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Linking Corporate and Individual Performance Management Systems

Linking Corporate and Individual Performance Management Systems

By Gavin Lawrie, CEO of 2GC who can be contacted by email at , and http://www.2gc.co.uk/

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1. Influencing the performance of individuals

Corporate Performance Management is ultimately about triggering changes in organisational behaviour that result in improved performance. Much can be done at the organisational or corporate level - through decisions about investment priorities and such like, but most improvements rely eventually upon one or more people choosing to change the way they carry out their work for their organisation.

In an ideal circumstance everyone would know everything about what is important and why, and so be able to select the exact right thing to do at any instance to ensure that the collection of people that make up the organisation do just enough of the right things at the right time to get exactly the outcomes required with minimum effort. But even in the smallest organisation, this rarely happens.

This working paper looks at the links between the performance management of individuals and methods of Corporate Performance Management - in particular at ways of aligning goals and incentives at the individual level with those of the organisation the individual is working with and for. As with all working papers, this is document represents a work in progress, hopefully a better version will evolve over time.

2. Setting the context: some notes on organisation theory

It can be argued that almost all management literature is focused on trying to work out why it rarely happens, and what to do about it: Performance Management theories approach this problem from a viewpoint relating to organisational communications. Due to the complexity of the organisation, it is both hard for individuals to communicate to other individuals what is needed of them, and for those individuals to be informed at the same time about what everyone else is doing.

Civilisation's response to this problem has been the 'hierarchy' - since the earliest military structures the idea has been to simplify the communication needs by categorising people (e.g. by status or role) - thus a General talks with his commanders, who instruct platoon commanders who instruct soldiers.

The problem with hierarchies is amply illustrated by the parlour game 'Chinese whispers' - each time you communicate between layers of the hierarchy, the communication gets slightly less clear and quickly you can end up with meaningless information coming through the pipe. The response to this was the introduction of 'bureaucracy' - where you add to an operational hierarchy a clear set of job definitions: thus even if the communications from above are poor, you know exactly what you are 'supposed to do' (and so does everyone else). Alloy this with programme management that ensures members of the organisation actually do do what they are supposed to do and you create what Mintzberg called the 'machine bureaucracy' - one of the social 'triumphs' of modern civilisation.

The benefit is the ability to build an enormously resilient organisation able to plough on with its programmed task almost regardless of the environment around it (e.g. UK Civil Service), the downside is that redirecting or changing the behaviour of the organisation becomes much harder - as not only do you have to change the instructions coming from above, you have to also change the 'structure' of the bureaucracy (e.g. by changing the job definitions).

The Performance Management approach is to try to limit the communication of task data and subsequent performance data around the organisation to be the smallest amount necessary to allow the data to be useful. The key issue is of all the things I could communicate, how do I choose (in either direction) the smallest useful set?

Information asymmetry theories (proposed by Oliver Williamson and others) imply that at any point in any organisation there is notionally much more information available that could be communicated than anyone would ever want to receive - if you don't edit this information flow all the pipes get blocked solid and effectively all communication ends.

3. Observations on the application of Performance Management systems to individuals

Advanced approaches to Performance Management such as the 3rd Generation Balanced Scorecard (see equity-Skills News& Views September 2002) look at how things are communicated about key goals and expectations one way, and concerning performance against critical activities and outcomes the other. Unsurprisingly the issue of 'alignment' between organisational units surfaces regularly during this work, and is explicitly addressed in established design methods. But a key related question is how to extend this work to encompass the individuals working within an organisation?

>> First, we have to acknowledge the existence of the bureaucratic form - individuals already have quite stringent boundaries on activity (some more than others) derived from their job definition, and from the impact of the management processes that have developed to ensure they comply with this definition. The extent to which they can, could or should be able to modify their work in response to communications about overall goals and outcomes is normally small - for most success is usually defined by 'compliance' to some degree with formalised role expectations.

>> Observation: behaviour change at the level of individuals requires more complex changes than simply a more elegant way of communicating goals and assessing subsequent achievement against these goals - it requires change to occur both within job description and management process (and according to some, many other organisational characteristics).

>> Implication: a typical Performance Management System design project will not have the mandate, budget or time to engage in this type of organisational change focusing on a more modest solution that is compatible with the existing fabric of the organisation will probably be just as effective (as major organisational changes are unlikely to occur otherwise), and probably easier to introduce (as it builds on what is already in place, rather than replacing it).

>> We have to acknowledge that the design of a sophisticated Performance Management system (such as a Balanced Scorecard), and used as an example for each individual will have a measurable economic cost to execute - for example in terms of training for managers, facilitators, and staff, the preparation of communications documents, and the execution of the design process with each individual.

Such an activity would need to generate a spectacular change in economic value for the organisation if it was to be worthwhile, but as noted above, even is such improvements were theoretically achievable such changes in performance would require substantial organisational structure / role changes that are likely beyond the scope of a typical Performance Management design project. It is most likely therefore, that the economic cost of introducing 'complete' Balanced Scorecards at the level of individuals would outweigh the benefits - and there is some case evidence to support this view from both UK and USA.

>> Observation: The costs associated with the introduction of complete / complex Performance Management System (e.g. a 'Balanced Scorecards') at the individual level is likely to be a greater than the benefits in improved organisational performance such a programme would generate, almost regardless of the complexity of the programme executed.

>> Implication: In the short term, the roll-out of a the Corporate Performance Management system to individuals is better done through small modifications to existing methods and processes than the introduction of a new Balanced Scorecard based appraisal and reward system.

4. Options to consider

Most complex organisations that are considering the introduction of Performance Management systems as discrete entities already have standing processes for staff appraisal and review, and for the reward of staff. The bulk of the potential benefit that can be obtained simply from improved performance management (through better communication of expectation and performance) can probably be realised through refinement of the existing staff level systems - mainly because the potential benefit that can arise from improved performance management at the individual level is going to be small without matching changes occurring within the bureaucratic form.

>> Use the Performance Management System to improve the awareness of managers as they execute the existing appraisal / goal setting system

A common weakness in appraisal / goal setting systems is that the discussions to do these tasks take place in a communication 'vacuum' - the manager and team member are probably both relatively unclear about the overall priorities of the business and how they affect individual tasks (one survey found only 10% of shop floor employees were able to relate their company's goals to their own job).

One of the side effects of an advanced Performance Management system being introduced within an organisation is that management teams become much clearer (explicitly) about their own priorities, how these relate to those of units near them in the hierarchy and how they can assess their delivery of the tasks necessary to get the desired results.

Small changes to the existing goal setting / appraisal system to require the discussions to be explicitly informed by reference to the local Performance Management system should be enough to ensure that personal goals are chosen that are overtly aligned with local organisational goals.

Provided the development of the Performance Management system has also preserved goal alignment at an organisational level, individual goals will thus implicitly be aligned with overall goals for the organisation.

>> Link incentive related pay to a few high-level goals

Simply use the Performance Management system as a tool to help management teams achieve these high level goals. Incentive pay linked to a rich set of measures derived from a Performance Management system is a highly marketable concept - but one that is nigh on impossible to do meaningfully without undermining the utility of the system it is based on - particularly for systems based on the Balanced Scorecard concept.

The Balanced Scorecard is designed to help management teams dynamically respond to their team's efforts to deliver medium and long term goals - the system will not be working usefully if all goals set are achieved (as it implies no learning is taking place): as the team learn about what bits of their original plan works and what don't they will want to change the Balanced Scorecard to reflect their evolving plans.

Linking a large proportion of Balanced Scorecard elements to incentive pay undermines this - it discourages the initial selection of 'risky' objectives that the management team may not be sure to meet (and reflect valuable experimentation and learning behaviours), and they will be reluctant to change their Balanced Scorecard during the course of an incentive period if they find that they are easily meeting some or all of the targeted values.

Such changes as are made will leave the team open to suggestions of 'fixing' the incentive criteria to allow them to get the bonus (or preventing such changes will lead to the incentive scheme be mis-aligned with the desired outcomes).

A much better idea is to link incentive pay to some overall measure of success (in purely commercial organisations, financial gain is usually adopted) that is a composite measure of the successful delivery of the team's Balanced Scorecard - and then the incentive is for the Management Team to use the Balanced Scorecard and the information it provides to generate the improved performance required to achieve the overall measure.

Under such a scheme - provided the overall measure is not easily going to be changed by the team themselves, they have an incentive to modify their Scorecard as they learn more about what is important, or to set risky or stretch targets - as if they fail to reach them it will only be a local problem, not a 'corporate' one.

Provided the overall target is met, their ability to match targets with actual performance is immaterial. Ideally the overall target will be set in line with some higher-level Balanced Scorecard goal(s) to which the team contribute - so provided the higher-level Balanced Scorecard is well set, this value should be too...

In the wider view, the idea that goal financial incentives for individuals can be an effective engender performance improvement in the modern complex organisation is doubtful: the move to more complex task definitions and multi-disciplinary team based approaches favoured seem at odds with the simple ideas about task and motivation upon which concepts of personal incentive pay are based.

5. Conclusion

Corporate Performance Management methods are intended to provide management teams with the means to achieve improved performance. This is achieved partially through high level benefits, such as those that arise from greater consensus at the executive level about the key goals of the organisation.

Changes in performance ultimately rely on changes in the behaviour of individuals. Yet, while often talked about, the linking of individual performance to an organisation wide performance management system remains largely a conjectural outcome: significant practical and economic factors strongly imply that a single performance management approach linking the 'backroom to the boardroom' is inappropriate. In this working paper some of the reasons for these limitations have been discussed, and specific pragmatic solutions proposed. But, the key conclusion that can and should be drawn is that however the behaviour of individuals is ultimately directed or monitored, any approach to corporate performance management needs to be based upon a strong and functional performance management model: 2GC's recommendation for most organisations is the use of '3rd Generation' Balanced Scorecards.

Gary Watkins

Gary Watkins

Managing Director

BA LLB

C: +27 (0)82 416 7712

T: +27 (0)10 035 4185 (Office)

F: +27 (0)86 689 7862

Website: www.workinfo.com
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