Performance management solutions of today must drive long-term value creation by aligning corporate goals with that of employee Key Performance Indicators (KPIs). One way to achieve both strategic value and shareholder value is by improving employee engagement through democratization of performance management.
KPIs should never be tied to compensation, according to two professors at INSEAD who believe KPIs should neither be served as carrots for rewarding employees who have met the targets, nor as sticks to punish employees who failed to go past the finish line.
As KPIs generally determine the career progression and growth of employees, many have learned to game the system by cutting corners, under invest to reduce expenses, or come up with innovative accounting practices or revenue recognition methods to boost sales figures in limited organic growth circumstances. This traditional red-line management, as it is called, puts too much emphasis on short-term value creation by delivering on the KPIs.
Long term financial performance and value creation are at odds with the monetized and measurable KPIs. Employees are blinded by short-term targets and work in silos without any collaboration with peers and managers to achieve their KPIs. Such mis-alignment destroys the long-term value creation, diluting the very purpose of having Specific, Measurable, Attainable, Relevant and Time-bound (SMART) KPIs.
In an increasingly competitive market fraught with disruptions and innovations, long term value creation is a major factor in every business decision. A new school of thought has been proposed by the INSEAD professors who have dubbed it “blue-line management”. The blue-line management does not eliminate the need for KPIs but is used as an instrument for continuous learning to drive continuous success and improvement.
Learning organizations, as Peter Senge described in The Fifth Discipline, are places where employees continually expand their capacity and nurture new patterns of thinking rather than repeating old practices. Blue-line management, to a large extent, has upended the conventional red-line management with its deep focus on improving value creation by fostering knowledge development and experimentation.
Performance management, in the era of blue-line management, is tricky as KPIs used for employee compensation must be trusted and foster learning and continuous improvement. As the aim of all decision-making is to create long term shareholder value, a good performance management system is transparent, preventing employees and managers from cutting corners to hit their targets and remove the siloed mentality.
And, when long term value creation and sustainable growth are the guiding principles of today’s corporations, appropriate forward-looking KPIs must be identified. More often, the corporate goals or KPIs are not broken down into measurable milestones or KPIs at the employee level. The disconnect in not aligning communications with long-term performance metrics leads to different business units and managers measuring different metrics.
Performance management solutions of today should promote blue-line management. They must offer real-time awareness of performance, insights, encourage collaboration, and corrective action by seamlessly linking corporate KPIs to operational metrics and individual performance. It encourages employees to construct KPIs, both short- and long-term metrics, and goals along the four layers of the balanced scorecard. Hence, the system ensures employees receive compensation based on short term goals like sales/invoicing and cost control that are more relevant to the customer and financial perspectives. It also promotes the growth of the employee by measuring on long term goals like new innovations, new initiatives undertaken, and quality of revenue prominently featured in the learning and growth strategic layer.
Overall, performance management solutions are the panacea to most of the problems associated with red-line management. The system has to break the siloed approach plaguing many organizations, creating more engaged employees through democratization of performance management. The performance management solution must address new cultural shifts such as the elimination of the bell curve and incorporation of continuous performance assessment. The performance management system is not a mere evaluation tool but a major instrument for promoting organizational learning and aligning the individual goals to the corporate goals thereby creating long-term value to the shareholders.