Finding the right performance metrics for employees, managers and executives at times seems like the impossible dream. Yes, you can rely on financial measures. But what about other equally important factors in the long-term, sustainable health of an organization – factors like leadership, innovation and developing talent?
Toby Gibbs, Suzanne Heywood and Matthew Pettigrew offer insight into how to find the right mix of performance measures in a recent article appearing in McKinsey Quarterly. They argue that metrics need to connect to organizational health without focusing on an employee’s operational, day-to-day responsibilities. For example, it is appropriate “to judge a senior product manager’s contribution to a company’s external orientation by tracking the number and quality of the new external contacts he or she develops over a year. But it makes little sense to apply the same health test to a media relations specialist for whom meeting new people is an essential part of the role.”
In other words, don’t differentiate employees using metrics that reflect what they are supposed to be doing anyway. Companies that make this mistake risk having employees view these performance incentives as easy takings.
McKinsey offers three ways to incorporate organizational health into measurement and talent management:
1. Back up metrics with consequences. Companies that want to incorporate measures of organizational health need to back that up by developing organizational processes and mechanisms to support those measures. For example, companies need to identify HR processes, systems, or managerial-training programs that undercut what the company is trying accomplish. The authors liken this to a company placing greater emphasis on safety by offering a series of emergency scenarios that line managers and their teams could act out together. The company would then reinforce the importance and seriousness of these safety metrics and the necessity of practicing these scenarios by factoring manager performance in this area when making promotion and pay decisions and even removing managers who did not perform as expected on these exercises.
2. Set priorities. Individual performance should reflect an organization’s values. However, like metrics, values must be prioritized to guide individual behavior. For example, an airline that gives high priority to safety at a level above and beyond regulatory requirements can measure how well flight crews work together to solve problems or how pilots and flight attendants interact.
3. Create meaningful metrics. Too many metrics or metrics that are too complex will do little to help guide and reinforce behavior. Therefore, companies will be better served focusing on a few well-chosen metrics. At the same time, these metrics should not be imposed from afar. A company with multiple business units should involve leaders from those entities in developing these metrics from the organization’s overarching goals to create some sense of buy-in and ownership. The company should also circle back to business units regularly to make sure metrics remain up to date and effective. Simple and clear reports on these metrics can also help business unit leaders manage performance and keep metrics relevant.
The authors conclude by stating that, “Once companies develop the right handful of health metrics, define the behavior that supports them, and implement assessments of the willingness of employees to practice that behavior, the final step is ensuring that their compensation reflects contributions to (organizational) health.”