It’s Time to Fine-Tune Performance Management

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.

Technology now allows businesses to project, estimate, measure, and report on all kinds of business functions. And they use it heavily in performance management. It seems like a good idea: set a broad set of standards across the organization, measure those, and you’ll have a fair way to judge employees work in improvement year over year.

Of course, that’s easier said than done, and today’s guest says that many companies are using rubrics that take an overly narrow and short-term view, and that one major downside of this is, they kill collaboration.

Heidi Gardner is a distinguished fellow at Harvard Law School and she co-wrote, along with Ivan Matviak of Clearwater Analytics, the HBR article, “Performance Management Shouldn’t Kill Collaboration.”

Hi Heidi, thanks for coming on the show.

HEIDI GARDNER: Hi. Thanks for having me.

CURT NICKISCH: First, just to get some definitions out of the way, we’re talking here about individual performance management, but trying to make it align and reflect business level goals. Is that right?

HEIDI GARDNER: What we’re talking about is really trying to figure out how you measure individual people in a way that they are focused on accomplishing what matters to their organization, say their company. And what matters to their company, ultimately, should be things like customer satisfaction. And right now what we find is so many companies are focused on individual metrics that just focus people on what’s right in front of their nose. And sometimes that runs counter to what’s good for the company or good for the customers.

CURT NICKISCH: But what’s right in front of their nose should be what’s good for the company and for customers?

HEIDI GARDNER: Not really. Right now what we find is that a lot of people have goals that are suboptimal. Take for example, a sales function. A lot of salespeople are incentivized to simply increase revenue, but they might not necessarily be increasing revenue on the right set of products, or they might be so far out ahead of their organization that they’re drumming up sales that their operations group can’t actually fulfill. They might be behind production schedule, but the salespeople are still motivated to go out and sell more. But that’s not good for customer service because then there’s going to be a big delay.

There are times when the salespeople are so focused on closing a deal, and moving on to the next one, that they don’t take time to document what the client actually needs. Or in fact, they might not even take the time to really explore what’s best for the client. They’re focused on selling what they get motivated and rewarded for selling. And in those instances, they’re driving certain metrics like revenue, but it’s not really sustainable, it’s not strategic. And we have to realize that not every dollar is an equal dollar.

CURT NICKISCH: I want to understand how we came to this point, how were performance management systems set up? And what is it that works about them? And where do we start to see where it breaks down?

HEIDI GARDNER: There’s a real logic in measuring people’s individual outcomes because they have control over them, or at least they have a great degree of influence over them. And the logic there is that we only want to hold people accountable for the outcomes that are within their control.

And so for a salesperson, that could be, how hard do you work? How many customers do you chase? How many deals do you close? But what it fails to account for is the second and third order effects of them accomplishing their goals without really understanding how that has an effect on the larger organization and on the customers. And what we’re advocating in this article is to take a broader perspective, not in substitute for individual goals, but in addition to. And we really want people, leaders, to start with what is it that the organization is trying to accomplish?

Is it customer service? And reverse engineering and saying, “How do people actually need to work together in our parlance? How do they engage in smart collaboration, bringing in exactly the right people and departments regardless of what part of the organization they sit in order to create the best strategic outcome?” And that’s what a lot of performance management systems are missing right now, is that more macro view of getting people to work together in order to accomplish these bigger tasks. And we’re still focused, almost exclusively, on those narrow individualistic ones.

There is some real rationale in that you don’t want to hold people accountable for accomplishing tasks that are so far outside their domain that they feel helpless to influence them. And it really is critical that you have this multi-part scorecard and you’re holding people accountable for their individual outcomes as well as for the part they play in accomplishing these bigger objectives.

CURT NICKISCH: What are some of the other common mistakes that companies make currently that what you’re suggesting would help fix?

HEIDI GARDNER: One of the common mistakes that companies make now is confusing collaboration with cross selling. And that’s a subtle way to think about the difference in… Back to the salespeople, what is it that we’re motivating them to do?

So, if you’re thinking about a customer centric mindset, you really want to motivate your sales people or customer service people to understand where’s the value that we are creating for those customers? Is it genuinely going to create extra value for them if they buy additional products or services from us? If you can justify why that’s true, it might be because we can offer them a bundle price. It might be because we can understand their business better if we’re in there serving different parts of their organization. It might be the deeper relationships we establish creates more trust, and we can work better as partners together.

There’s a whole variety of reasons why a customer might be better off expanding their relationship with the supplier, but the salesperson needs to understand where that value is created and be able to articulate that to the customer and then only pursue those opportunities that truly add value to the customer. They’re bringing in a broader range of services, they’re bringing in more products, they’re bringing more expertise, and through that, they’re creating value for the client.

If what they’re motivated to do is simply sell more, more, more, tick the box. How many products did you sell? How many divisions did you bring in? That’s a very self-serving way to go about serving the clients.

CURT NICKISCH: What’s one of your favorite things that you’ve seen where you’ve seen this really go awry, that the personal incentives in some of the companies that you’ve worked with or researched, do you have a favorite story?

HEIDI GARDNER: I actually work with a lot of the clients of my own clients. I work with a lot of professional service firms, and in doing that work with them, I go out and talk to their clients. And the worst stories often arise around January, when firms are changing their comp system, and the clients say, “I can tell that firm X has just implemented a referral bonus,” because the customer service reps, the salespeople, the partners, whoever is serving them, come in and try to do this cross sell. “Hey, can you have lunch with my partner who’s an expert in tax?” “Hey, do you want to try out this new software we’ve got?” And when the customers feel like they’re being sold at or cross-sold to or up-sold, it cheapens the relationship a lot. It makes them feel like whoever is serving them is treating them just as a source of revenue and not as a real partner. And I always say, as soon as your client can figure out your compensation system based on the behavior of the individuals in there, you’ve probably got something wrong.

CURT NICKISCH: So much of this has to do with short term values and long term value, the tension between those two. Is this really a reflection of the fact that companies can’t do a great job of rewarding employees on an annual performance basis for creating long term value?

HEIDI GARDNER: Well, it’s actually another one of the problems that we see in the typical performance management system, is that the organization says that it values these long-term projects, getting to net zero carbon emissions, for example. But that’s a multiyear, multidisciplinary, multifunction project.

Companies say, “That’s where we want to head,” but they co-mingle that big aspirational goal with a bunch of short-term, much more easily quantified metrics. And guess which one’s people focus on? It’s not surprising. The other thing to point out is that when you have shorter term, easily quantified, individual metrics, it’s much easier to manage. It really doesn’t require a whole lot of leadership. If I can hold you to some very specific tasks that you can accomplish by yourself in the short term, I don’t really need to do very much to motivate you, or so it seems, because your incentives will guide your decision making, guide your allocation of resources, make you focus on whatever’s right in front of you.

CURT NICKISCH: Is it all based on poor incentive structures from organizations themselves? Or are the tools that they use to measure it also a problem?

HEIDI GARDNER: When anyone sets up a performance management system, they have to have the right supports in place, and that involves some of the data that gets collected. People need to have real confidence that the data represents what leaders believe it represents. And having accurate data that’s timely and trustworthy is truly essential. But I don’t think it’s the only thing. We’re not measuring productivity of robots here. We’re also measuring people. And part of what is hard to measure in the performance management system is people’s behaviors.

And we, for sure, want to talk about collaboration as a means to an end and wherever possible will measure those ends. Customer satisfaction is a great example. Getting people to work together across sales and installation and follow on customer service in an integrated way to improve the whole process is something that we can measure. We measure those customer satisfaction outcomes, but we also need to measure more of the behavioral inputs.

And this is where it gets really tricky. People will generate interim results, for example, thought leadership. They might invest a huge amount in developing expertise in an area and writing that up in a way that generates a stronger reputation for the company and for themselves and for the products. How do you measure exactly the value of that? You could try to track how many customer inquiries came on the back of it. You could try to track the close rate and what that was worth, but sometimes those efforts have very diffuse outcomes that are incredibly valuable.

And what you actually want to track is who’s putting in the effort and generating high quality thought leadership papers and reward them for that, even if you can’t draw a direct line to some measurable outcomes.

CURT NICKISCH: So as far as talking about solutions, what’s your biggest recommendation for changing performance management systems so that they reward the right things?

HEIDI GARDNER: We need a multifaceted, a multi-part scorecard. We need some of those objectives focused at the biggest, broadest overarching goals. For example, customer satisfaction could be one of those. At the next layer down, something focused more proximal, something closer to the environment people are working in, say a department or a team goal.

That’s important because in as much as you want people focusing on those broad objectives, how do you get sales and operations and customer service working together? You also want people within sales to be figuring out how do we have a better campaign? How do we sell this product better? How do we speak to customers in a way that really resonates with them? And you want those sales people sharing ideas with one another. Likewise, in every other department you’ve got going on. And it’s really important to have people focusing on the local team, people in the similar function that they’re in, and how do they make their jobs better or easier or more profitable, whatever their goals are for that department.

And then you come to the individual goals, and that’s the classic ones. How much does an individual salesperson produce in a certain way? Or does somebody meet their on time delivery in an operation sense? Or a whole variety of metrics that I think a lot of people are familiar with. Having those three levels of metrics, and at increasingly broad levels, is something that I think is absolutely foundational to getting people to work together to achieve something that is, ultimately, strategically important for the company, but otherwise will get lost in the shuffle of mirror individual metrics.

CURT NICKISCH: When you’re talking about levels, you’re not talking about you need to do this first and then something that is a second or a second or a third level. Those are not priorities. These are all common priorities that may be weighted differently in your bonus or incentive structure.

HEIDI GARDNER: Or it could be different actions that somebody could take. In the instance of a salesperson, they might have a quota that they need to hit.

CURT NICKISCH: And this would be the old model.

HEIDI GARDNER: This is the old model.

CURT NICKISCH: The simple, the one thing you’re measured on.

HEIDI GARDNER: The one thing you’re measured on is, do you hit your quota or not? And again, it’s important so that everyone knows that everyone else is pulling their weight. The next level up is imagine that salesperson is part of a key account team. They’re responsible for hitting their quota of selling product X, but there’s a stronger waiting for them that the client that they’re serving is profitable and growing. And that will incentivize the salesperson when they’re in there selling product X to keep their ears to the ground about other opportunities and make sure they’re passing those other opportunities on to other members of that key account team. And it will incentivize them to do more than just that cross selling, “Hey, I’ve got product X and she’s got product Y, so let me pass the lead on and throw it over the wall,” but in a much more strategic way of engaging with the client.

Let me understand what their needs are. Let me understand the personal priorities for the individual that I’m serving. How do we help them get ahead in their career? How do I learn more about this industry so that I can give more tailored advice to this client? Lots of things that I could do as a salesperson that are well above and beyond just selling product X. And if I have a team goal where I’m helping everyone grow our business at that account, it motivates me to take a different set of actions. That’s level two, is the team goal.

Beyond that, I might need sales to be working with operations who’s going to develop the product and customize it for that customer. And I might need to work with the install team to make sure they have all the information about what that customer really wants.

I might need to work with the training function because they’re going to help the customer really know how to use that product and, ultimately, with the customer service team, who’s going to be responsible for the long term care and feeding of that client. And I should have some goals, as a salesperson, for how satisfied that customer is in the long run because what I sell to them, right at the get go, will influence how happy they are with our whole company down the road. And I should have some skin in the game in making that customer satisfied based on the decisions that we make, right in the very beginning. And that overarching goal of customer satisfaction in the long run isn’t something that I directly influence day in, day out, but I play enough of a role in enabling other people to do their job better, that I should be incentivized in helping that to happen.

CURT NICKISCH: How do you weight those? How do you know how to weight those?

HEIDI GARDNER: We recommend that the most heavily weighted goal is that biggest goal because that’s the most strategically important one for the company.

CURT NICKISCH: You’re talking customer?

HEIDI GARDNER: Customer satisfaction, for example. If you don’t have satisfied loyal customers, you really don’t have a business in the long run. And what you want is for people across the organization to wake up every day and say, “How is it that we could improve customer satisfaction?” Ideally, they’re reading the newspaper and they’re spotting some trend and they’re saying, “Wow, this would really affect our customers down the road. What are we going to do about that?” And they come into the office or virtual room, whatever they’re in, and say, “Hey, have we thought about this? I know it has nothing to do with sales right now, but it could affect sales in three years.” Who’s thinking about that? Is there anything in today’s incentive system that would make somebody want to have that conversation? A lot of places the answer is no.

CURT NICKISCH: And one of the interesting things that you suggest is separating the conversation that you have about the compensation that comes as a bonus or reward for your performance, and separating that from a conversation about personal development. Why is that something you’re recommending?

HEIDI GARDNER: I suppose everyone can recall a conversation that they had with a manager who spent 20 minutes talking about development opportunities and career advancement. And in the 21st minute said, “And oh, by the way, your bonus this year is X.”

CURT NICKISCH: It’s what you’re going to go home and talk to a spouse or partner about, first thing.

HEIDI GARDNER: The only thing you remember is X.

CURT NICKISCH: Yeah.

HEIDI GARDNER: And you probably, in anticipation of trying to understand what X was going to be, heard almost nothing of those first 20 minutes. Maybe you heard it but didn’t process it because you had high anxiety and really you were focused on X. How much money am I going to make this year? Our recommendation, for that reason and some others, is to separate those conversations, have the discussion about compensation. Here’s how much your salary is going to change or not. Here’s whether you earned a bonus or not, and here’s how much it is. And you can link that to somebody’s performance and recap, I hope, what has been a series of conversations throughout the year on how somebody has been performing. It’s a recap conversation. Here’s how well you did against this basket of metrics, and therefore here’s how much you’re going to get paid. And frankly, that shouldn’t be a surprise.

The other thing to think about then is, what do you do in that second conversation? If you have one conversation about compensation, then in the second conversation, you can genuinely focus on what are the person’s aspirations? What kind of career moves are they hoping to make? Do they really want to advance further in the track that they’re on, or are they looking for something different?

And what will it take in order for them to reach those aspirations? Do they need to develop a different kinds off skills? Do they need exposure to different kinds of projects or different kinds of leaders? And by having that conversation separately, it allows everyone to genuinely prepare for it in and of itself and to have an honest conversation about what somebody is looking for.

And sometimes we know that it’s realistic to have two different people conduct those conversations. In many organizations, somebody just has a primary supervisor, and even in those cases, we’re still recommending that you set different times, maybe even different parts of the year when you have those two different conversations to really let people know that we are interested in the second conversation on their development. Where are they trying to go? You can offer advice on where you think their strengths are going to best play out, but keep it separate from the money.

CURT NICKISCH: One other nugget here, you recommend that people take away numerical ratings and use qualitative ones. Can you explain that?

HEIDI GARDNER: Nobody wants to be reduced to a number. When we’ve done research with different organizations that have moved away from numeric ratings, it was surprising to us and leaders in those organizations how much more motivated people were to understand where they stand, relative to their own performance, rather than being racked and stacked and numbered based on some competitive system.

CURT NICKISCH: Which you don’t have oversight into anyway. It’s hard to really…

HEIDI GARDNER: It’s hard for people to know what it means to be a three.

CURT NICKISCH: Out of five or whatever.

HEIDI GARDNER: Five or out of anything. And the forced ranked systems are absolutely killers, not only of collaboration, but of morale. And if we rack and stack people and get them to compete with one another for their place in the hierarchy, and therefore all of the follow on effects, how much they’re going to get paid or whether they get a raise, et cetera, we shouldn’t be surprised then when there’s some pretty bad behaviors going on induced by that competition.

And even if you don’t have a forced curve, the numeric rating system can be pretty demoralizing for people. Instead, rate people on whether they’re improving on key areas that really matter. Again, it’s more complicated because you have to have the capability matrix that shows people, what does it look like if you’re improving in your job? What does it look like for you to have deeper problem solving skills? What are you demonstrating when you have better communication skills? But if you’ve laid that out in a competency grid, it should be relatively straightforward for people to see whether they’re making progress or not. And ultimately, that’s what we want to reward people for.

CURT NICKISCH: Can you tell me a success story of an organization that implemented this?

HEIDI GARDNER: I’m thinking of a consulting firm that we worked with that moved from very siloed metrics. For example, they had a number of specialist consulting areas, and they had a leader for each of those areas. And everyone in those, they called them practice groups, everyone in each of those practice groups knew that their bonus depended on the success of their particular practice group. And yet the organization espoused a value of collaboration and full service to their clients. What happened, in that old system, was that everyone basically filled their bucket up first and come October, November when it was pretty clear they were going to hit their metrics for themselves and for their practice group, then they’d start to think bigger picture like, “Okay, so how do we engage more of our services for the clients that I’m serving right now?” But it was pretty much an afterthought.

They moved to a performance management system that was much more focused on outcomes for particular clients. They organized into key client teams. They set metrics for, not only the key client leader, but for everyone who served that client. And these were metrics that were revenue based in some ways, how much are we growing the client? But it was the quality of the revenue and not just the amount.

So they wanted to make sure that they were generating revenue from a variety of different sources, that the client was actually satisfied. And they took a lot of time to understand client satisfaction based on qualitative and quantitative metrics there as well. And they also included other kinds of KPIs like the diversity of the teams serving the client, because they were really looking at developing sustainable, loyal client relationships that would last for years, regardless of whether they had some churn in the organization.

So they focused on institutionalizing those client relationships and they motivated people to really keep the client’s best interest in mind. And it changed the organization dramatically. We saw customer satisfaction scores going up very significantly. They increased revenue and profitability of clients. And they were able to create reference cases. They started doing really interesting, sophisticated, future focused work for these clients. And then they could take it out to the market and say, “Hey, we’re serving this client on these very sophisticated issues and you want to learn more about that.”

It changed the organization in all the ways I just talked about strategic and financial. But on the talent side, it made a huge difference as well. People were much more engaged. You can measure engagement scores, but you could feel it in the air too. People were excited about what they were doing. They were proud to work there in ways that had been waning for quite some time.

CURT NICKISCH: Heidi, thanks so much for coming on the show to talk about your research and your work.

HEIDI GARDNER: Thank you so much for having me. Appreciate it.

CURT NICKISCH: That’s Heidi Gardner. She’s a distinguished fellow at Harvard Law School and a co-author of the HBR article, “Performance Management Shouldn’t Kill Collaboration.”

If you got something from today’s episode, we have more podcasts to help you manage your team, manage organizations, and manage your career. Find them at hbr.org/podcasts or search HBR in Apple podcast, Spotify, or wherever you listen.

This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Our audio product manager is Ian Fox. And Hannah Bates is our audio production assistant. Thanks for listening to the HBR IdeaCast. We’ll be back with a new episode on Tuesday. I’m Curt Nickisch.