As interest rates continue to rise with stock prices and business values falling, owners and shareholders are going to be examining performance which typically means raising targets and increasing incentives to motivate extra effort. However, is that the best way to maintain upward momentum?
It wasn’t so long ago that a brutal economic downturn cleansed excess expense and inefficiencies from daily operations and you might think that the survivors were already lean in the right places. In tough times, however tightening a financial metric is interpreted as cutting cost which in time likely results in reduced service or quality that affects future results.
Asking for the same or even more with less does not address “how”, or the behaviors that need to change or why if it were that easy, it has not been possible to scale these heights previously?
After articulating expectations owners/shareholders/boards expect the CEO to respond with a plan. Team members are sent scurrying to develop a course of action that they believe in aggregate is achievable while mitigating risk for the organization. In other words they self-populate their performance goals.
Organizations spend a great deal of time analyzing annual and quarterly financial statements but, ironically less time analyzing future projections where in theory future value lies. For example we tend not to breakdown human behavior or mechanical process in an attempt to predict how change might add value which is inherently difficult for managers who have done something the same way successfully for years.
Understanding and identifying minor changes to behaviors and processes that can enhance profitability may be best achieved by an outside analytics group such BIOPS who working with management will dissemble current activities, measure their impact, and develop real-time Key Performance Indicators (KPIs) no matter how small while suggesting course corrections toward achieving those revised targets.
When management is expected to collaboratively self-populate their targets, it follows that they are also likely to be responsible for reporting results against them. No matter how objective, it is extremely difficult to avoid some degree of inadvertent bias. This may be less of a problem where targets are whole company or financial measures, subject to disclosure and audit, but when goals to determine incentive payments are custom designed then some independent assessment and analysis may be advisable.
Most of us can tell when a goal has been met but identifying degrees of achievement below or above target is more difficult for a board. A scale measure (e.g. 80% of production equates to 80% of the incentive target) helps overcome this recognition challenge but unless independently verified exposure to inadvertent bias remains both in the setting of targets and assessment of achievement against them. Management is often conflicted adding another barrier to making the changes required to meet those enhanced goals.
If higher targets have not previously improved long term performance or changed methodologies and with more compensation at risk, perhaps it is time to start to analyze outcomes; why results are what they are and to validate target setting? Sustainable organizations constantly monitor process and behavior to identify performance improvements.