Monday, July 25, 2011

Performance Management – Part 1

Since it is a little past June, many of us are involved in that ritual called mid-year reviews.
Today on LinkedIn I ran across a posting making the argument for a strong “performance management” system. What exactly does this mean – performance management?
It has the feeling of one of those consulting buzzwords.
What is Performance Management (in theory)?
According to Wikipedia – “Performance management (PM) includes activities that ensure that goals are consistently being met in an effective and efficient manner.”
That being said, I am all for performance management. We do our jobs in order to achieve a result. Some of us do our jobs better than others. Some of us do better in some areas, some do better in others. Some of us are not doing as well overall and need to do better. I get all that.
Upon thinking about it, who can be against that? Ensuring goals are being met…that has got to rank up there close with apple pie and momma.
What is Performance Management (in practice)?
In some companies it boils down to setting a series of “SMART” goals for all of its employees: the acronym standing for Specific, Measurable, Achievable, Realistic, and Timely. This sounds good too – in theory.
Problems with Performance Management
Why is this a problem? For one, most of what goes on in a company is not measured. Not even close.
So when faced with a choice of “should we measure something new in order to have a goal” or “should we set a goal around something that is already being measured”, what is the default? Go with what is already being measured.
After all, this is the most “efficient and effective” route, isn’t it? So we limit the universe of goals to that which is easy to measure - the fallacy of measurability.
The second problem can be termed the “Fallacy of annual prescience”.
Let’s say that at the beginning of 2008, when we did not yet know we were in a recession, we had a specific goal of improving our return on invested capital by 10%, measurable by NOPAT / invested capital, at the time of the establishment considered achievable and realistic over the following year’s timeframe. Put a checkmark on all the elements of SMART.
Say we ended the year where we started, with bank capital still relatively available, able to access the public markets if we dared, and our operations performance throughout the last quarter break-even or better?
By almost any measure, given what went on during the financial crisis, that would have been an astounding success, passing by far the median corporate performance and probably landing us in the top 20%. But what would it say according to our “SMART” goal? “Did not meet expectations”. No accolades (let alone bonus) for you!
Other problems to come….
I would love to hear your thoughts about performance management or your stories on this topic if you have them.
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