effort is expended at the start of the year in goal-setting, and at the end of the year in evaluating and rating performance, and communicating the outcomes to employees.
And yet, for all the effort, the results are unsatisfactory and spotty. Managements struggle to define performance and identify their truly outstanding performers. Our experience in designing and reviewing performance management processes suggests that even as managements have become more sophisticated in measuring performance, they have become less skilled in understanding performance. Caught up as they are in the science of performance measurement, they have lost the ability to go beyond the numbers to truly understand what the numbers tell. Furthermore, they have failed to create and foster a truly performance-oriented culture.
Consider the case of a pharmaceutical company which decided to place its best sales manager, Pankaj Dutt, to head its sales team in the north-east where its market share was low. True to its style, the management set an aggressive target for this sales manager who had had an outstanding record in sales with the company. When the performance of the sales teams was reviewed at the end of the year, it was found that Pankaj had achieved 80 per cent of his target. He was understandably mortified as this was the first time he had missed his target. In comparison, his counterpart in the western region had achieved 110 per cent of his target and was placed in the list of top performers, while Pankaj was placed in the second rung.
What’s wrong with this, one might ask. After all, the facts speak for themselves. No one in the organisation had disputed the veracity of the sales numbers. And yet, something doesn’t sound right. If the management has gone beyond the numbers to ask themselves, “why has Pankaj, our star performer until now, failed to meet his numbers?”, they would have understood many things, including the fact that their goal-setting was flawed, and did not take into account they were coming from behind in the north-east and that the company’s products and brands were relatively unknown in that territory. Armed with this knowledge, they would then have established equivalence between goals for the west and those for the north-east, instead of dealing simplistically with absolute numbers.
If managements do not go beyond the numbers, they would have a wholly incorrect view of their talent pool, would risk alienating and eventually driving away their top performers, and encourage risk-averse behaviour in their organisations, especially if, as is commonplace today, performance ratings are closely linked to rewards.
To illustrate the last point, many companies whose performance management is severely numbers-oriented and the compensation of whose executives is strongly linked to performance, foster risk-averse behaviour in their executives, who are unwilling to accept aggressive, aspirational targets for fear of missing them. They know that the management will not take kindly to their missing their numbers no matter what the circumstances and so they set and accept incremental, conservative goals for themselves and their organisation, which they then surpass. The performance management system would identify such executives as top performers whereas, in fact, they are mediocre ones. Those who “under-promise and over-deliver” are often not the best performers in an organisation.
How then can managements go beyond the numbers and gain insights into the performance both of their organisation and of their executives?
They can do so by:
Setting goals and reviewing performance over a full business cycle or over the medium term: Companies in industries whose performance is subject to predictable business cycles must set goals over the business cycle for themselves and their executives. Doing so will ensure executives do not get penalised for “poor performance” during a downturn or disproportionately rewarded during the boom years, when they may have had little to do with either good or sub-par performance. Companies not subject to predictable business cycles must nonetheless strive to take a medium-term view of organisational and employee performance (say, over a three-year timeframe). A well-designed long-term incentive plan will complement such a medium-term view of performance.
Putting in place an inclusive process of performance consultation and review: Too often, managements do not subject good performance to a stringent review. No one asks questions when the numbers appear good. On the other hand, the executives concerned are showered with encomiums and are regarded as top performers. Especially when the performance of a business or executive is stellar must the management subject it to scrutiny. What caused us or the executive to outperform? Was there a favourable wind? Were targets set low? Even though we did well, did we outperform our competitors? Is the performance sustainable? Likewise, in the case of employees who may have missed their numbers, managements must ascertain whether there were extenuating factors.
Rewarding effort in addition to outcomes: Contrarian though this may sound, an exclusive focus on outcomes will lead to an obsession with numbers and result in the distortions earlier mentioned. On the other hand, recognising effort implies an acknowledgment that often outcomes are beyond the control of individuals and that people and organisations may fail not because of, but in spite of, the efforts of their employees. Discussions focused on efforts are also developmental in that they encourage questions such as “could you have done this differently? Our decisions were right, the timing inappropriate. Were we as a group blindsided by competitors’ actions which we should have anticipated?” and so on. This, in turn, encourages free and frank debate, which could potentially lead to better future performance.
Creating a culture in which employees are not afraid to fail: Employees will perform to their potential and take the risk necessary to grow the business only when they are confident that the management will not penalise failure. The fear of failure militates against high performance. Enlightened managements therefore make it clear to their employees that they will go beyond the numbers to understand the cause of failure or success and that employees need not be overwhelmed and paralysed by performance anxiety.
None of this is to suggest that we should find excuses for non-performance or return to an era of poor accountability and a mediocre performance culture. On the other hand, a truly performance-oriented culture will come about only when performance is viewed over a longer time horizon than a year, when executives do not fear failure, when the organisation fosters a culture of honest debate, and when managements probe the causes of organisational and executive success and failure relentlessly until they understand it honestly and thoroughly.
R Sankar is executive director (people & change consulting), PricewaterhouseCoopers. He can be reached at
sankar.ramamurthy@in.pwc.com
