Although most organizations have performance measurement processes in place, many don’t align those measurements with the goals of the organization. And incentives, which can be a good idea, too often encourage managers to make decisions that are for the best of the division over the best interests of the company as a whole.
Implementing a holistic performance measurement process can help you set goals, evaluate employees based on their adherence to those goals and ensure that the actions of your employees have the impact that you intend on your company.
By doing so, you can align individual goals with your company’s objectives, focus your training efforts where they are most needed and build a practical program for feedback on performance, says Harry Cendrowski, CPA, ABV, CFF, CFE, CVA, CFD, CFFA and managing member of Cendrowski Corporate Advisors LLC.
Smart Business spoke with Cendrowski about how to incentivize your employees in a way that benefits your entire organization.
What is a holistic performance measurement process?
A holistic performance measurement process is composed of the following primary components: strategic and operational goals set by the organization and a system to evaluate employees based on their adherence to these goals.
Many organizations have performance measurement processes in place for employees. These processes try to translate the overarching strategic and operational goals of the organization to employees through goal-setting processes.
When employees attain goals set for them, they are rewarded with merit pay or bonuses. However, a holistic performance measurement process will not only ensure that goal-setting processes are in place for employees, it will also make certain that employees are properly incentivized to the benefit of the entire organization.
For instance, many buyers in purchasing divisions today are measured on the amount they save on purchased parts year-over-year. A buyer measured on this metric may choose to award a contract to a new vendor on the basis of cost without considering the parent company’s relationship with established vendors, the quality of the goods received or the financial stability of the supplier.
Thus, while the buyer meets his goal — and improves the purchasing division’s performance — the parent company may suffer as a result of the improper incentives presented to the employee.
What kinds of organizations that often lack holistic metrics could benefit from them?
Large, bureaucratic organizations often have difficulty evaluating metrics from a holistic perspective. Divisions within these types of organizations frequently operate as autocratic entities with little to no interaction between other divisions. While this type of organizational structure may incentivize division-level managers to make decisions in the best interests of their division, they may not look out for the organization as a whole, simply because it is not in their best interest.
Organizations that lack a rigid bureaucratic structure are sometimes better at establishing holistic performance measurement processes because of their flat structure. Lacking discrete divisions, managers of such organizations are more likely to look out for the entire team, rather than their staff members. However, this is not always true, especially in small businesses.
Small businesses also have issues with establishing holistic performance measurement processes. However, the issues they possess generally relate to their lack of concrete strategic and operational goals. Many small businesses grow so fast that their owners sometimes forget to lay out future state plans. This creates issues for employees when they aren’t exactly sure what goal they are working toward.
At one small business, employees were told that the company was striving to become a high-quality, low-cost provider of services. However, when push came to shove, employees were confused about whether they should err on the side of high quality or low cost. The firm’s lack of a mission statement created significant issues for employees.
How can organizations avoid such practices in decision-making?
When incentivizing employees, it’s always important to remember the adage, ‘What gets measured gets done.’ If an employee’s merit pay is based on achieving a certain goal, he will generally try his best to achieve it — sometimes by any means necessary.
There are instances where plant managers of manufacturing operations were measured on the number of products they shipped each month. While this metric was well intentioned in that it incentivized managers to keep the production line moving, plant managers would purposefully order all goods shipped to retailers at the end of each month, irrespective of final quality inspection results.
Products that were produced midmonth with defects would be reworked prior to shipment if necessary; however, goods produced at the end of the month were often shipped to retailers with defects. One can imagine the harm this could cause the organization if retailers did not detect these defects before they sold the goods to customers.
When organizations wish to incentivize employees, they should be aware of adverse consequences that their metrics may cause. For instance, if the plant manager in the above example had been measured on both quality levels and the number of products shipped per month, he may have made different decisions.