Control Motivates People to Focus on Goals

The ultimate objective of organizational control is to try to motivate or influence people to achieve organizational goals—not to control people's behavior in predefined ways, but to influence them to make decisions and take actions that are likely to be consistent with the organization's goals.

Ideally, the objective of the performance management system is to increase the congruence between the goals of the organizational members (individuals and groups) and the organization as a whole. This is important, because individuals are most motivated to work toward the goals of the organization if, by so doing, they are also able to satisfy their own goals. It should be pointed out, however, that although there is usually some degree of correspondence between the goals of organization members and those of the organization as a whole, total congruence is rarely attained.

Performance Management/Control Influences the Probability of Goal Achievement

There can be no guarantee that all people will always behave in ways consistent with organizational objectives all the time. Rather, there is a specified probability or likelihood that such behavior will occur. Performance management systems are intended to increase the likelihood that people will behave in the ways desired by an organization. Next we examine the key tasks of performance management systems, and then discuss the components and design of these systems.

Key Tasks of Performance Management Systems

In order to motivate people to behave in ways consistent with organizational goals, performance management systems must perform three tasks. First, they must be able to influence people's decisions and actions in an appropriate direction. As we have seen, without an effective performance management system people are likely to make decisions and act in ways that fulfill their own personal needs and goals but not necessarily those of the organization. In one magazine publishing company, for example, employees and departments did their own thing without considering the needs of the company as a whole. This resulted in a number of people and departments that did nothing at all or that, consciously or unconsciously, worked at odds with the goals of the company. It also resulted in duplication of effort between departments, which contributed to increased costs.

Performance management systems must also coordinate the efforts of diverse parts of an organization. Even when people are trying to act in the best interests of a company, they may find themselves working at cross-purposes. In one $10 million service firm, there were a large number of rush orders because coordination between sales and production was poor. When orders were rushed, many had to be redone because of mistakes in production, which resulted in unanticipated delays for customers and increased costs for the company. Lack of coordination between shipping and production contributed to shipping delays and customer dissatisfaction.

The third task of performance management systems is to provide information about the result of operations and people's performance (performance measurement). This information allows the organization to evaluate results and make corrective changes as required. Even if individuals, groups, and the organization have common interests, problems may occur that require correction. In one residential real estate business, for example, managers could not be held accountable for failing to meet their budgets because the information necessary to monitor financial goals was not available. When profits began to decline, the company was unable to take corrective action because it did not have adequate information on income and expenses. In a magazine publishing company, a lack of adequate information contributed to poor performance and ineffective operations. Employees did not know how to improve their performance because managers were reluctant or unable to provide both positive and negative feedback. The result was that, even when individuals were performing poorly, they continued to operate in the same fashion as they had before the evaluation.

Key Components of a Performance Management System

The control process can be informal, but a performance management system is a formally designed set of parts intended to motivate and reinforce the behavior of people to achieve organizational objectives and goals. The basic components or parts of a formal performance management system are (1) key result areas for the company, department, team, or individual; (2) objectives within each specified key result area; (3) goals that define the specific, measurable, time-dated activities that should occur to support the achievement of each objective; (4) a measurement system or method for assessing performance against each goal; (5) a method for providing ongoing feedback on performance against goals; (6) a method for evaluating performance (at the end of the planning period); and (7) a method of administering rewards to motivate and reinforce performance. These seven components constitute what may be termed a company's core control (performance management) system—a formal mechanism for planning and communicating objectives and goals, measuring, reporting, evaluating performance, and rewarding performance.¹ The relationships among these seven components are depicted in Figure 8.1. We now define each component and describe how to apply (operationalize) them at the organizational, departmental, and individual levels.

Key Result Areas

As described in Chapter 6, key result areas can be thought of as critical success factors—the key factors on which achievement of the mission is based. The first step in developing an effective performance management system is to identify the key result areas for the organization, department, team, or individual.

For an organization to effectively develop and use performance management systems, key result areas need to be defined at the corporate, strategic business unit, department, and individual levels of the company. As explained in Chapter 6, at the corporate level, the key result areas consist of the six key strategic building blocks of the Pyramid of Organizational Development, as well as financial results. For a manufacturing plant, the key result areas might include production volume, quality, scrap, and safety. For an individual salesperson, key result areas might include sales growth, new business development, customer service, sales documentation, and professional development.

It is important to keep in mind that key result areas are categories of activities, not the activities themselves. They tend to be stated in one, two, or three words. Further, as suggested in Chapter 6, there should be between five and nine key result areas for the company as a whole, for individual departments or divisions, and for individual position-holders.

Objectives

As described in Chapter 6, at the organizational and department levels, objectives are broad statements of what needs to be accomplished within each key result area over the course of the planning period in order to make progress in achieving the mission. Examples of objectives at these levels include:

• To achieve a satisfactory return on assets
• To grow market share
• To continuously improve management capabilities

Objectives at the individual level, as described in Chapter 7, are ongoing responsibilities. There will be a “package” of what we typically term “objectives/activities”—as few as 2 and as many as 10 or more—that the position-holder should be performing to effectively fulfill or perform each key result area. Objectives/activities at this level, then, are intended to help the individual understand general “ongoing” performance expectations.

Objectives at all levels help to direct or channel the efforts of people in an organization to achieve certain results. They are both a means to achieve desired ends and a form of ends in themselves.

Goals

Goals are specific and measurable results to be achieved by a designated date. At the organizational and departmental levels, each goal is linked to a specific objective (as described in Chapter 6) in the context of the company or department strategic plans. At the individual level, each goal is typically linked to a specific key result area in the role description for the position that person occupies.

Goals are used to establish desired performance levels, to motivate performance, and to serve as a benchmark against which performance can be assessed. For example, “standard costs” can be used in a manufacturing plant as a goal to motivate employees to control production costs and also as a way to evaluate their performance. Goals may be based on management judgment, expectations, or historical data.

Goals at all levels—organizational, departmental, and individual—are intended to influence people's behavior both before and after actual performance. Ex ante (pre-performance) control is motivation of performance before the operation or behavioral system is executed. Goals in this area are intended to bring about desired performance levels in people. Ex-post (post-performance) control uses goals as standards in evaluating actual performance and as a basis for rewards—the seventh component of organizational performance management systems.

Measurement System

Measurement is the process of representing the properties or qualities of objects in numerical terms. In organizational performance management systems, measurement has a dual function. One purpose is to provide information that can be used for evaluating performance and making corrections in goal-directed behavior. This is the informational function of measurement. The accounting system, with its measures of financial and managerial performance, is a part of the overall measurement system that contributes to the informational function. That function also draws on nonfinancial measures of performance such as market share, production indexes, and measures of product quality.

Measurement plays another role in performance management systems. The very act of measuring something has an effect on people's behavior because people tend to pay more attention to the aspects of jobs or goals that are measured. This aspect of measurement may be termed the process function. It is related to Marshall McLuhan's notion that the medium is the message.² The medium of measurement is itself a stimulus.

There should be a system in place to measure performance against each goal in the organization's strategic plan, department plan, and individual plan; otherwise, some goals may be ignored. For example, if a store uses an incentive pay plan that compensates employees on the basis of sales volume as a performance measure, those employees will tend to compete for sales and ignore unmeasured functions such as stock work.

Progress Review and Feedback

A variety of reports, ranging from financial statements to cost reports and performance reports, provide information about the results of operations to management and others. The information contained in these reports is based on the measurements of performance. This information, in whatever form it is presented, needs to be fed back to the organization, department, or individual.

As described in Chapter 6, at the organizational and department levels, progress review should occur each quarter as the company and each unit team reviews progress against their plans. This involves having each goal owner report on the progress being achieved. It also involves working as a team to identify and address any problems being encountered in achieving organizational or department goals. Finally, it involves making adjustments to the plan, as needed, to reflect current realities and enhance the probability of achieving long-term goals (that is, the strategic mission).

At the individual level, progress review should occur on a regular basis between each manager and each of his or her direct reports. This can be provided in an ad hoc manner (immediately when the behavior is observed), in regularly scheduled one-on-ones, and, as appropriate, at group meetings to recognize good performance. The focus of this feedback should be on the individual's goals, as well as on the extent to which the individual is effectively performing his or her role on a day-to-day basis (that is, based on information in the role description).

Managers at all levels—from CEOs to those on the front line—do not always take the time to provide ongoing review of progress, which includes recognizing successes and providing constructive feedback and suggestions for improvement when needed. This can reduce the probability that desired results will be achieved. An indication that effective progress review has not occurred is when people find the results of their performance evaluation a “complete surprise.”

Progress review helps the organization, department, or individual understand the level of performance that is being attained against goals. Regular feedback gives the organization, department, or individual the opportunity to take corrective action in order to increase the probability that goals will be successfully achieved. Even if performance against goals is being measured, if there is no feedback, the achievement of goals may only happen by chance.

The results or output of measurement and reporting is to provide a scorecard or scoreboard as a basis for assessing performance (which will be discussed later in this chapter).

Performance Evaluation

While measurement and feedback are occurring on a regular basis, performance evaluation occurs at the end of the planning period (that is, after the due date for all goals that have been established). Performance evaluation is a systematic process by which organizations, departments, and individuals are provided with information on how effective they have been in achieving the goals that have been established for that period of time (which, in most organizations will be a year). Typically, these evaluations include both positive feedback (to reinforce behavior consistent with the successful performance of goals) and constructive criticism (that identifies what can be done to improve performance relative to the goals—the third component of the system).

Evaluative reports generated by the measurement system (containing such items as net income, budgets compared to actual, and return on investment), as well as reports generated during the progress review process are used as input to performance evaluation at the organizational and departmental levels. At the end of each fiscal year, senior management should systematically assess overall performance against the goals in the company's strategic plan—using both the output of a “final” (year-end) measurement, as well as the progress reports that have been generated throughout the year. In larger companies, the most senior managers of each division and department should complete a similar evaluation.

At the individual level, organizations typically use performance appraisal forms as the basis for the individual performance evaluation process. While the basis for individual performance management should be specific, measurable, time-dated goals that are linked to the individual's role, some organizations adopt and use “off-the-shelf” forms that assess factors like “quality of work,” “leadership,” “business acumen,” and so on. While these factors may be important, they have nothing to do with achieving results in a specific role. We recommend that evaluation/appraisal forms for each individual be structured around his or her position's key result areas, with the goals for each year (linked to each key result area) clearly defined and used as the basis for the performance evaluation.

While there are a variety of ways to approach the completion of performance evaluation forms and the overall performance evaluation process, at a minimum each manager should identify the extent to which each direct report has achieved his or her goals and record this information on the form. The form should then be used as the basis for a formal performance evaluation meeting between the manager and the specific direct report. If the manager has been providing regular feedback throughout the year, this process will be very easy to complete because both the manager and each of his or her direct reports has been tracking it throughout the year and therefore already knows what has been achieved.

The performance appraisal process is very tricky to execute. One specific issue relates to the use of “scores” to indicate the level of performance achieved. For example, some organizations use a 5-point scale, with 5 being “high” and 1 being “low” to evaluate performance. This can work as long as there are very clear definitions of what each score means (e.g., a “5” means 20% over the stated goal, a “4” means 10% over the stated goal) and as long as these definitions are consistently applied throughout the organization. When performance criteria are vague (e.g., there is a lack of clear, measurable goals) and/or when scoring criteria are vague, the individual performance evaluation process will become an annual exercise versus a management tool. In these situations, managers may not provide valid feedback to employees and may inflate evaluations—so that they can avoid dealing with the conflict that might arise if they provide a low evaluation.

Given these and other problems with using a scoring system, some organizations are moving away from quantitative evaluations (that is, scoring) in the context of individual performance evaluations. Later in this chapter, we will describe how one organization—SCPH—effectively accomplished this.

The Reward System

Rewards are positive reinforcers for appropriate “goal-directed” behavior. Organizations offer a wide variety of rewards, ranging from monetary items such as compensation or bonuses to recognition and promotion. Rewards can be extrinsic or intrinsic. When people perform tasks because work is interesting or challenging, their rewards are intrinsic. When people perform tasks because of the rewards they expect to receive from others, such as praise or pay, the rewards are extrinsic.

Whatever the nature of rewards, they should reinforce good performance and promote modification of poor performance. In brief, the reward received should be linked to the level of performance achieved. For something to be considered a reward, it must be valued by the individual receiving it. For example, if a person values being in charge, he or she might view the opportunity to chair an important committee or a promotion to a management role as a reward. If, however, a person values being part of a team, chairing a committee might not necessarily be viewed as a reward. Further, the rewards that are given must be seen as being linked to desired behavior in order to be effective as motivators.

Sometimes organizations fail to offer rewards that motivate people to behave in desired ways, or they offer rewards for one type of behavior while actually trying to motivate another. This has been called “the folly of rewarding A, while hoping for B.”³ For example, a business manager may be rewarded only for not exceeding his budget, even though the firm hopes that he will also pay attention to personnel development. Similarly, an organization that wants to motivate people to be good planners but rewards only “fire fighters” may soon find that some managers have become “arsonists.”

Rewards can be useful in motivating employees before behavior occurs because of the expectation of rewards in the future. Once good performance occurs, rewards reinforce the behavior and lead to the greater probability of this behavior happening again. Behavior that is not followed by a reward is less likely to happen in the future.

The System as a Whole

All the components of the performance management system affect the operational or behavioral system for an activity. As shown in Figure 8.1, the first level of control consists of key result areas, objectives, and goals. If an organization, department, or individual does nothing but establish these expectations (and does so in an effective manner), it increases the probability of achieving desired results by about 25%. Measurement directs attention toward measured dimensions of goals. It provides information that can be used through the feedback process to help organizations, departments, and individuals take corrective action in order to increase their probability of achieving their goals. If these components (measurement and feedback) are added into the performance management system (assuming that they are designed well and function effectively), the probability of achieving desired results increases to about 50%. If the performance management system also contains the evaluation and rewards components (assuming that performance evaluations are conducted regularly and effectively and that rewards are valued and linked to desired behavior), the probability of achieving desired results increases to about 80%.

Performance Management Systems at Different Levels

As described above, there are three different organizational levels for which performance management systems should be developed: (1) individuals, (2) organizational subunits such as teams, departments, divisions, and (3) the organization as a whole. A performance management system is required to help manage the performance of people in an organization at all three levels or aggregations of people. While the design of performance management systems at each of these three levels might superficially appear to be different, each requires the same underlying seven components identified above. Exhibit 8.1 summarizes the source of information for each component of the performance management system at each organizational level: the enterprise as whole, business units (divisions, departments), and individuals.

Illustration of an Organizational Scoreboard

To illustrate the feasibility and utility of applying the scoreboard model of organization control just described, we examine the application of the model in a manufacturing plant. As seen in Exhibit 8.2, the plant has five key result areas: production volume, quality, safety, energy utilization, and scrap.

All these key result areas are different in nature. Production volume is something that can be easily quantified. Energy use and scrap can also be measured but in a different way. Quality and safety require still a different type of measurement.

To use this scoreboard, the company would establish goals for each of these five key result areas and list them in the column titled “This Year's Goals.” The scoreboard would then show last year's actual performance in the next column. In addition, this year's performance would be tracked on a monthly basis in the adjacent columns.

Virtually any company or any unit of a company can use a format similar to that shown in Exhibit 8.2 to apply the performance management system to its operations. This approach can be used for the company as a whole, a division, a department, or even an individual such as a salesperson. Indeed, one of the authors observed the application of this framework on a visit to China in 1983 in a chemical plant located in the city of Shanghai. The plant manager was using a blackboard to list the key result areas, current performance goals, prior year's actual performance, and historical best performance, as well as to track the actual performance of the plant to date. Whenever an employee walked past the blackboard, he or she got a quick glimpse at how the plant was performing to date.

Today, some companies provide similar scoreboard information to employees through their intranets. For example, in one Stage III distribution company, employees can view up-to-the minute information related to orders (including orders shipped, orders backlogged, and so on), sales (including dollar volume, new customers, and size of purchase), and quality (for example, orders returned and defects) on their company scoreboard, which can be accessed from any desktop. This provides employees with the information they need, on a regular basis, to make adjustments in systems and in their own behavior to better support the achievement of company goals.

At an individual level, these scoreboards are most typically contained (or should be contained) in the forms that are used in the performance appraisal process. If an organization relies too heavily on more subjective measures of performance related to skills and personal attributes (like judgment, attitude, or leadership) versus more objective measures as reflected in goals that are linked to the individual position-holder's key result areas, the likelihood of achieving desired results (in terms of goals) will be diminished. Further, the evaluation process is much more difficult when individuals need to be assessed on subjective rather than objective criteria.

Beyond the “Balanced Scorecard”

The organizational scoreboard can be viewed as an improved version of the so-called Balanced Score Card (“BSC”) that was popularized by Kaplan and Norton and has become widely discussed and used.⁴ The core notion of the BSC is that organizational performance ought to be evaluated from more than simply a financial perspective. This premise is reasonable.

However, there is a fundamental problem with the original version of the BSC proposed by Kaplan and Norton. The original version is based on the idea that four “perspectives” ought to be used to evaluate organizational performance: (1) customer, (2) internal business processes, (3) learning and growth, and (4) financial. Although this concept has intuitive appeal, the basic problem is that Kaplan and Norton have not provided any empirical support for these particular perspectives. We are implicitly asked to accept them at face value, without data supporting their validity.

We do not know whether these are the correct perspectives to be used as a basis for assessing organizational performance. This can have serious consequences for organizations. Managers are implicitly being encouraged to focus on these four factors, when others might be more significant. In addition to our criticism of the Balanced Score Card, there have been other critiques of this construct. For example, Marshall Meyer, Professor at the Wharton School of the University of Pennsylvania, published a book titled, Rethinking Performance Measurement: Beyond the Balanced Scorecard.⁵

Instead of the four perspectives proposed by Kaplan and Norton, we believe that the six key variables that make up the Pyramid of Organizational Development ought to be used to provide a truly valid and balanced scorecard. In contrast to the four perspectives of the original version of the BCS, which have not received empirical support, there is a growing body of empirical evidence to support the six “key strategic building blocks” of successful organizations (described in Chapter 2). Specifically, the six key variables making up the pyramid should be used (in addition to financial results) to provide true balance for both performance measurement and strategic management. This should not be viewed as invalidating the original concept underlying the BSC (the notion of balanced performance measurement); but, rather, as the next logical generation or iteration of its development.⁶ As we know, many products are introduced and then later replaced by improved versions. This is the case with software, where a first release is later replaced with a new and improved version. Similarly, the BSC should be replaced with our notion of a Balanced Scoreboard utilizing the variables of the pyramid as the underlying areas of focus or, in our terms, “key result areas.”

Technical Criteria for Effective Performance Management Systems Design

For a performance management system to operate effectively, each of the seven components described must be designed so as to function effectively. This means the following:

• All key result areas must be accurately identified. If one of more key result areas are ignored or not included, the organization will experience problems in achieving desired results. Certain important areas will not receive adequate focus.
• Objectives within each key result area need to reflect what the organization, department, or individual wants to or needs to achieve over the long term. In addition, care needs to be exercised to ensure that objectives within one key result area do not conflict with those in another.
• Goals need to be specific, results-oriented, measurable, and time-dated. In other words, they need to be stated in a way that performance against them can be accurately and adequately assessed. Further, all objectives need to have at least one measurable goal.
• A measurement system needs to be in place to assess performance against each goal. If, for example, an organization sets a goal that all of its products need to achieve a certain level of profitability, then the measurement system needs to provide information on product profitability. If the system is unable to do this, the goal is ineffective and either needs to be redefined or a measurement system needs to be created that will allow performance to be tracked against the stated goal.
• Feedback (based on the results of measuring performance) needs to be given on a regular basis. More important, decision makers need to use the information provided by the measurement system to take corrective action to better promote the achievement of the goals. If performance is measured but management does nothing with this information, the performance management system will break down.
• Performance evaluations need to be conducted at the end of the planning period (which is usually a year) at all levels of the organization. These evaluations need to focus on performance against goals. Further, both positive feedback (which promotes behavior consistent with goals) and constructive criticism (which should result in behavioral change) need to be provided, based on the results achieved against goals. In the absence of performance evaluations, organizations, departments, and individuals will not understand what they can do to continue their effectiveness into the future and to improve their performance.
• Rewards need to be provided, based on the level of goal achievement. It should be clear how rewards are linked to performance against organizational, departmental, or individual goals. Further, rewards should be established so that they provide something that is valued by those receiving them.

For a performance management system to function effectively, all parts of the system need to be effectively designed and connected. If any component of the system is poorly designed or is not linked with the other components, the probability that the organization, department, or individual will achieve desired results is decreased.

Behavioral Criteria for Effective Performance Management Systems Design

From a behavioral perspective, an effective performance management system meets two criteria: (1) it enhances goal congruence, and (2) it minimizes unintended dysfunctional behaviors.

Increasing Goal Congruence. The effectiveness of a performance management system is measured by the extent to which it increases the probability that people will behave in ways that lead to the attainment of organizational goals. Typically, this is the result of establishing goals in a manner that creates at least an acceptable degree of goal congruence—that is, by the individual working to achieve the organization's goals, he or she is also satisfying one or more of his or her personal goals. If a performance management system sometimes results in goal congruence and sometimes in goal conflict, it is ineffective, or at least less effective than might be desired.

To be effective, a performance management system must identify all behaviors or goals that are required to support the organization's continued development and long-term success. If the system does not identify all relevant goals and seek to control them, people may simply channel their efforts toward some desired but uncontrolled behavior. In addition, in order to be effective, the performance management system must actually lead to the behavior it is intended to (or purports to) produce. For example, a performance management system may be intended to motivate people toward achieving both a budgeted profit and personnel development. If it produces this effect, it is said to be behaviorally valid. If it leads to behavior that is in conflict with these goals, it is behaviorally invalid. In general, a performance management system cannot be expected to lead to behavior that is totally consistent with what is desired, but it must have some degree of behavioral validity if it is to be effective.

A performance management system's effectiveness also depends on the extent to which it repeatedly produces the same behavior, whether this behavior is intended or not. This quality is called the performance management system's behavioral reliability. A performance management system may have a high degree of behavioral reliability but lead consistently to unintended behavior, or a system may lead to intended behavior but do so irregularly.

Dysfunctional Behavior. When a performance management system is ineffective, dysfunctional behavior can result. There are two types of dysfunctional behavior: (1) goal displacement and (2) measurementship.

Goal displacement is a lack of goal congruence created by the motivation to achieve some goals sought by the organization at the expense of other intended goals. Goal displacement may be caused by several things, including suboptimization, selective attention to goals, and inversion of means and ends.

Suboptimization occurs when the performance of an organizational subunit is optimized at the expense of the organization as a whole. It is caused by factoring overall organizational goals into subgoals and holding individuals and units responsible for those subgoals. Suboptimization is a common problem and is difficult to avoid in large, complex organizations.

Selective attention to organizational goals is closely related to suboptimization. It occurs when certain goals of the organization are pursued selectively, while other goals receive less attention or are ignored. In this case, a rule or guideline that is part of the performance management system is followed absolutely, even if it contradicts or prevents achievement of the goal. The original goal is replaced by the goal of following the rules. A third type of goal displacement is caused by the inversion of means and ends. This occurs when a performance management system tries to motivate attention to certain instrumental goals, which become ends in themselves because of rewards and thereby prevent achievement of other goals.

Measurementship involves a lack of goal congruence created by motivation to “look good” in terms of the measures used in performance management systems, even though no real benefit is produced for the organization. It involves manipulating the measures used by a performance management system, that is, playing the numbers game. There are two primary types of measurementship: (1) smoothing and (2) falsifying.

Smoothing is an attempt to time activities in a way that produces the appearance of similar measures in different time periods. For example, a manager may wish to smooth the calculated net income in two adjacent periods. If profit is expected to be unusually high during the first period, this figure can be smoothed by incurring expenditures that otherwise would have been made in the second period in the prior year.

Falsification is the reporting of invalid data about what is occurring in an organization in order to make a person or activity look good in the management system. For example, Enron was charged with manipulating revenues by creating false transactions in order to show good earnings for the stock market. This and similar problems at WorldCom (now defunct) and other companies led to the Sarbanes-Oxley legislation.

Problems related to dysfunctional behavior point to the importance of designing and implementing effective performance management systems at each stage of organizational development.

Incomplete Development of the Performance Management System

Certain aspects of the Superior Security Systems performance management system were more developed than others. The company had developed a relatively sophisticated strategic planning process. The company had been involved in numerous formal planning exercises over several years since its inception, including planning meetings that involved a considerable amount of discussion concerning problems facing the company, identifying alternatives, assessing their strengths and limitations, searching for information that was relevant, and formulating a broad concept of where the firm wanted to go. These sessions were the basis for the firm's decision to franchise, for example.

One problem with the planning process was, according to the organization's administrative staff as well as the branch managers, that it did not tend to result in a set of specific goals and objectives for the firm or a set of priorities to guide them in carrying out their overall efforts. The frequent complaint was that many of the plans that were made at the beginning of the year tended to be “bumped” by more immediate problems handed down by top management. The introduction of unplanned projects or crises that tended to emerge resulted in shifts in the focus of energy; the result was neglect of many of the projects that had originally been agreed to at the beginning of the year. There was a sense that the firm was making progress but that a great deal of the progress was in an ad hoc or piecemeal manner. The bottom line was that many of the participants in the planning sessions expressed uncertainty about how the content of the meetings would be translated into action.

Although the overall planning process was extensive, there had never been formal consideration of what the company's key result areas ought to be. Accordingly, although the branch managers and, in turn, the installation technicians understood in general what their role was, there was not a specific set of key result areas for which they were held accountable. Similarly, there was not a specific set of goals or objectives for which they were held accountable.

Another problem with the firm's performance management system related to the nature of its goals: Only a few were quantifiable. When goals were measurable, the level of performance expected was frequently unrealistic. For example, the times that were available as “standard times” for installation were thought by all but a few of the most talented and experienced installation technicians to be unrealistic. As a result, many of the employees found the standards to be demoralizing. Moreover, the enforcement of the standards was relatively uneven. Some branch managers tended to stick to standards and to evaluate installation technicians negatively whenever their performance was below standard, which was quite frequently. Other branch managers, who recognized that the standards were not wholly realistic, tended to ignore them.

One strength of the measurement system of the company was that it was organized on a “responsibility accounting basis.” This meant that the business had good information concerning the profitability of each individual branch. At each branch, the company had institutionalized a monthly financial review of the data. A representative from the home office met with the branch manager and examined the monthly financial report. They also discussed issues involving branch performance on such key factors as market share.

Within each branch, however, the process of performance review was relatively uneven. With the exception of an examination of overall bottom-line profitability, there did not tend to be a review of performance in key result areas that supported that profitability. Discussions of problems would occur as they emerged. There was no systematic attempt to identify the critical success factors of the branch, to measure the branch's performance in each one of those factors, and to examine it in depth.

With respect to performance evaluation of each employee, there was an uneven emphasis by the different branch managers in evaluating their direct reports. Although it was company policy that employees were to be reviewed, based on their performance on a yearly basis, some individuals indicated that over two years had passed since their last review. They also reported that feedback on their performance ranged from some very specific, constructive criticisms to more global assessments of their performance. Many individuals indicated that they were not really sure how they were being evaluated by their managers or whether they were valued or not valued by their managers. One stated, “Well, I'm still here, so I must be doing okay.”

At this stage of the company's development there was not a well-designed compensation program. The administration of compensation increases was on an ad hoc basis. Some individuals had not received a salary increase in more than two years. Further, there were no specific guidelines for salary increases that would be allocated in relation to different levels of performance, such as excellent performance, good performance, or satisfactory performance. Individuals reported that they did not have a clear idea as to how their performance would result in increases in their compensation.

Improvements in the Performance Management System

An analysis of the performance management system at Superior Security Systems indicates a number of problems in the design of that system. There are problems both in the individual components of the system and in the overall integration of the system. In this section, we examine some of those problems and make suggestions about how they can be solved.

Goals and Objectives

As described in Chapter 6, goals and objectives are the output of the organization's planning system. A company's strategic planning system should result in a statement of its mission, its key result areas, its objectives, and its goals. In the case of Superior Security Systems, the planning system did not provide a foundation for an effective performance management system in these areas. The basic problem with the planning process at Superior Security Systems was that it was not producing a well-defined statement of key result areas. The key result areas were necessary to provide an overall focus for the branch managers and, in turn, for the installation technicians and the administrative assistants. Once the key result areas for each branch were identified and defined, it was necessary to further improve the planning process at Superior Security Systems by generating a set of objectives related to each key result area. The next step would be to generate goals related to each objective, which, by definition, are specific, measurable, and time-dated. Implementing these steps would help overcome the problems faced by branch managers, installation technicians, and administrative personnel. To help avoid the problem of setting unrealistic goals, the branch manager, installation technicians, and administrative personnel should participate in the process of setting these goals. It is particularly important that great care be devoted to ensuring that the goals are measurable, specific, and time-dated. Otherwise, they will not provide an effective basis for comparison with actual performance.

Measurement Systems

A measurement system permits a company to represent the performance of a branch or individual in quantitative terms. At Superior Security Systems, the measurement system included the accounting information system, sales management system, and other sources of information. Although there seemed to be ample financial information to assist managers at Superior Security Systems, there did not appear to be an adequate source of financial information concerning performance in the branches.

To improve this, the company needed to ensure that measurements were available for each of its key result areas in order to enable it to assess performance on each of these key factors. However, this was not yet being done.

Performance Evaluation

A company should do an analysis of each of its key result areas in order to assess performance on each of these key factors. The measurements do not all have to be in dollar terms. Some can be in monetary terms, and others can be in nonmonetary terms. Some measurements can even be what may be characterized as go/no-go measurements. This means that a manager can do an informal rating of whether something has happened or not happened. For example, customer service might be assessed by the number of written complaints or letters of praise received. Ultimately, the home office might conduct a telephone sample of customers and have the interviewer generate a judgment as to whether the service provided was satisfactory or unsatisfactory. By then tabulating the number of satisfactory versus unsatisfactory responses, we can generate a measurement of branch performance in this key result area. However, little of this was being done.

Rewards

Another significant problem with the organization's performance management system was the lack of linkage between objectives, goals, measurements, and rewards. The company's compensation system did not appear to be linked to its objectives and goals. Individuals did not perceive that they were rewarded based on their ability to achieve goals. Because people did not perceive a clear linkage between goal achievement and compensation, there was unlikely to be a great deal of ownership of the goals. People may very well have been motivated, but the firm's reward system was neither enhancing nor channeling their motivation directly toward the goals and objectives that the branch sought to attain.

To improve its performance management system for this component, an enterprise should analyze its overall compensation system. To be effective, the compensation system should provide incentives for an individual to achieve the goals and objectives that the organization wants to attain. An increasing number of entrepreneurial firms are relying on compensation systems that have a significant component based on incentive compensation. In such circumstances, people are generally provided a base salary that is relatively competitive, as well as opportunities for substantial increases in compensation linked to the achievement of individual and company objectives and goals. Wherever feasible, a company should attempt to tie incentive compensation to measurable factors. However, even where this is not feasible, if management can identify the key factors it wishes people to focus on and indicate how incentive compensation will be based on those factors, it will result in enhanced motivation and performance.

Overall Assessment of Superior Security Systems Performance Management System

As can be seen in the case of Superior Security Systems, it is one thing to talk about what should be done to develop a performance management system, and quite another to review what is being done in reality. There are, as we have described above, several deficiencies or problems with the Superior Security Systems performance management system. Key problems include:

• The planning process did not result in a set of specific goals and objectives for the firm or a set of priorities to guide them in carrying out their overall efforts.
• The organization did not stick to its plan; plans that were made at the beginning of the year tended to be “bumped” by more immediate problems.
• There were problems with goals—only a few were quantifiable. When goals were measurable, the level of performance expected was frequently unrealistic.
• There did not tend to be a review of performance in key result areas that supported that profitability.
• Administration of compensation increases was on an ad hoc basis.

Problems in a performance management system can be identified and corrected using the model described in this chapter as a template. Similarly, the performance management systems model can also be used in any organization as a template for the design or improvement of a performance management system.

Revision of Job Descriptions

Although SCPH had traditionally had fairly detailed job descriptions, the task force determined that an effective performance appraisal process would be best facilitated by using a key result area–based role description format (described in Chapter 7). Senior and middle managers from throughout the company were provided with training in this methodology and were asked to transform their existing job descriptions into the key result area format. Once each manager had completed a draft of his or her job description, a workshop was held in which each manager was able to obtain feedback from others in order to ensure that the role description accurately reflected the key factors on which that position should be focused. The final step in this process was for each role description to be approved by the manager's immediate superior. Once managers were trained, they worked with the members of their team (supervisors, front-line workers) to help develop key result area-based role descriptions for these positions. In other words, the methodology was cascaded throughout the various levels of the company. The stage was now set to introduce the new performance appraisal forms and process.

Design of the New Performance Appraisal Forms

The Performance Management Task Force met several times to debate what should and should not be included in the new performance appraisal forms the company would use. One thing all task force members could agree on was that the forms should be as simple as possible and that they should include specific goals for which people would be held accountable. The team also felt strongly about the need to move away from numerical scoring of individual performance, at least for a short time. The task force believed that employees throughout the company had come to rely too heavily on using numbers both to just get the performance appraisals done but also as a standard for understanding their performance. The new process should focus both managers and their direct reports on performance against goals, rather than on numbers that represented this performance.

There was also discussion about the need to retain some of the subjective criteria that had been used in the previous evaluation process. The task force felt that some of these criteria were important from a cultural perspective. Five of these factors were, therefore, retained on the performance evaluation form. Although these criteria were retained, the task force also believed that managers should take the time during the goal-setting process to explain or discuss how performance would be measured in these areas. In other words, the goal was to make the evaluation of these subjective criteria somewhat more objective. A decision was made, however, that 75% of the individual's evaluation would be based on performance against goals. The remaining 25% would be based on performance against the more subjective criteria.

As can be seen in Exhibit 8.3, the form was designed to include the key components of an effective performance management system, plus space for the manager to provide an evaluation. The form provides space to list each position-holder's key result areas (taken from the role description) and space to list up to three goals for which the individual would be held responsible over the course of the coming year. The task force agreed that, at least in the first year of this new process, no individual should be held accountable for more than three goals in any key result area. It was also suggested (when the process was eventually introduced to the organization's entire management team), that managers try to keep the number of goals for any individual to no more than 10. In an effort to keep the form as simple as possible, the task force decided that there was no need to list the individual's objectives on this form (they were included on the role description). Instead, the role description would become an attachment to the form.

Evaluating performance on each goal would consist of circling one of the four statements—exceeds, meets, conditionally meets, or doesn't meet—and then providing comments about why this particular evaluation was given. (Dingivan had added the term conditionally meets to the form in an effort to take into account those situations where individuals had given a great effort to achieve a goal but had simply been unable to meet it.) The task force agreed that it was particularly important that comments be included on the form and that they were, in some ways, more important than whatever level of performance had been circled.

Use of the Form

To use the form, managers would meet with each of their direct reports before the beginning of the year to set specific goals. Prior to these goal-setting meetings, key elements of the organization's strategic plan (written in the format described in Chapter 6) would be shared with each manager. All those in management positions would be asked to establish what they believed their goals should be for the coming year to help the company achieve its goals. Their immediate supervisor would also prepare a list of goals (organized by key result area) for which they felt that individual should be accountable (in order to support the achievement of the company's plans). The goal-setting meeting would then take place, and an agreement would be reached between the manager and the direct report (who, in this case, was also a member of the management team) as to what the individual's goals would be for the coming year. For those who occupied technical roles (for example, housekeepers and technicians), it was decided that the “goal” column of this worksheet would contain standards of performance that needed to be met. In other words, goals for these positions would, in a sense, be pre-set. When supervisors reviewed these standards with those holding the positions, the individual in question would also have the opportunity to provide input on these expectations and include additional goals (if appropriate). The idea was to make the performance appraisals of these positions somewhat more programmable.

One concern that the task force had was how to handle a situation in which an individual might not have any goals under a specific key result area for a particular year. It was decided that, in these cases, the manager would simply write in the blank, “see role description.” What this meant was that the individual would be held accountable for performance against those objectives that were a part of the key result area–based role description. These objectives would be reviewed as a part of the goal-setting meeting. While the process was being introduced to the management team, it was later decided that managers could choose to include the phase “see role description” within all key result areas if they so desired, even if specific goals were also set. In these cases, the individual in question would be evaluated both on the specific goals and on general performance within each key result area.

As a part of the goal-setting process, managers would also discuss specifically how they would be evaluating the individual's performance with respect to each of the more subjective criteria. The factors they would be looking at or the behavior they would be looking for were to be recorded in the appropriate space on the performance evaluation form.

At the end of the year, the manager would then complete the last column of the form, thus evaluating the individual's performance against specific goals, relative to the objectives listed in the person's role description and against the five subjective performance criteria. Managers would then meet with each direct report and provide their feedback. There was space at the end of the form for both the employee and the manager to provide additional comments prior to signing the form. The form would then be submitted to the next level of management for final approval before being sent on to the company's human resource department.

Training in Conducting Effective Performance Appraisals

It was important that all managers throughout the company adequately understood the new performance appraisal forms and how to use them. To facilitate the effective implementation of this process, Yvonne Randle (who had been assisting the Performance Management Task Force in the design of the process) provided several training sessions on the new performance evaluation process. These sessions took place over the course of 18 months. Sessions focused on helping managers understand the key components of effective performance appraisal systems, the design of the new form and its advantages over what had been used in the past (from the standpoint of promoting behavior consistent with helping the company achieve its goals), and how to effectively prepare for and conduct effective goal-setting and performance appraisal meetings.

Another important part of these sessions was that they provided managers from throughout the company with the opportunity to provide feedback on how effectively the new process and forms were working. They were encouraged to make suggestions for changes that might be made so that the forms and the process would better meet their needs. This feedback was collected and reviewed by the Performance Management Task Force. They responded to every idea submitted. Some were used to make minor adjustments in the form or the process that was to be used. Other suggestions for changes were not adopted, but the task force made sure to provide their rationale for not using these ideas.

Results

SCPH fully adopted the performance appraisal process throughout the company. Although some managers were, at times, still skeptical about the process, most managers described it as less cumbersome than the one previously used. More important, the new process helped the company focus individual efforts on those goals that would be most important to helping achieve its long-term mission.

Stage I

Even the smallest organizations need some type of control, but at Stage I, control typically is relatively informal. Usually, the entrepreneur can exercise control during Stage I simply through day-to-day interaction with people in the organization. By the very fact of constantly being there, the entrepreneur is able to observe what is happening and be on top of almost everything. At this stage, the entrepreneur still knows all the company's employees and is able to observe what most of them are doing and suggest modifications when necessary.

Even in this informal stage, however, the basic functions of control need to be exercised. The organization should have a basic budgetary system and an accounting system. At Stage I, a company can get by with a relatively informal performance appraisal system, but there ought to be some regular appraisal process.

Stage II

As soon as an organization reaches Stage II, its control needs to increase dramatically. The entrepreneur no longer has the time to handle control single-handedly, nor can he or she personally interact with all of the growing number of employees. There is increased need for the kind of coordination that only a formal performance management system can bring. If the entrepreneur fails to recognize the need for a more formal system, the company is likely to experience difficulties.

During Stage II, a company ought to be beginning to develop a formal planning system that includes the basic elements described in Chapter 6. It also needs a basic performance management system to help carry out its plan that includes basic measurement systems designed to provide information that can be used in assessing progress against goals and holding regular progress review meetings. It will most likely need to change its basic accounting system to some kind of “responsibility accounting system,” which provides information not only on overall financial performance but on product-line profitability and business segment profitability as well.

In Stage II, the evaluation and reward component of the performance management system must also be developed further. Job or role descriptions specifying responsibilities are required. Some sort of individual goal setting should be introduced, accompanied by a formal performance appraisal system. The organization's compensation program also ought to become more systematic and include an incentive component that is linked to performance. Failure to make these changes during Stage II may lead to the feeling that the organization is out of control.

Stage III

By the time a company has grown to Stage III, it requires more sophisticated and powerful methods of control. This is the stage at which the company must develop a formal performance management system, along with other components of its management systems.

As we have noted, planning at Stage III needs to be brought down to the level of individual products or profit centers. Similarly, the company's budgeting system needs to be brought down to the level of individual products or profit centers.

The company's accounting information system will typically need to be reconceptualized to provide a greater amount of information for management control. By the time a business reaches Stage III, it ought to have a well-developed set of management reports dealing with the nonaccounting information that is required to monitor the business. In brief, the company should have well-developed measurement systems and reporting processes that provide the accurate and timely information needed to assess performance against all goals at the organizational and unit (department, division, team) levels.

By this stage, managers at all levels should be effectively setting and using specific, measurable, time-dated goals as the basis for performance appraisals. A formal performance appraisal system should be in place, and all managers should have the skills needed to effectively fulfill their roles in this process (including having the ability to set effective goals and provide effective feedback).

If management did not lay the foundation for these systems during Stage II, they will be more difficult and costly to develop during Stage III. If the company still has not put the systems into place by the time it reaches the later phase of Stage III, it is likely to experience serious growing pains. These may be masked temporarily by continually rising sales if the company is in a favorable market. Unfortunately, when the market ultimately turns, the company may find itself facing a “scissors effect” of simultaneously reduced revenue and increased costs. This can prove fatal.

Stage IV

By the time an organization reaches Stage IV, its core performance management system should be in place. Most of the changes to be made at this stage are (or at least ought to be) merely refinements.

The planning system becomes more sophisticated. Moreover, the budget process may be refined to include features such as flexible budgeting (budgeting based on different assumptions about the economy and related level of business). The accounting information system ought to be able to generate accurate, timely, comparative data.

Performance appraisals, oriented toward performance against plan or goals, should be regularly scheduled, and employees should expect that deviations from standards will require factual explanations. The performance appraisal process described in the case study of SCPH is an example of what is appropriate for a Stage IV organization.

By the time an organization reaches Stage IV, its core performance management system ought to be well developed, functioning smoothly, and in place as an integral part of its overall corporate culture.

Stage V

The challenge for performance management at Stage V is to design performance management systems to support a multi-product/service or multi-market business. The design of each component of these systems will, at least in part, depend upon the divisional structure form adopted. For example, in a company that is highly centralized (such as McDonald's), all franchisees are held to the same performance standards, and performance is monitored on a regular basis against these standards. In a less centralized divisional structure, there may different standards of performance for different divisions (because they operate in very different markets and/or offer very different products or services). At this stage, attention also needs to be devoted to identifying how the divisions and corporate will complete and coordinate with each other with respect to performance review and what the expectations are with respect to performance evaluation. Finally, some attention needs to be devoted to designing the reward system at the corporate and divisional levels.

When diversification has occurred as a result of a merger or an acquisition, time should be spent during the due diligence process identifying the nature of the performance management system in each company and determining what the system will be once the “deal” has been completed. The new entity may adopt the performance management system of one of the companies involved or may create a new system that reflects best practices from each company involved in the acquisition or merger. This can include how the individual performance management system is designed and implemented.

Stage VI

The challenge for performance management at Stage VI is to fully integrate the systems for all the diversified units, while simultaneously having an appropriate system for each of the individual business units. For an enterprise like Johnson & Johnson, which typically has relatively mature business units, this is not that difficult. However, for a rapidly growing enterprise that has been created by acquisitions, it is far more challenging. For such diversified businesses, the core notion is that at Stage VI there probably cannot be a single performance management system where “one size fits all.” Instead, the principles of each of the performance management systems must be the same, but the features might be different.

What is required in such complex situations is a custom solution to the design of a performance management system. There cannot be a “cookbook” approach.

Stage VII

The central challenge at Stage VII is to deal with organizational decline by revitalizing the entire enterprise. It is possible that one of the contributors to decline has been poorly designed performance management systems or even the lack of performance management systems per se. For example, if performance management systems are not functioning effectively, managers may not receive the information needed in a timely manner to make critical decisions. As a result, opportunities and critical threats to the business may be missed. If the individual performance management system is not functioning effectively, people may not be held accountable for results that need to be achieved. As a result, important goals are “missed,” the organization begins to experience significant problems and, as a result, goes into decline.

The development of performance management systems during Stage VII will depend upon the overall plan for organizational revitalization. As in Stage VI, what is required in such complex situations is a custom solution to the design of a performance management system.