At its essence, becoming "performance-driven" is about motivating the entire work force -- including all employees, partners, suppliers, agents, and others inside and outside the enterprise -- to work collectively to execute the strategy of the organization. Yet most companies fall short in this endeavor. Research by David Norton and Robert Kaplan of the Balanced Scorecard Consortium shows that nine out of 10 companies fail to execute their strategy. What's more, this same study indicates that only 5 percent of the work force, on average, understands their company's strategy; a mere 25 percent of managers have their incentives linked to the successful execution of the strategy; 85 percent of executive teams spend less than one hour per month discussing strategy; and 60 percent of organizations fail to link their budgets to their strategy.

Clearly, companies are not paying close attention to what their employees are doing, which means they don't have a handle on where their organization is truly headed. They don't effectively correlate corporate objectives with individuals' activities, nor do they tie workers' compensation to their achievement of specified targets. Executives are beginning to understand that there need to be tighter links between pay, performance, and business strategy -- but most have no idea how to solve that problem.

Defining the "Who" of Performance Management

Most approaches to business performance management (BPM) focus exclusively on high-level corporate activities and overlook the behaviors of the employees and other stakeholders who execute the company's strategy. If these individuals' efforts are not aligned to the strategy, they can be a significant drag on the organization's overall performance.

To transform their company into a performance-driven business, senior management must:

1. Align the objectives and resources of the different parts of the organization.

2. "Cascade" objectives down into the work force and manage work force performance.

3. Reward individuals for performance.

4. Understand organizational and individual performance using real-time information.

5. Optimize strategy execution using models and analytics.

These are the five critical components of a useful framework for performance management that encompasses the entire organization but also accounts for the inseparable linkages between individual, departmental, and organizational performance. (See the sidebar 5 Critical Components of Performance Management, and exhibit 1 on page 32, for an overview of the components and the 12 building blocks of performance management, respectively.)

Most companies looking to improve their results concentrate on the align, understand, and optimize components of this model, as these most visibly affect enterprisewide performance. As a result, the cascade and reward components -- which drive the behavior of individual employees and align it with corporate strategy -- are often neglected.

Exhibit 1
12 Steps To Link Pay and Performance

COMPONENT BUILDING BLOCK
ALIGN

1. Define strategic objectives for the organization.

2. Size and structure organizational resources.

3. Link objectives and resources to budgets.

CASCADE

4. Cascade strategic objectives down into the work force.

5. Create alignments between the work and the work force.

6. Set work force production quotas.

7. Manage work force performance reviews.

8. Manage work force competencies and training.

REWARD

9. Measure organizational and individual performance.

10. Link individual performance to individual pay.

UNDERSTAND

11. Provide real-time performance and pay information to individuals.

OPTIMIZE

12. Use models and analytics to more optimally execute strategy.

The Cascade Component

Most of the buzz about "performance management" and "performance measures" is about organizational performance. One of the most common concepts missing in the buzz is the very practical need for tools, methodologies, and processes to closely tie the organization's objectives to individuals' activities and goals.

Share strategic objectives. To link employees with corporate strategy, executives should cascade the strategic objectives of the organization's various entities down the hierarchy. Each individual in the work force should be assigned specific goals that support the company's strategic objectives. Workers must understand the activities they are expected to perform, how their performance will be measured, and how their performance will help the organization achieve its high-level targets. Each goal needs to be weighted so that all employees know where to concentrate their efforts.

An annual or semiannual objective-setting process cannot adapt to change quickly enough. To be most effective, goals should be set and evaluated quarterly. Frequently establishing objectives and cascading them down through the organization allows management to increase work force productivity by focusing people on those activities that directly align with strategy. It also helps executives ensure that the entire work force understands how their activities fit into the overall strategy, and it enables the company to outmaneuver the competition by quickly changing strategic direction and individual behaviors when necessary.

Create alignments between the work and the work force. To produce optimal results, management needs to consciously allocate employees to the areas of opportunity within the organization. Business opportunities are reflected in the strategic objectives, so if workers are assigned to the tasks for which they're needed most, their actions will contribute most productively to corporate strategy. Failure to consider this alignment results in missed revenue opportunities in the case of the sales force and wasted resources or higher costs throughout the rest of the enterprise.

A sales organization's work is primarily to develop and close opportunities for business. Thus, leaders of a performance-driven sales team need to create sales territories that assign geographies, customers, or prospects to each salesperson. To do this, they should develop a benchmark for market potential in each territory, balance potential against workload, and then allow managers in the field to make adjustments based on local information.

In other parts of the organization, the work force can be productively aligned with their work in a variety of ways. Manufacturers align their staff to production needs, professional services organizations align their consultants to projects, and pharmaceutical and high-tech companies align their R&D professionals to promising new initiatives.

A structured resource-alignment process increases work force productivity and improves job satisfaction. It helps maximize sales and revenue-generating opportunities by applying the optimal level of sales resources in each territory, and it helps reduce costs by providing the right amount of resources to the right workers.

Set work force production quotas. With good resource alignments in place, the next step in maximizing the productivity of the work force is setting production quotas. Setting them properly is crucial to overcoming the perception that quotas are unfair, unachievable, and demotivating. While many people think of quotas as applying only to salespeople, they also make effective performance goals for the rest of the work force. A quota is any numerical production target, either in absolute terms or as a percentage of some total goal -- whether the measure is revenue, margins, new customers, widgets, or any other unit of production.

For a sales force, an effective quota-setting process involves cascading the company sales goals down into the organization by using one of a variety of mathematical algorithms (similar to those used to determine territory alignments) and then allowing managers to make adjustments based on local conditions. Quotas for the rest of the organization can include measures such as the number of calls processed (in the case of a call center), the number of defect-free widgets produced (in the case of a manufacturer), or the number of referrals made (in the case of a financial services company).

Successful work force quotas increase employees' productivity by giving them a numerical production goal (provided their pay is also linked to that goal's achievement). Because quotas can easily be adjusted at any time, they enable companies to respond quickly to market changes or external events.

Manage work force performance reviews. Setting specific goals for employees is a necessary step in enhancing work force productivity and becoming a performance-driven organization. However, before they can accomplish their goals and further improve their productivity, individuals must possess the competencies to most productively perform their job. Corporate managers need to define a set of desired competencies for each position in the organization, together with objective criteria for evaluating competence. Then they can set up a consistent, structured work force performance review process that uses input from co-workers, managers, subordinates, and even clients and partners to evaluate each individual.

As with the setting of goals, the work force performance evaluation process should be executed quarterly. This will ensure that people with performance problems rapidly receive sufficient feedback to change their behaviors. Frequently and objectively evaluating employees' contributions can enhance teamwork, instill a consistent culture throughout the organization, and reduce labor costs.

Manage work force competencies and training. When managers uncover deficiencies in individuals' skills, they need to be able to determine the training required to fill those gaps and they need to track the results of training efforts. The abilities to evaluate and, more importantly, improve the skill sets of the work force can become strategic corporate advantages. They are a key element of becoming a performance-driven organization.

Some common organizational needs are fulfilled by enterprise-learning solutions, including sales training, channel certification, customer education, regulatory compliance, and corporate universities. When possible, such tools should also enable individuals to learn "on demand" through the delivery of training in a virtual, real-time environment. Learning management and e-learning systems appear to have begun to accomplish this.

By managing worker competencies and training in a structured way, an organization can ensure that people have the skills and competencies they need to be successful -- which, in turn, can increase productivity. In addition, standardizing employee-training systems helps a company adapt work force skills to changing strategies and cut costs.

The All-Important Reward Component

The pressures created by increased government scrutiny have led businesses to focus on proactively measuring their overall performance. At the same time, processes for cascading objectives throughout the organization and frequently measuring individual performance based on goal achievement and demonstration of competencies and cultural values have not been implemented at many organizations. What's more, many employees see no direct rewards for molding their activities to corporate strategy.

Measure organizational and individual performance. To link individual pay to individual performance, executives must understand how both the organization and the work force -- individuals and teams inside and outside the enterprise -- are performing. By constantly measuring the performance of individuals and of the organization as a whole, senior management can instill accountability. Basing such measurements on a common set of performance metrics builds a performance-driven culture, enhances the visibility of corporate leaders, and helps managers proactively address issues before they impact strategy execution. A structured performance-review process also improves work force productivity by regularly communicating performance results to each and every individual.

Link individual performance to individual pay. Many management teams assign and measure objectives and evaluate competencies, and have started using this data to more effectively run their businesses. But to really see significant results, performance must be linked to compensation.

If your company is like most, you attempt to correlate performance with pay by using some sort of labor-intensive, error-prone, inflexible homegrown system -- or "spreadsheet farm" -- administered by a staff that is always fighting fires. The results are less-than-optimal performance and a misalignment between your company strategy, your incentive compensation plans, and the desired behaviors of your employees.

However, directly rewarding people for delivering the desired results creates the kind of performance-driven organization that many executives only dream about. The benefits of linking pay to performance are many. Companies can react quickly to changing market conditions by driving individuals' activities through updated pay-for-performance plans. They can drive accountability deeper and increase senior management's visibility throughout the organization. And they can improve job satisfaction and retain top performers by clarifying expectations and rewards.

Making It Happen

Most companies are not ready to become truly performance-driven. Many may lack a culture that tolerates risk, and others fear accountability. Although successful performance management initiatives have many drivers, three primary success factors must be in place for a company to begin the process of becoming performance-driven: Top management must be committed to cultural change, pay must be linked to the achievement of goals and objectives, and the organization must have software that "operationalizes" the concepts behind performance management.

Commitment of top management. Creating a performance-driven organization is ultimately about the corporate culture. Employees need to accept risk, be willing to be held accountable for measurable progress toward concrete goals, and be honest about their ability to meet those goals. Cultural change is a major undertaking that requires dedication, advocacy, and leadership at the top level of the enterprise. Therefore, senior management must be committed to the concepts of performance management and its execution, and must support the performance management initiative at every turn. This commitment must involve frequent communication and reinforcement of the concepts to employees, stakeholders, process owners, customers, suppliers, and partners.

Linking of pay to achievement. Although good communication is essential for success, it is not sufficient to ensure the successful rollout of a performance management strategy. Too often, the missing link in BPM initiatives is a system of employee pay incentives that would promote the successful adoption of required practices throughout the organization. When people see that their behaviors have a direct impact on their compensation, they are motivated to change deficient behaviors. Only when this monetary connection is made do performance management systems really deliver on their potential.

Software that operationalizes the concepts. Performance management strategies provide a structured framework through which all objectives and goals are organized, assigned, measured, and monitored. This framework forces companies to systematically plan, execute, and measure results -- an ongoing process that enables successful firms to maintain their competitive edge.

Organizations that rely on manual processes, that keep data in disparate formats, or that use multiple systems in different departments and business units may not be able to successfully implement performance management projects. To become performance-driven, a company needs an effective software system that easily automates the many integrated processes associated with the 12 building blocks of performance management.

Business concepts evolve as the technology that supports them advances. Today's technologies can create a significant shift in how organizations define performance management and what they can do to become more performance-driven.

The Stakes Are Enormous

Industry research indicates that companies which implement a performance management solution experience a very rapid return on their investment and, at the same time, outperform their competitors. These results are driven by three primary factors that relate to the organization's ability to more effectively execute strategy: the software's improvement of operational efficiencies, its effect on sales productivity and profit margin, and its impact on business change.

To dismantle the prevailing -- and ineffectual -- performance management paradigm, companies must operationalize the five critical components of performance management (aligning, cascading, rewarding, understanding, and optimizing) in an integrated fashion. Then they will be prepared to achieve their full potential.

5 Critical Components of Performance Management

Performance management needs to encompass the entire organization and recognize that individual, departmental, and organizational performance are inseparable.

1. Align. An organization is made up of various business units, departments, and divisions. To create organizational alignment between these entities, executives must define the overall vision and mission, the key perspectives, the critical initiatives, and the strategic objectives for each entity of the organization.

2. Cascade. Once strategic objectives are set and organizational alignment has occurred, the next step in becoming more performance-driven is to cascade these objectives down to all levels of the work force. This cascading process involves setting individual goals for each person in the work force (e.g., employees, partners, suppliers). While the align step is about the organization, the cascade step is about the work force, and the cascade process also involves managing work force performance and competencies, work alignments, and production quotas.

3. Reward. To motivate the work force toward achieving their individual goals, senior management must link individual pay and individual performance. Connecting the achievement of objectives, the demonstration of competencies and cultural values, and other measures of performance with an individual's compensation -- whether bonuses, stock options, reward points, merit pay increases, or commissions -- drives each person to change his or her behaviors and helps the organization achieve its strategic objectives.

4. Understand. The effective use of real-time information is necessary to manage the performance of the organization. It helps management see what initiatives are working, what projects are helping to achieve the strategic objectives, and what strategies are producing results. Similarly, providing actionable, personalized information to individuals is the key to helping them understand how they are performing, how they can improve, and how they can help the organization achieve its objectives.

5. Optimize. The use of models, analytics, and business intelligence (BI) to continuously adjust strategic objectives and reallocate resources in a way that optimizes the performance of the organization is the fifth component of the performance management model.

Mark A. Stiffler is founder, president, and CEO of Synygy Inc., a provider of software and services for creating performance-driven organizations.