Performance management involves three clear stages, but is best viewed as a yearly cycle, and is often referred to as the performance management cycle:
1.) Target Setting (Start of the year)
2.) Observation, Informal Feedback & Training Period (During the year)
3.) Assessment and Feedback (End of the year)
This process is repeated every year, hence the performance management cycle.
The performance management cycle enables the company to optimise the contribution of each employee and ensure this contribution is focussed towards enabling the company to reach its growth and profitability targets.
Motivation, while not specifically mentioned above in the performance cycle, should be ever-present; it acts like a catalyst driving the performance management cycle. In simple terms, there are two elements to motivation:
1.) Effective Target Setting
2.) Motivating employees to reach those targets
HOW TO SET EFFECTIVE TARGETS
To motivate an individual to perform within a business one should set a goal and should reward the individual for achieving it. This goal must also be aligned to organizational goals, if you are to achieve your business performance targets. So there are two elements to effective goal setting within a business:
1. Establishing Organizational Goals.
2. Establishing Effective and Business Aligned Personal Goals
Step 1: Establishing Organizational Goals.
This is an exercise normally carried out in the boardroom; the executive team should establish measurable goals in areas of profitability, revenue, customer satisfaction, employee satisfaction, etc… Some example of business goals are:
- “Achieve 95% customer satisfaction”
- “Increase annual revenue by 10%”
Step 2: Establishing Effective and Business Aligned Personal Goals
The recommended way to create effective goals is to follow the SMART system, which states that goals should be SPECIFIC, MEASURABLE, ATTAINABLE, REALISTIC and TIME-BOUNDED.
However, in this increasingly competitive world, the term STRETCHING has been added to form SMARTS, which is about pushing the individual a little beyond what they feel they can achieve at any one time.
Latterly, the term ALIGNED has been added to the end to form SMARTSA, which represents a final check to ensure that these goals are aligned to your business goals, ensuring each employee is maximising their contribution to your overall organizational objectives.
An example of a SMARTSA goal might be
“Turnaround 95% of customer queries within the department’s 4 hour targets schedule”
HOW TO MOTIVATE EMPLOYEES TO REACH THOSE TARGETS
A Bonus or Incentive scheme is one of the most common and effective ways to motivate employees to achieve targets. There are many types of incentive scheme, but we will focus on the area of cash based incentives and the key points to consider when developing them:
1.) Setting the Level of Reward
2.) Establishing the Frequency of Payment
Level of Reward
This is a surprisingly straight forward question to answer. The most effective way to do this is to establish the market rate for the position in terms of Total Cash Compensation (Base Pay + Bonus). This information can be purchased from a professional salary survey provider or can be collected (less reliably), using your own surveys of the market.
Frequency of Payment
Studies show that the shorter the time gap between the completion of a goal and the receipt of the associated reward, the higher the resultant motivation level. So, how does this translate to bonus design? Simply, it suggests that a bonus paid quarterly, (in recognition of performance in the previous quarter), may be more effective in motivating employees than an accumulative bonus paid at the end of the year in recognition of performance across all four quarters.
A note of caution however as bonuses paid on a quarterly basis can lead to short term focussed behaviour that can be detrimental to the long term focus of the business. It can also increase administration time and costs.
In practice, it is about doing what fits your business best, and many businesses change back and forth from annual or quarterly payments as their business environment changes. Some even opt for twice yearly payments.
Other businesses have been observed to operate a hybrid approach, with a proportion of the bonus paid quarterly for achieving key short terms goals and the remainder paid annually for achieving longer term development goals.
There are many permutations here and it is about choosing the model that best suits your business circumstances.