Setting the right performance measures to drive desired organizational behavior

Managers reviewing performance measures

At every start of a school year, teachers normally brief students on what’s needed to pass the subjects they are taking. Exams, levels of participation, quizzes, projects, etc. have corresponding weights and determined via quantitative calculations the student’s grade. Students and parents are made aware of the time and effort required to respectively ensure they and their sons & daughters get passing marks, if not honors. The student’s grades underlie the academic world’s definition of performance measures and the acceptable levels for success.

In the business world, executives brief employees and managers of expectations in performance to enable the firm to reach its targets. Companies establish performance measures and set corresponding targets. Unfortunately, unlike the academic world, it frequently isn’t that straightforward.

For example, a firm, who wanted to boost low worker productivity, initiated an attendance incentive system in which employees who have a month-to-month perfect record of no absences or tardiness receive financial incentives. The result: many employees succeeded in achieving the perfect record but productivity remained low. People went to work but the day-to-day operational results that drove productivity were unchanged.

Another example: a manufacturing plant embarked on an efficiency program to reduce production costs to levels lower than its sister plants in the Asia-Pacific region. The plant attained its target and was awarded the lowest cost producer among its peers. After several months, however, the regional management team discovered that its sales department rented three (3) additional warehouses to accommodate the unusually high inventories the winning plant manufactured, which kept production unit costs down.

In a final example, a subsidiary of a large global firm took the initiative to save on raw materials costs.  The subsidiary succeeded not only in lowering raw material costs at its location but also inspired other subsidiaries to reapply its tactics in generating even more savings. After some time, however, management realized the lower spending on raw materials was offset by lower quality of delivered materials. Product rejections from the firm’s customers were climbing and the firm’s reputation suffered as a result.

In these three examples, performance measures and expectations were clear to the organizations. The organizations delivered what were required by the leadership. But despite the initial successes, overall company targets were not met or were offset by higher costs or poorer quality. The executive leadership’s weaknesses were in how the performance measures were set. The measures were set at the functional level without consideration of their impact on the firm as a whole.

In establishing the right performance measures, the following are some points that may be well worth considering:

Alignment to overall company goals and objectives

Any performance measure that is set should have a connection to the firm’s corporate numbers. To put it another way, the firm’s business goals are the foundation of functional performance measures. Definition of a department metric should derive from a business goal or standard.

Timeliness in inspiring action

Performance measures are meant to be acted upon in real-time. Executives may like weekly or monthly reports but the true value of a performance measure lies in the people who directly influence it. If a metric shows quality problems on a production line, for example, the production workers who see it first should also be the same ones who work on it first.  

Focused on the medium to long-term

The tracking of performance measures over time reflects the behavior of an operation. It would show whether management initiatives are bearing fruit. It would show if there is control or the lack of it. A firm implementing a productivity solution may at the beginning show a drop in volume per man-hour as employees undergo a training or learning phase for the change in operation. But as employees gain experience, the performance would show incremental improvement that over time provide beneficial results for the company.

Setting performance measures is a critical role of top management in leading and running a firm’s operations. In almost all instances, employees will deliver the performance level management expects from them. Executives, however, have to make sure they are using the right measures that are rooted in overall business results. In driving the organization to the right path, executives have to consider that what are being measured are aligned to organizational objectives, will inspire timely action, and are focused toward medium to long-term results.

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About the author

Jovy Jader

Managing Partner, Prosults Consulting LLP

Jovy is a supply chain consultant and speaker of Prosults Consulting LLP. His clients include multinational companies in the food, pharmaceutical, consumer goods, energy, and export industries. He is the author of Speed Kills…Your Competition “Driving Growth Through Supply Chain Excellence”, and has been a regular contributor to BusinessWorld. Jader was with Procter & Gamble Philippines and PriceWaterhouseCoopers, assisting companies across Asia in Supply Chain Management improvement projects. Jader holds MBA from the University of the Philippines and a BS in Chemical Engineering from Pamantasan ng Lungsod ng Maynila.

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