Article

Twelve common pitfalls to avoid

– when designing your performance management system

Published

August 2020

Authors

An ideal performance management system aligns and drives an organisation towards achieving a common set of strategic objectives. It resonates across organisational levels and establishes the necessary incentives for everyone to pull in the same direction. However, often organisations fall victim to one of these common performance management pitfalls.

KPI tsunami

In a world with ever-increasing data availability and computing power, it is easy to be intrigued by the possibility of showing a myriad of performance measures. However, research shows that too much data decreases people’s ability to make choices. This is referred to as decision paralysis. Consequently, a proper performance management system does not overflow the receiver with too much information but provides a limited set of key performance indicators (KPIs) aligned with the company's strategic objectives.

Improper metrics

It is inherently difficult to define KPIs that are proper proxies for the strategic objectives you want to achieve. Even when you have defined a KPI that actively drives a desired behaviour, you might end up removing focus from other critical elements in your service delivery model. You get what you measure, and thus it is always relevant to ask yourself: what will be overlooked, and what will not be done as a result of our performance metrics?

Rearview mirror reliance

It is easier to measure historical events rather than predict future trends. However, a proper performance management system should focus on enabling future performance rather than reporting on the past. Consequently, it is critical to avoid reporting on lacking indicators and instead monitor any leading indicators outlining the road ahead. This, in turn, requires a shift towards behaviour-based metrics, which is not easily linked to traditional financial performance. Making this shift often requires significant management support.

Narrow stakeholder focus

All companies interact and rely on several key stakeholder groups such as customers, employees, suppliers, the surrounding community and so forth. Thus, one way of validating whether a performance management system is holistic is to ensure that all stakeholder groups are represented by at least one KPI. If you have ten financial KPIs aimed at satisfying shareholders but no KPIs tracking supplier relationships, you might be missing critical information to steer your organisation in the right direction.

Read more about battling the blind spot of performance management by including a stakeholder perspective.

Faulty target-setting

Targets, i.e. the goals defined for each KPI, should push your organisation and present a challenge compared to current performance. However, if the target is considered unrealistic and too hard to achieve, the organisation will not strive to achieve it. Striking the right balance is critical. Sound advice is to set SMART goals, i.e. goals that are Specific, Measurable, Attainable, Relevant and Time-bound.

No single source of truth

Most finance professionals cry for one set of numbers. In performance management, this is especially critical. If you do not have a single source of truth behind your metrics, uncertainty and mistrust is bound to arise. Nobody will ever be motivated by a measure in which they have no trust.

Read more about how to become a trusted business finance partner

Improper cascading of KPIs

No single KPI fits all. The CEO does not care about the same thing as the plant manager. Thus, proper performance management reflects the corporate priorities at all levels. If your metrics do not follow a clear hierarchy cascading down through the organisational layers, you will not be able to guide the organisation on a common strategic path.

Missing meeting cadence

A performance management system only creates value when behaviour is changed, and decisions are altered based on performance insights. Presenting a KPI dashboard does nothing in itself. Value is only created when insights are communicated, discussed and translated into actions. Only by creating a natural flow of performance discussions will you be able to build a culture of data-backed decision-making. Consequently, if you do not have a clear annual cycle and defined governance for your performance management system, you are likely not reaping its full benefits.

Read more about five steps to keep cadence and pace of your performance management initiatives. 

Missing link to personal objectives

Performance management should be cascaded into personal objectives of the employees that can impact performance. The challenge is to define proper, relevant metrics that support the overall desired performance while being relevant for the scope of work of the individual employee. For this to work, the measures need to be behavioural and linked to activities that support the overall value creation. Unfortunately, this link is often broken, and employees are not measured against parameters that create personal engagement and purpose and also support the overall strategic objectives.

Read more on designing motivating performance indicators. 

Lack of transparency and communication

Performance management should not be a management exercise performed behind closed doors. To drive the organisation in the right direction, selected performance metrics should be accompanied by adequate communication across all organisational levels, thereby creating transparency and fostering an honest dialogue about performance. In other words, performance metrics should not be perceived as passive measures of progress but should rather be used as a tool for changing the dialogue and directing the effort towards what matters most.

If you do not have a structured approach to communicating performance metrics to the organisation, you are unlikely to succeed in fostering ownership and accountability with the right stakeholders.

Misaligned decision authority

To ensure a dynamic performance management system where KPIs are added and subtracted as the business evolves and strategic objectives change, it is critical to know who has the authority to make such changes. Who can decide to substitute one KPI for another, and what are the requirements for such an update? If you are unclear in terms of the roles, responsibilities and decision authority, you risk ending up with a stale KPI structure that will quickly become outdated and useless.

Read more on how to instil proper governance surrounding your organisation's performance management setup. 

Missing consequences

The late Jack Welch, former president at GE, famously laid off the bottom 10 percent of the workforce based on the annual performance measurement. This is an extreme example that might be outdated in today's sociocratic organisations. However, the fact that performance must have consequences remains. Consequently, if you are not installing countermeasures to improve poor performance or recognising and rewarding good performance, you risk undermining your performance management system.

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