Group/Individual Level

Facilitating structures - Reward systems and performance indicators

Performance measurement
Research illustrates that companies with performance management programs out-perform companies without such programs across a wide range of financial and productivity measures. For example, one study (McDonald & Smith, 1995) found that companies with performance management programs demonstrated: higher profits, better cash flows, stronger stock market performance, and higher stock values; significant gains in financial performance and productivity; higher sales growth per employee; and lower real growth in numbers of employees.

When trying to implement innovation and technical change, it is important to set goals, to measure progress, to provide feedback regarding progress, and to modify the process and take corrective action when necessary. Feedback is essential for the operation of any control mechanism. Without performance measurement, there can be no feedback.

Several issues related to the measurement of performance are critical to consider at this point:

Reference
McDonald, D. & Smith, A. (1995). A proven connection: Performance management and business results. Compensation and Benefits Review, January/Feb.

A model of performance management
 There are eight components or elements that you must have in place in order to make your performance management system effective:
  1. Measures and standards. The choice of performance measures and standards is critical. Multiple aspects of progress and performance should be chosen that have an impact on success, that differentiate between successful and unsuccessful performance, and that are within the control of the individual(s) involved. These measures and standards must be defined in specific, behavioural terms, and must be discussed with, and communicated clearly to, those involved.

  2. Setting and communicating expectations. Once measures and standards have been chosen, these expectations must be communicated to the appropriate individuals. It may be necessary at this point, to encourage negotiation and participation by those to be assessed. If people do not think they are valid, fair indicators of progress and success, they will have a negative, not a positive, effect on behaviour. Once the final expectations and criteria are agreed upon and understood, they must be communicated to relevant "superiors", if they have not been involved in the process for some reason.

  3. Implementation execution. Points one and two above must be considered very early on in the process of implementing innovation and technical change. If measures, standards and expectations are to have any effect on people's behaviour, people will need to know about them in advance of that behaviour. That is why this is being considered as one of the Facilitating structures that will help enable the innovation and changes to happen. As the rest of the implementation process proceeds, we move through the remaining five components.

  4. Monitoring, assisting and controlling. This is one of the places in which we can see the major distinction between performance appraisal, which might happen once or twice a year, and a performance management system, in which performance is managed daily as part of a the continual process of the management of innovation and technical change. Frequent performance feedback, problem-solving, coaching, counselling, encouraging, and removing obstacles to success are part of this element in the system. Management by walking around and getting out of your offices, is a key to this performance management system.

  5. Appraise performance. This is the typical performance appraisal activity. Performance is reviewed against the standards and expectations set earlier. This process has been very well documented and studied and will not be discussed in detail here. There is an extensive literature related to this topic that can be accessed through your local or university library.

  6. Coaching and feedback. While this general performance management process works best when continuous feedback is provided, there should also be a formal feedback session held after the individual's performance has been assessed. This is the time to communicate facts about specific behaviours and the progress toward, and achievement of, major goals and activities. A great deal has been written about this process and great care must be given to the tone, the setting, and the balance between negative and positive feedback provided. Again, there is an extensive literature related to these topics that can be accessed through your local or university library.

  7. Personnel decisions. At this point, results can be used to make decisions about such issues as: (1) rewards and recognition, (2) promotion, demotion or termination, and (3) careers, jobs and individual growth and development.

  8. Personnel development. The last step in this on-going performance management system, is consideration of the growth and development of individuals. Further education, training, and development plans can be considered at this point.

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Why traditional performance appraisal is not adequate for assessing the implementation of innovation and technical change
There have been thousands of studies of performance appraisal, in both the experimental laboratory and real-world settings, which have lead to the establishment of many guidelines and a real academic understanding of "how to do it right." However, the reality of it is that performance appraisals are, for the most part, arbitrary, inadequate and unreliable.

Since there is such a vast amount of literature that already exists exploring how to do good performance appraisals for technical staff, we will instead briefly consider why performance appraisals are so very rarely done adequately in the real world. If we spend some time working at removing some of these barriers to successful performance appraisal in our organisations, then we can begin to apply more usefully the huge amount of knowledge we already have about the process.

The first problem is that no one is usually held responsible or accountable for providing adequate performance feedback, nor are appraisers rewarded for doing so. That is, if appraisers were themselves appraised, and held accountable for the appraisals they made of others, they would be more likely to do a better job. Also, if rewards were given to appraisers who provide realistic, accurate appraisals, they would be more likely to do a better job.

Not only are there no rewards or incentives for providing accurate feedback, there are actually very many dis-incentives for doing so:

This list can go on. You can add your own barriers and disincentives if you like. Take some time and identify some of the barriers that are relevant to you, to people in your organisation and to the specific innovation or technical change you have in mind. It may be quite beneficial to begin a process to address these issues. Although it may be very difficult, the benefits will be significant.

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Linking corporate and local performance measures
Many organisations have a strong tradition of collecting and reporting a number of corporate-level business measures related to financial reporting (e.g., ROA) and/or key performance indicators (e.g., revenue and/or sales targets, staff numbers, meeting or exceeding forecasts). At the individual, group and department levels, however, it is frequently very difficult to make the link between what happens on a daily basis and these corporate-level measures. It is difficult to see how measures of potential concern to those implementing innovation and technical change (e.g., the number of e-mail messages sent, the number of people connected to a new system per day, customer retention rates, network utilisation rates or the "delay to answer" in a telephone service or sales environment), directly relate to corporate-level measures such as ROA.

It may be necessary, therefore, to create some new integrated measures that show progress toward agreed-upon business objectives and/or to make clear the links between variables related to the implementation of innovation and technical changes and existing corporate-level measures.

In general, this is done by considering questions such as:

Example 1 - Implementing a new system in a financial services division, or re-engineering the work-organisation.

Department purpose: To provide credit and collection control.

Value-adding activities: (1) monitoring spending patterns, (2) collecting overdue accounts, (3) managing 3rd-party collection activities, (4) handling customer service calls.

The main task is to make clear to people the links between the local measures of the effectiveness of these activities and corporate-level financial measures. For example, 3rd-party collection rates and system up-time directly impact revenues and, therefore, gross margin, EBIT and ROA. Employee attendance and training costs directly impact overhead costs and, therefore, EBIT and ROA.

Example 2 - Implementing a fleet management control system

Department purpose: to provide fleet management services to internal fleet users.

Value-adding activities: (1) vehicle acquisition and maintenance of registration, insurance, fleet-card and repairs, (2) vehicle disposal and off-lease advice, (3) accident-handling and driver training.


Again, the main task is simply to make clear to people the links between the local measures of the effectiveness of these activities and corporate-level financial measures. For example, maintenance and petrol costs directly impact costs and, therefore, EBIT and ROA.

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