Ventana Research: Remedying Performance Compensation Gridlock

Managing the effectiveness of an organization's workforce is a critical objective of performance management. To improve productivity, the organization needs to be able to measure and monitor the performance of its people and to have a process for applying this intelligence to improve execution and strategic alignment. Executives should not view managing workforce performance as a narrowly focused task for the human resources (HR) department; rather, the entire organization can apply this approach across functions and groups to achieve maximum effectiveness from all of its employees.

Our research confirms that most organizations fail to maximize the value of their human capital. They do not measure employees' performance in ways that provide sufficient insight or actionable intelligence with which to make improvements. They simply do not give workforce performance management the priority it deserves — at least in part because they do not seem to grasp the importance of measuring this performance in relation to corporate goals and objectives. Most workforce metrics used today are traditional ones, such as compensation, budgeting, and goals and objectives. However, newer measures (such as competency, workforce planning and aging, and sales compensation effectiveness) are coming into wider use and require technology support in order to help with tracking, analyzing, and optimizing workforce performance.

Our research also shows that people in HR departments believe that they don't receive sufficient IT support. Also, a majority feel that their human resources management systems do not provide useful workforce performance analytics, forcing them to use spreadsheets for analysis instead. While this works well enough in small groups, having these analyses reside in spreadsheets make them inaccessible to groups not directly using them; even where the metrics are accessible, they may not be so readily enough to satisfy the performance management needs of HR, sales, or operational management. Over the past several years, new software packages have become available that are truly useful for large workforces (in contrast to desktop spreadsheets) and that address the limitations of many ERP and HR packages.

What does this have to do with the finance department? When it comes to HR management, finance executives need to expand their responsibility for “control” to measure and monitor personnel spending for its effectiveness, not just whether payroll limits are observed. The typical annual planning, budgeting, and review process pays scant attention to setting objectives and assessing performance related to employees' capabilities and effectiveness, and it does not examine how this relates to measures of customer satisfaction, industrial safety, or the effectiveness of incentive compensation plans.

To correct this situation, we advise finance professionals to elevate their workforce focus from what all too often are simplistic expense measures and vague “feel good” statistics to objective measures of the short- and long-term abilities of the workforce to support strategic objectives.

Also, since finance plays an important role in IT governance, it is important for executives to understand the value of having these analytic capabilities and to realize what their HR software packages can and cannot do. Most companies with 1,000 or more employees will find that there are substantial gaps between where they stand in the people, process, information, and technology aspects of their workforce performance management and today's best practices.

We advise companies interested in improving their strategic effectiveness to make addressing these gaps a priority. We believe they will find that having the right software will allow them to address these gaps faster and more productively.

See a larger version of "Home Improvement: Tools for Aligning Compensation with Strategy" here.