This article updates a post originally published on February 4, 2014 by CEB, now Gartner. Current research may include updated and/or alternative positions on these issues.
Midsize companies (those with revenues of up to $750 million) are always keen to explore new ways to increase growth and yet few have fully leveraged their existing strategies. One imperative for midsize companies is to better utilize performance management systems.
These systems are too often detached from corporate goals and encourage conflicting behavior in employees. This creates a major drag on performance, with finance and HR managers having to manage an unwieldy mix of targets, activities, people and resources and still create a cohesive system that allows employees to work together in pursuit of a common goal.
Here are five solutions to address the most common reasons performance management systems break down.
Align systems to strategy
In our analysis of over 100 mid-size companies, we found that organizations use performance management as an umbrella term for a broad set of analytical and management tasks. In fact, no two organizations regard performance management in exactly the same way, so it’s no surprise that performance management tasks are disconnected from organizational goals.
This also explains why the effect of performance management systems on employee performance can vary widely even within an organization. Most often, performance management systems stop well short of influencing employees or reinforcing positive traits.
Mid-size companies must learn to view performance management systems not just as a tool to measure performance but as a way to align employee behavior with organizational objectives.
One mistake midsize companies often make is to chase multiple goals and use a “cascade process” to ensure the entire organization contributes to the same goals. In reality, this approach leaves the workforce misaligned, disengaged, and inefficient.
The best organizations simplify and focus performance management on a few vital goals. Successful companies are explicit about the key causes of improved employee performance and seek to create momentum to achieve a few clear, transparent goals.
Align employee metrics to goals
Performance management systems are often complex and disconnected. Many organizations set targets that only tangentially align to long-term goals, fail to track the completion of must-have tasks, and ultimately fail to incentivize the right behaviors in employees.
The best companies use tracking mechanisms that align employee metrics to future goals, track task completion as well as metric success, measure the effect of that success, and reward those employees who encourage the right outcomes in the right way.
Take full account of employee contributions
Only 23% of HR executives believe their performance management processes accurately reflect the entirety of employee contributions — including the way that some employees develop value-added connections among employees, teams and the organization that multiply their contribution to enterprise performance.
Successful organizations align business performance management to HR performance management. To achieve improved performance, the best managers establish a climate of trust, create incentives for joint business objectives, and reward those who encourage organizational value over individual achievement.
Ensure systems are adaptable
When managers are overwhelmed with data and overly focused on financial results and past variances, they inadvertently miss changes in their operating environment. Our research found that the vast majority of reported data in midsize companies complicates decision-making instead of clarifying it.
Even if managers do see changes they seldom have the decisionmaking ability to adjust course and reallocate resources midstream. Successful firms create an adaptable review system that sets escalation and divestment triggers ahead of time, reduces data metrics to identify the most relevant information, ensures their reviews look at changes to the operating environment and regularly report on human capital, market, and operational factors, as well as financial factors.