Companies know that human capital is their greatest asset and that employee performance is a key factor in achieving corporate goals and objectives, but employees at many companies remain the stepchildren of corporate concern. "Employees are the number one cost of an organization and the number one source of risk, innovation, and competitive strategy, but businesses will spend time analyzing products and services and not the workforce," says Becca Goren, product marketing manager, SAS Human Capital Management. "Strategic human capital management will be playing a more central role in performance management moving forward, as companies recognize the importance of driving accountability into operations."

Linking employee performance to business strategy remains an elusive goal for many organizations for several reasons. One is the inability to bring all of the performance information together. Most businesses fail to achieve full integration of financial and HR systems. "You need to link data from multiple systems," says Farhana Alarakhiya, associate vice president of analytics applications, Cognos. "All of the information necessary doesn't reside in one system. The issue lies either in having the ability within their own organizations to bring that information together or in being able to buy packaged applications that can bring all of that information together."

But technology alone won't lead companies to attain world-class performance in this critical area. A well-developed, technology-based system will help to improve the consistency of application across the organization, a commonly cited barrier in a recent survey of HR professionals and line managers by OnPoint Consulting. However, technology does not address managers' skills or commitment to developing people, nor does it clarify the link between pay and performance.

"Companies will invest a tremendous amount of money in technology to prove that their system works," says Jennifer Forgie, an OnPoint consultant. "But it comes down to the skill of the individual manager in creating clear, measurable goals and providing ongoing coaching and enforcement. While technology can facilitate goal-setting and achievement and can be effective, without the right mind-set, competence, and reinforcement, technology can do more harm than good because it can create frustrations between employees and managers."

Forty percent of the respondents in OnPoint's survey said that managers don't set clear and measurable goals for their direct reports as part of their performance management process. The survey points to four primary obstacles in achieving intended objectives: lack of clarity between pay and performance; inconsistent application of the system across the organization; managers' lack of commitment to developing people; and managers' lack of the skills necessary to use the system effectively.

Best practices are emerging, albeit slowly, and differ from industry to industry. "Best practices depend on their industry's key drivers for growth and the goal of the company," says Alarakhiya. "Companies that are moving ahead are taking packaged applications and adapting them to their particular business needs. It might be sales productivity in one firm and be a completely different set of measures in another company."

Often, best practices are confined to one area within a company. "Unfortunately, employee performance management and overall performance management is often done in pockets," says Goren. "It's not driven throughout an organization at enterprise level. It's often a pilot project in one area or another."

Regardless of industry and company differences that separate the specifics of workplace alignment programs, consultants, academics, and HR professionals agree that the following general best practices are universally important:

• Strengthening the links between HR and finance. Few organizations have fully integrated their financial and HR systems. Best-practices companies have created a single database for workforce information for one version of the truth for performance data.

Another problem is that often finance lacks a firm grasp on return on investment for key HR initiatives that are essential in sustaining a successful employee performance management system, such as training and education, and a solid understanding of how those activities support company objectives. In best-practices organizations, finance and HR have beaten the "silo" mentality and are collaborating with each other.

• Linking monetary rewards to performance goals. A workforce alignment program without consequences for success or failure is like a shark without teeth. But clarifying the link between pay and performance is an uphill battle for most companies as they struggle to quantify the value of employee actions. This is why many businesses focus on pay-for-performance linkage in their sales organization, where performance outcomes are most visible and have enormous impact on business success, according to John Colbert, vice president, service development, BPM Partners. But best-practices companies develop metrics that map the performance of all employees who function at a level that can impact business objectives.

• Selecting the most meaningful metrics. Best-practices companies engage a cross-functional team in setting performance metrics. "A best practice is having top executives across the organization at the strategy table -- operations, finance, marketing, sales, the CEO -- all come together," but it's uncommon, according to Goren. "It's wishful thinking at most organizations, and metrics usually come from one department."

• Avoiding metric overload. "Many times, people will err on the side of too many goals and objectives, and the point of creating the objectives is to focus people on high priorities that will drive the business," says Forgie. "Creating more of them isn't necessarily better. The key is to keep those objectives aligned with the strategy of the department and the organization."

• Using scorecards. The balanced scorecard methodology enables companies to single out employee learning and growth as an area that needs to be managed from a strategic perspective, but still relatively few companies adopt it because of its complexity. In fact, in the past, balanced scorecard companies frequently left HR outside of the system. Now, some best-practices companies are adopting a more comprehensive methodology and tying departmental scorecards with their own metrics to a companywide scorecard that includes HR metrics to help shape the organization's future. "But the adoption rate for scorecards is slow because of the difficulties of linkage," says Alarakhiya.

• Taking a collaborative approach to setting performance objectives. The most advanced businesses include employees in creating performance objectives. A top-down approach in which only the managers set goals discourages employee buy-in and commitment to achieve goals.

• Providing frequent performance updates. Forgie recommends providing employees performance feedback on a minimum of a quarterly basis. "With the fast pace of business change today, goals you set at the beginning of the year can become obsolete two months down the road," she says. "And this gives managers the opportunity to reshape goals so that at the end of the year it's just a summary and not a surprise."

The Whole Package at Eaton Corporation

Eaton Corporation, a diversified industrial manufacturer with over $12 billion in revenues last year, exemplifies many of these best practices.

"Eaton's employee performance management system is designed to drive continuous improvement in the pursuit of personal growth and excellence," said Billie K. Rawot, Eaton vice president and controller. "The system provides our employees with the tools and processes necessary to ensure that everyone is able to perform their best, that employees understand they are responsible for their own performance, and that our managers understand that one of their most critical responsibilities is to provide open and honest feedback to their team."

What business results has Eaton generated with its system? "We have more qualitative measures than quantitative right now. There are a couple of things that we look at. One is how much better we're getting year-over-year at managers conducting performance evaluations within the guidelines and the timelines," says says Jill C. Windelspecht, senior manager, leadership and development. "We've done some surveys of our population year-over-year, and we've seen that managers are having more discussions with their employees around development planning, goal-setting, and performance evaluation." (See case study "How Eaton Formed the Link." )

The Beauty of a Single Metric

Selecting the right metrics is essential in aligning workforce performance with corporate goals. "But too many metrics creates confusion," says Goren. "Sometimes organizations that take performance management to the nth degree are shooting themselves in the foot because they establish so many metrics that there's no focus."

Within General Electric Co.'s highly developed employee management system, there exists a single customer-focused metric that the organization emphasizes in its efforts to align its workforce with its corporate objectives. The metric is Net Promoter Score (NPS). The concept is simple: Ask customers to rate their willingness to recommend the company on a scale from 0 to 10. Customer ratings with a 9 or 10 are promoters, while those with a 0 to 6 are detractors. The rest, 7 and 8, are known as "passively satisfied." Take the percentage of promoters and subtract the percentage of detractors, and you arrive at a Net Promoter Score, which serves as a baseline of customer loyalty.

GE has married NPS to Lean, a continuous improvement methodology that focuses on eliminating waste from business processes. For example, if they learn from NPS that a customer is not happy, they take that feedback and do intensive Lean engagements involving employees from across the business. Last year, they did more than 150 such events, including a huge cross-section of employees whom they took away from their jobs for two weeks. During the first week, the group maps the process behind the issue that NPS feedback reveals is causing the customer pain. In the second week, the cross-functional group works on how to eliminate steps that don't add value to the customer and/or shrinks wait-time gaps. The result is a faster, easier, and more efficient process that makes the customer experience better.

"NPS gives every employee the line of sight into how their team is doing with customers," says Bob Mitchell, president and chief executive officer of GE Capital Solutions Fleet Services. "Lean empowers them to make the changes that link directly to business performance and goals. The annual goals of our senior managers in marketing, fulfillment, and services are tied to the NPS score and to helping to drive awareness across the organization of what those scores are. Scores have been rising every year since 2003, when we implemented NPS, and when scores go up, orders also go up. The trend we see is the most important part of NPS."

Change Management for Leaders

According to OnPoint's survey, a key factor that differentiates top-performing organizations is the ability to align performance management with change events and strategic initiatives. Best-practices companies know that their high-performing leaders are their greatest asset and are concerned about retaining those top performers, particularly during times of change, when their performance is most vulnerable. Retaining, developing, and keeping them functioning at full potential while maximizing their influence within the business is of paramount concern.

Recognizing the importance of keeping its leaders fully engaged, particularly during critical transition times in their careers, American Express undertook a program to ensure that leaders get up to speed quickly in a new role and resume adding value to the organization. The program is called "The First 90 Days."

"During this period, leaders will either sink or swim -- either get up to speed quickly or leave the organization. By focusing new leaders on the types of behaviors that will have the most immediate impact, such as forming the right coalitions, increasing one-on-one contact with their leaders, it helps them to get quicker wins," says Paul Leone, Ph.D., manager of assessment and evaluation. "We've trimmed away some of the down time that high performers typically experience [during a time of transition] by more than a month."

The only technology tool required to support the program is a statistical analysis package that Leone uses. "We report at different levels of evaluation via questionnaires after the program is completed. We send a survey to participants, and they report on the amount of time they save by participating in the actions of the program." And Leone has quantified the results. "We've achieved over 300 percent ROI per participant when considering the cost of the program vs. time saved and value added to the company."

Linking employee performance to business strategy is an ambitious goal, but one that offers big payoffs. The Hackett Group reports that the average Fortune 500 company can generate a nearly 15 percent improvement in earnings before interest, taxes, depreciation, and amortization (EBITDA) -- netting almost $400 million annually by doing so.

Before finance executives start salivating at the prospect of such a substantial sum, businesses will need to keep looking for the best means of measuring intangible assets such as human capital. "The spread of performance management out of the finance department creates a tremendous opportunity for finance to become a thought leader within their organization, a performance management guru," says Goren. "But they'll have to find ways to build the bridges that drive accountability into operations and recognize the nonfinancial as well as the financial aspects."

CASE STUDY: How Eaton Formed the Link A Company Aligns HR Using a Three-Phase Process Among those companies that have adopted a pay-for-performance model, electronics manufacturer Eaton Corp. has seen a steady rise in its employee performance management ratings. "When we first designed the system, we wanted to make sure that employees would clearly understand that the better they performed, the higher their pay would be," says Nicola Rae Deskovich, director, talent acquisition, HR. The company instituted a dual rating system for senior leaders and business unit leaders that provides employees a score for how they accomplish their goals and a rating based on how they demonstrate behaviors that align with the company's leadership model and philosophy. "This means that somebody might get outstanding results, but if they run people over along the way, their compensation is going to be reflective of that because their competencies aren't aligned with what we believe about how individual contributors should act within the organization," says Jill C. Windelspecht, senior manager, leadership and development. "People might have great competencies and behaviors, but if they don't get results, their compensation will be aligned as well." Part of the employee's bonus is tied to the overall performance rating. Each business unit has different metrics, but they all cascade from the CEO's goals for the year. "Eaton is a balanced scorecard company, and also each business unit has different scorecards with their own metrics that all tie together," says Windelspecht. A single database for all workforce information affords the company "a single version of the truth" and a Web-based platform enables employees and managers to view progress at any time. "The system allows employees to track their performance against metrics to find out about personal professional goals, and it also allows managers to manage individual performance by coaching, giving feedback, and growing employees rather than just getting them to hit the numbers," Windelspecht says. Eaton's process is collaborative in terms of establishing goals and numbers. Rather than a top-down approach, there's alignment among senior leaders and frontline managers to understand the business's overall goals. The process involves three phases. At the start of each year, there's discussion between manager and employee about how the employee will contribute to making profit-plan and strategic-plan goals. Midyear, there's a formal progress check focusing on execution of goals, wherein the manager provides coaching and feedback. The end-of-year evaluation phase focuses on accomplishment. Eaton's system is relatively new, and efforts to attain employee buy-in are ongoing. Prior to its implementation about three years ago, there was no single standard across the company. Many parts of the organization were already using some form of performance management process, and other parts were doing nothing. "Employee reviews at the beginning were mixed," says Deskovich. "The degree of change varied based on which part of the organization you were in, so it was a complex change effort. It was important that it was not viewed as just a corporate deployment, so we focused on why it's important. There was a lot of communication through newsletters, emails, bulletin boards, and publications from HR. We wanted to help position managers for having conversations with employees from the get-go about the new process, explaining their role and the employee's role and how it works for them together. Where we know that happened, it seemed to be very effective, but there have been varying degrees of success."