Strengthen Performance Planning to Drive Performance Management
March denotes the end of a fiscal year, so April becomes the best time for performance planning and target setting. A carefully designed performance planning process can boost efficiency and facilitate the appraisal process at the end of the year.
In the volatile market environment, it is a challenge for each company to determine appropriate performance indicators and targets that could both cater for the strategic planning of the company and sufficiently motivate employees. The extent to which Key Performance Indicators (KPIs) is properly determined and cascaded will directly influence whether performance appraisal reflect the actual results of the company and the employees. If performance planning tends to be sloppy, the whole performance management system will doom to be superficial and defeat the original intention of the system. Proper performance planning are prerequisite to successful strategy execution, and KPI setting serves as the key engine in driving the performance management cycle.
Principles for Performance Planning: Emphasize Both Process and Results
In the process of performance planning, senior executives would identify KPIs for their departments and employees that are consistent with business strategies by adopting the SMART principles, i.e. Specific, Measurable, Attainable, Relevant and Time-based. Targets should also be set according to the SMART principles to reflect the actual situations of the company and abilities of employees. Yet the sole focus on results is apparently not suitable for all departments and positions. Many companies conduct comprehensive performance assessment with various factors taken into consideration to ensure both results (achievement of KPIs) and the process (competencies of employees) are measured.
Apart from key goals and responsibilities, competency assessment is vital for encouraging positive working attitude, teamwork and prevent relentless drive for results at the expense of sustainability. Comparing to KPIs with rather short-term focus, competency assessment focuses more on the long-term development of employees; this will have far reaching implications on strategy execution of the company.
Setting and Cascading KPIs
Cascading KPIs from the top is a common approach for performance planning. It ensures the alignment of KPIs to company strategies, balancing short-term profitability and long-term development. Executives should cascade high level company strategies into specific and measurable tasks for departments and individuals. For example, if the annual goal of the company is to raise profits by 30%, it can be translated into increase in revenue and cost control. Revenue generation could include goals such as “improving revenue from underwriting”, and “improving revenue from securities brokerage”, etc. Further, to improve revenue from securities brokerage, Department of Research is supposed to complete publish 10 research papers on IT companies in the performance year, Department of HR has to ensure vacancies in Department of Research are 100% filled, and Department of Legal and Compliance has to complete the necessary declaration on time. As illustrated, cascading of the overall strategy across different departments and levels of the company can ensure each department to work coherently towards the realization of company goals.
Department Level: Financial Vs. Non-financial Indicators
In terms of category of performance indicators, KPIs generally consist of financial and non-financial indicators, both including qualitative and quantitative indicators. The weighting of these KPIs differ among departments. Front office departments put more emphasis on financial indicators such as investment scale and profit growth. Some common non-financial KPIs for front office including market share and customer satisfaction. The roles of back office departments are more supportive by nature, thus heavier focus on non-financial KPIs. For instance, HR department has to ensure job vacancies are filled and reduce staff turnover; while the Legal and Compliance Department has to complete certain legal documentation to support front office business. Therefore, the weighting of financial KPIs is relatively lower for back office, with cost control being the main financial KPI.
Individual Level: Considerations on Cascading KPIs
After confirming KPIs at department level, department heads have to define the individual responsibilities and performance expectation of the employees to cascade the department KPIs to each individual. OGSM process is a typical top-down model for cascading KPIs, which is shown as follow:
Cascading of KPIs varies across company scale, grading system and current business situation. The OGSM model serves as a good reference for those companies with clear organization and grading structures. Meanwhile, smaller companies or startups implementing flattered grading structures, can consider to set congruent KPIs for individuals in the same department or similar positions, but differentiate by assigning different KPI weighting across grades. In such cases, a department head has to assume more responsibility for achieving KPIs of the department, and more focus will be put on assessing his/her managing and organizing competency. The focus for other employees is to complete work assigned by their managers, so more emphasis will be put on assessing work efficiency and quality. Employees’ abilities and past performance can also act as a reference in the KPI setting and allocation process.
Moreover, the performance management experience and skills of a department head impacts how KPIs are set and cascaded, as he or she is responsible for coaching and implementing performance management at the department level. Every individual is part of the performance management system, considering different responsibilities, capabilities and limitations among individuals, while ensuring strategy alignment and fairness of the process. Department heads have to communicate with each employee to set KPIs and determine targets during performance planning; subsequently they have to provide coaching and feedback, and make adjustments if necessary. As mentioned before, proper KPI and target setting can increase efficiency of mid-year progress review and year-end appraisal, making the results effectively reflect the condition of core business as well as performance of departments and individuals. It can improve the sense of responsibilities among employees and creditability of the overall performance management system. Therefore, department heads have to spare the effort in polishing KPIs and use them as the important vehicle in performance planning at the beginning of a year.