Survey shows pressing need for solutions to align employee goals with business strategy*
Lynn Summers who can be contacted at www.performaworks.com
1. Executive summary
Do you have a strategic, streamlined performance management system in your organisation? If you don’t, you are not alone. That’s the bad news. The good news is that most organisations recognize the value of strong performance management and have specific plans to make dramatic improvements in their process and systems.
In the spring of 2003, Performaworks conducted a survey of large organisations to learn about their current performance management practices and their future plans. The survey identified many problems that are consistent with our years of experience helping many large organisations automate their performance management systems. On the positive side, we have identified a growing sense of urgency to fix these problems—and do performance management "the right way." To better characterize the sophistication of performance management for these organisations, we developed the
# EVEN IN AN ENVIRONMENT OF CONSTANT CHANGE, THE VAST MAJORITY OF PERFORMANCE MANAGEMENT SYSTEMS ARE DESIGNED AS ANNUAL EVENT VS. AN ONGOING PROCESS
For the past several decades, it has been difficult to find articles in management literature that don’t start out with the cliché, "We live in an era of constant change," or something akin to that. Wouldn’t it be refreshing to read that we have come out the other end of the tunnel and entered a world where things are stable and change is slow and incremental? A nice thought, but it’s not what we found.
The results of our Performance Management Practices survey suggest we continue to live in a world of constant change. In over three-quarters of the companies participating in our survey, there have been changes in strategy in the past year, with half of those companies experiencing major changes in strategic direction.
Changes in top leadership have occurred as well in over half the companies. Nearly one-half of our sample had some M&A activity in the past year. Of those companies, one-fifth experienced high-impact M&A activity. What does performance management have to do with change? If you have a good performance management system, it can help you focus the energy and talent of your workforce on executing your strategy. It can also help you refocus your people’s efforts as needed and when needed, keeping everyone attuned to the company’s strategic direction—no matter how small or great the change in strategy.
To keep pace with all the change, a performance management system would have to be nimble. You would want to be able to adjust priorities and employees’ work efforts in response to, or ideally in anticipation of, changes in your company’s internal and external environments. If there were a sudden change in your product’s market, a dramatic competitive development, or a short-term opportunity that must be quickly seized, you would want to be able to make rapid adjustments to capitalize on the opportunity or minimize the risk. You would want to be able to turn the ship on a dime, as the old metaphor goes.
Our survey uncovers evidence that the performance management processes currently in place are nowhere near as nimble as they need to be to help make corrections in the ship’s course.
Eighty percent of the companies in our sample set goals no more frequently than annually. Clearly, to be agile, a performance management system should accommodate setting or refining goals at any time during the year. And this performance management system should facilitate conversations between manager and employee, not replace them. As one respondent said, performance management "… needs to focus on constructive conversations between managers and employees." Without this ability, a company’s performance management system simply is not able to adapt employee efforts to the changing priorities and moving targets of the real world.
The reason current performance management processes are so slow to respond is that fully three-quarters of them are either manual systems (paper-based) or very basic automated systems (Word documents, spreadsheets, emails).
# MANUAL PROCEDURES AND INFREQUENT USE LEAD TO SYSTEMS THAT ARE NOT CONSIDERED STRATEGIC—AND SOMETIMES VIEWED AS A HEADACHE
Thus there is a fundamental disconnect between the rapid pace of change that characterizes the contemporary business world and a company’s ability, through its performance management system, to successfully navigate its turbulent world. Although people do make adjustments in their goals to comply with changes in the real world, they do not use their performance management system to make these adjustments.
Stuck in manual or inflexible electronic media, it’s no wonder their systems soon lose relevance after the year gets underway. And no wonder that their systems are not considered strategic. Less than one-fifth of our respondents believe that the performance management system is perceived as strategic to the business in their companies. Not surprisingly, more than a third feel the process is viewed as an administrative headache—that is, it is difficult to convince everyone to participate in the performance management process.
In our interviews with survey respondents, this compliance issue came up again and again. Looking out over the next one to two years, our respondents anticipate emphatic changes in the positioning of their performance management systems.
Two-thirds see their currently non-strategic systems becoming strategic during this time. Nearly two-thirds expect employees to be able to update and revise their goals more often than annually. And, to make these outcomes happen, almost two-thirds of the companies in our sample would like to move toward some type of automated performance management system during this timeframe.
These automated systems could be packaged performance management software, custom software developed by a third party, or internally developed software—the preferences seem to be about evenly split. This is what our respondents desire. Is it going to happen?
About one third report that their companies plan to install performance management software, or update their existing software system, this year. Their intent is to eventually have a performance management process that is automated, goal driven, and strategic. And what will this system look like?
There is strong indication that the system should incorporate all elements of the performance management process. They are looking for a suite of performance management products—a suite that is automated, tracks and measures competencies and goals, and facilitate alignment to corporate strategy.
Interestingly, most respondents who spoke of an integrated suite of performance management products also intended to develop such a system internally. Why would they build it themselves? Most respondents were unaware of any goal-driven performance management products available on the market that were sophisticated enough to accommodate their company-specific process requirements.
# MOST FUTURE PERFORMANCE MANAGEMENT SYSTEMS WILL INTEGRATE GOALS, COMPETENCIES AND ONGOING DEVELOPMENT PLANNING
What are the elements that make up a performance management system? Automated, streamlined performance evaluations, setting of goals, cascading of corporate strategy and high-level goals to lower levels of the organisation, alignment of individual employees’ goals to higher level goals, ongoing coaching and tracking of progress against goals, holding people accountable for achievement of results, and rewarding the high performers are all key elements of an effective performance management process. An effective performance management system should also integrate seamlessly with other human resource applications.
Regarding rewarding star employees, one respondent said: "The pain with performance management is that often the high performers go unnoticed." Setting of goals and measurement of the results achieved are integral parts of the process in 89% of the companies surveyed. If the trend plays out as our respondents would like, fully 98% of the companies will include goals in their systems within the next two years.
Two-thirds of our respondents’ companies include development plans and competencies as elements of their performance management systems. About half of them track the completion of employees’ development plans, slightly more than one-third include business metrics, and one-fifth of the companies incorporate team performance as part of their performance management process.
Which of these elements are most likely to rise in their representation over the next two years? More than half of our respondents hope to add team performance to their processes while about one-third would like to include business metrics as part of the mix.
Performance management systems undergo frequent revision. We asked which components of the system need updating. Over half of our respondents say that their performance evaluations and goal-setting process need to be updated. Slightly less than a half are updating their competency models and about one-third are revising their multisource assessments and compensation policies.
Nearly every company plans to cascade and align goals throughout the organisation—very few are doing it today An effective performance management system harnesses the talent and energy of employees toward achievement of the company’s strategic goals. To do this, the system must have a way to get employees’ goals lined up with and supporting higher-level goals. This alignment process can be achieved by "cascading" goals out through the organisation as well as through "visibility"—enabling employees, as they set their goals, to see the higher-level goals that they need to support.
Currently only 3% of the companies can automatically "cascade" their senior managers’ goals out across the organisation, enabling each employee to set goals that support the higher level goals. Sixteen percent say they handle this cascading and aligning process manually, while the remainder say it either doesn’t happen at all or goals eventually sort of percolate down over time. Employees set their own goals with a general awareness of the corporate or departmental goals.
It is clear, however, that respondents believe that having the ability to align goals is critical to the relevance of a performance management system, and one of the keys to making it strategic. Nearly three-quarters of them anticipated being able to automatically cascade goals within the next two years.
The respondents we interviewed recognize that increasing the alignment of individual performers’ goals to higher-level goals and to company strategy inevitably increases company performance. They also believe that the ability to align their goals to something larger has a positive effect on employee satisfaction and retention.
In slightly over half of the companies, most—if not all—of their employees are involved in the performance management process while an additional third of the companies would like to achieve a similar level of coverage in the next year or two.
This trend is consistent with the desire to make performance management more strategic. Not only is it important to have a high percentage of employees involved in the performance management process, it is also necessary to give them visibility into the company’s strategic goals as well as into their managers’ goals. In how many companies is this visibility currently a reality? Employees have line of sight visibility from their goals up to the corporate goals in barely 10% of the companies. Almost two-thirds of our respondents hope to add this level of visibility to their performance management systems over the next two years.
# It is very difficult to communicate and manage corporate competency models
Competency models specify the knowledge, skills, and other characteristics needed to be an effective performer. They often embody the company’s values, giving these values behavioral meaning. They may also delineate the specific skills required for different groups of jobs within a company.
Competencies are useful in recruiting and in making employee selection and promotion decisions. They are also an integral part of performance management. One way to think of it is that it is employees’ competencies that enable them to achieve the goals they are accountable for in their positions.
Half the companies in our sample have a corporate-wide or "core" competency model and about the same number have individual, job-specific competencies. Most companies without competency models intend to develop a model within the next two years. One respondent notes that a number of competency models have evolved in different parts of the company over the last few years. "One of the tasks facing our project team," this respondent says, "will be to develop and standardize a set of core competencies."
The proliferation of independently developed competency models within a company is a theme we hear often from HR executives. But without a convenient place to "house" a competency model that allows both central control and enables everyone to access competency information, it would not be surprising that competencies sprout up in different places in the company.
Respondents hope to move their competency models out of the paper world and into some form of electronic system—either into their current performance management system, the HR management system, or their learning management system.
Slightly more than two-thirds of the companies currently have some type of formal development planning process in place. Most (two-thirds) of the companies that practice development planning do so on paper but have plans to move it to their HR management systems or to their learning management systems. Almost all the companies that don’t currently practice development planning hope to institute the process within the next two years.
# PERFORMANCE EVALUATIONS ARE ANNUAL EVENTS, BUT SHOULD BE SUPPORTED WITH ONGOING DIALOGUE BETWEEN MANAGER AND EMPLOYEE
Performance evaluation is the hub around which most performance management systems revolve. Ninety-two percent of our respondents report that they conduct evaluations annually. Ideally, the evaluation is a summation of the ongoing performance-related discussions that have been occurring between manager and employee throughout the year. In reality, our respondents told us, it is one of the few, if not the only, and opportunities the manager and employee take at any time during the year to discuss the employee’s performance.
Major issues surrounding performance evaluation are compliance and quality. How to get everyone to follow a standard procedure? How to improve the accuracy and fairness of evaluations? It is probably fair to say that many respondents feel frustrated in their efforts to achieve compliance and raise evaluation quality. Yet, at the same time, most of them also aspire to the ideal. They realize that evaluations ought to be an integral element of an ongoing process and look forward to seeing the ongoing part of the process become a reality. Accordingly, over half the respondents would like to initiate either ongoing performance discussions or quarterly informal performance reviews.
# 360S AREN’T JUST FOR DEVELOPMENT ANYMORE—THEY ARE INCREASINGLY BEING USED FOR ASSESSMENT
About half the companies use multisource assessment (MSA), or 360 feedback programmes, as a component of their performance management systems. Another one-third of our respondents want to implement multisource assessment in the next two years.
MSAs can be used for a couple primary purposes. They can be used solely as developmental tools (the "traditional" way), helping employees identify strengths and weaknesses and triggering development plans to better apply their strengths or to make improvements in areas of weakness.
More than 90% of the companies currently using this assessment approach are conducting development-only MSAs. MSAs can also be used for administrative purposes—in essence, as employees’ performance evaluations, with results affecting personnel decisions such as pay and promotion. About one-third of the companies are conducting administrative MSAs.
Interestingly, about 15% of the respondents currently conduct both development-only MSAs and use the MSA method in their performance evaluations. Yet almost half would like to use MSA for both purposes. They see the value in collecting feedback from work peers for use in performance evaluations.
Who participates in MSAs? Fully 90% of the companies that use MSAs for developmental purposes only involve senior management or the top 25% of the organisation as participants. The companies that use MSA for performance evaluation include a larger proportion of their workforces in the process.
# ULTIMATELY, THE PERFORMANCE MANAGEMENT SYSTEM SHOULD DIRECTLY FEED THE COMPENSATION SYSTEM
Compensation is a natural part of performance management. In our survey, we asked specifically about variable pay. Variable pay is performance-related compensation that is paid out in addition to base salary (unlike merit increases, which are rolled into base salary every time they are granted). Examples include bonuses, commissions, piece-rate pay, gainsharing, and stock options.
To be effective, variable pay plans need to have accurate information about employees’ performance. In about half the companies surveyed, variable pay plans cover less than 25% of employees. Plans that cover most or all employees are in place in only 16% of the companies. Over the next two years, according to our respondents, we should see a gradual penetration of variable pay into a larger percentage of the workforce.
More than half the companies are using manual systems to handle the administration of their variable pay programmes while another one-third are using internally developed automated systems. However, significant changes are seen over the next two years. Most of the companies currently using manual systems anticipate moving to automated systems (much like other aspects of performance management), although they are headed in about equal numbers in three different directions: internally developed compensation management software, custom software from a third party, and packaged performance management software.
In an environment of tremendous change, a performance management system that can measure, manage and adjust to this change is necessary. Manual or basic performance management automation (word documents/emails) is not sufficient to contend with the dramatic changes at companies today such as M&A, leadership turnover and strategy change. Currently, despite all of these changes, goals are changed only annually.
# Aligning employee performance with corporate strategy and goals throughout the organisation is key to making performance management a strategic process (rather than just HR automation).
HR Managers do not simply want an automated performance evaluation module; they want a system that provides everyone in the company with a direct line of site to corporate strategy and goals.
# Evaluating employees based not only on competencies, but also goals is of critical importance. What good is a performance review if an employee is evaluated based only on whether they are a "good communicator" or "work well with others?" This is certainly valuable information, however the question that HR Managers are realizing is of even more importance is, "have they achieved their goals?’ They realize that most employees set goals, but these goals are not aligned to corporate initiatives, or even their manager’s goals—and need to be.
# Multi-Source Assessments (MSAs)—360s—are powerful evaluative
tools. Traditionally (and currently) most companies use MSAs for developmental purposes—and usually only for their senior level managers. Increasingly, these companies see the value in using multi-source feedback to evaluate all of their employees (i.e. as a determinant of pay and promotion). The result is richer, more accurate performance reviews.
# Competency models and development plans have become more valued. Establishing individual, business unit and corporate competencies as well as the mechanism (development planning) to facilitate these competencies (and goals), is of great importance to organisations. Most companies currently have less than 25% of their employees using competency systems and 69% using development plans; their goal is to have most of their employees working on these systems.
# Performance management establishes an ongoing process of evaluation, goal setting/adjusting and development planning. The value of performance management is not that it enables one to conduct performance evaluations on a quarterly basis, rather that it facilitates a continuous dialogue between managers and direct reports about aligning employee outputs with corporate goals.
* Reprinted by permission