Performance Management

As a result of this narrow perspective, companies overlook the greater opportunity to leverage the power of performance management as a business management tool that aligns decision making differentially across various roles, reflects the unique aspects of the business model and culture, and considers the risk profile of the industry. By ignoring these facets of performance management, companies are missing out on opportunities to generate economic value. Because they have limited visibility into the value of different employee groups and roles, organizations will often opt to spread HR investments equally across organizational units — for example, investing a comparable amount in critical-skill employees as in employees whose skills contribute less economic value. Companies also face similarly negative consequences when key performance management activities such as goal setting are not aligned with a company’s vision and business model. For instance, a company focused on delivering a superior customer experience may fall short of achieving this objective — and realizing the corresponding economic value — if it uses a rigid top-down approach to goal setting that fails to take into account the unique demands of different customer segments. Lastly, value is also lost when organizations fail to fully consider the implications of their industry’s risk and performance tolerance. For example, a computer chip manufacturer that uses too broad a range of performance goals faces a significant risk that its product will not meet the tightly defined set of quality standards demanded by customers and it will lose significant market share as a result of the variance in its product quality. But not all companies are ignoring the power of performance management as a business management tool. Our work reveals that a number of organizations are making strides in aligning performance management with their companies’ business drivers. These players routinely analyze how variances in business models and risk tolerance can influence the performance requirements placed on different employee segments. This knowledge enables these organizations to better calibrate performance management to get the best return on their HR investments and achieve their strategic priorities. Aligning Decision Making With Business Strategy Unlike many HR processes, performance management has a direct and often-missed connection to a company’s business strategy and key value drivers. While much has been written about cascading goals and the importance of aligning individual key performance indicators (KPIs) with business objectives, research would suggest there is plenty of room for improvement. According to the 2012 Towers Watson Global Workforce Study, 37 percent of the global employee sample gave either a negative or neutral response when asked if they understood their company’s business goals. A similar percentage (38 percent) gave either a negative or neutral response when asked if they understood how their job contributes to their organization achieving its business goals. Moreover, in companies that do attempt to align individual KPIs with broader company objectives, the process of cascading goals is often purely a strategy agnostic, financial exercise. While financial goals may be relevant to executive leaders, they often have minimal relevance to employees at lower levels. Towers Watson research over the years has found that high-performing companies emphasize specific cultural attributes based on their chosen strategy:

• Efficiency. An organization focused on efficiency seeks to attract and retain talent that is productive in a way that optimizes processes, technology and resources. Key characteristics of this type of organization include an emphasis on comprehensive training in basic processes and very precise role descriptions accompanied by disciplined workload allocation. In terms of performance focus, the “what” weighs more heavily than the “how” in an 80/20 ratio. An efficient organization values top down goal setting and quantitative performance metrics.

• Quality. A quality organization looks to focus its workforce on excellence, precision and continuous improvement. Employees in this type of organization are empowered to improve processes and share best practices. A quality-driven company typically relies on multi-rater feedback systems, including peer reviews and top-down metric-driven goal setting. While the what weighs more heavily than the how in performance assessment, it does so to a lesser degree (60 percent what versus 40 percent how) than in an efficient organization. The tolerance for performance variance is typically minimal.

• Innovation. An organization that prioritizes innovation requires its employees to be entrepreneurial, creative and proactive. Its culture encourages diverse thinking and supports risk taking. The emphasis is typically on competency-based goals (the how) that are aligned with the company’s longterm vision. In this type of organization, there is a tolerance for wide performance differentiation and less formal top-down goal setting.

• Customer Service. A service-oriented organization seeks talent it can empower to build strong customer relationships. It promotes teamwork and focuses on long-term development. There is strong support for information sharing, which results in an improved understanding of customer needs and preferences. Because there is significant performance differentiation in this type of organization (as a result of its continuous pursuit of individual excellence), it is important to identify top performers. Goals aligned with customer requirements are typically set on a unit-specific basis to recognize differences in customer requirements.

• Brand. An organization pursuing a brand strategy seeks employees capable of serving as its brand ambassadors. These employees focus on building a community in which there is deep pride in the brand and a strong belief in the product. A brand-focused organization emphasizes team-based goals aligned with its vision and typically relies on a multi-rater feedback system, which includes peer reviews. These cultural attributes have significant implication for all aspects of performance management, including determining the types of goals to use, how targets are set, the degree of variance between targets across a given employee population, etc. Yet it is rare for an organization to start with the cultural attributes required to execute its strategy when it thinks about designing its performance management process. Another area of opportunity to reflect an organization’s strategy — the pathway to delivering financial outcomes — is in employee goals. This integration can be accomplished by cascading the nonfinancial goals of the organization into individual employee objectives in various functions. For example, Exhibit 1 illustrates the case of a printing company that used a value tree to disaggregate high-level metrics into lower-level business drivers that employees can understand.