Appropriate goals and links to rewards sharpen focus on bottom line

Analysis of key business drivers creates foundation for engaging employees
By Robert Tarvydas Claudine Kapel
|Canadian HR Reporter|Last Updated: 06/18/2002

With goals such as cutting costs and improving customer service topping the list of organizational agendas, getting employees focused on key business priorities has become an urgent priority.

The best way to achieve this alignment is to set meaningful individual or team performance goals and then link the achievement of these goals to rewards such as incentive awards, merit increases or other forms of cash and non-cash recognition.

While this may seem intuitively obvious, many organizations struggle with how best to align employee performance with business objectives.

The traditional approach

The process of goal setting begins right at the top with executives establishing corporate-level goals.

In most cases, however, the business units, departments, sections and individuals all set their own goals at about the same time with minimal (if any) co-ordination between levels. Often, lower level goals are based on the previous year’s goals or on each level’s often-divergent interpretations of current priorities.

This approach may require some thought of corporate objectives, but even then, they are typically not clearly linked with goals higher up in the organization. The key problems with this approach are the lack of a cascade effect and the absence of any analytical rigour.

A cascade effect is created when the highest level of an organization sets goals first and then the next level and sets its goals based upon them. The process continues down through each level of the organization to front-line employees or work teams. This cascade creates a clear view of how each level in the organization supports the level above. This also creates the line of sight from individual contributors, right up through the overall corporate objectives. In a proper goal cascade, individuals have a clear idea of how their actions contribute to organizational success.

The lack of rigour inherent in traditional goal-setting processes stems from the fact that employees and managers set goals based on their own interpretation of what is important.

Without clear direction on organizational imperatives, employees and managers will decide themselves. They may believe they are setting objectives based on high-level business goals, but there is no process to test whether the objectives have the most direct link to the key drivers of performance.

Finally, the traditional approach to goal setting does not provide any insights into how goals should be calibrated for the purpose of determining rewards. Ideally, there should be a direct relationship between the organizational impact of the results achieved and corresponding rewards.

For example, typical incentive plans have target, threshold and maximum goals aligned with specific bonus pay-outs. These goals correspond with increasing levels of performance. In most cases, the evaluation of different performance levels is based on guesses that may have a minimal relationship with the resulting organizational impact. The traditional approach to goal setting lacks the analytical rigour needed to identify the differences in performance between, for example, a threshold and target goal.

A new approach

The two key problems with the traditional approach — the absence of cascading goals and the lack of rigour — must be overcome in order to create a more useful goal-setting process.

A holistic, analytical approach to goal setting should identify the ways employees at all levels make the most meaningful contribution to organizational performance. This information can then be used to set meaningful goals reinforced through the rewards program.

There are five key elements to an effective goal-setting framework:

•clarify strategic priorities;

•identify value drivers;

•educate employees about value drivers;

•line-of-sight goal setting and alignment with rewards; and

•performance feedback.

The first step in the process focuses on developing a common understanding of the organization’s strategic priorities — either specific corporate objectives or strategic themes. Organizations typically identify organizational objectives in the business planning and budgeting processes. If these processes are done well, all that is typically required at this point is to prioritize the corporate objectives. In the absence of formal strategic or business plans, it may be necessary to supplement this step with a strategy clarification process.

The second step is to identify the “value drivers” that support the strategic priorities. Value drivers are those factors that have the greatest impact on organizational performance and are identified in the process of building and analyzing value trees that define the organization’s business model from the financial, operational, customer and employee perspectives. This is an analytical approach that uses real data to model performance from several perspectives.

Once the key value drivers are identified, those that employees have the most impact on can be selected. It is these employee-driven value drivers that form the basis for good goal setting and for creating links to rewards programs. This approach not only identifies which goals are most appropriate for employees, but also provides insights into how these goals should be quantified.

When the value drivers have been identified, they need to be communicated. This information provides employees with insights into the value creation process that allows for more informed decision-making and a better understanding of their role in achieving priorities — an important element in enhancing employee engagement.

A cascading goal-setting process uses the value driver information to identify the most appropriate goals at each level in the organization and then drives these down through the organization to the individual contributor. An essential element of the cascade is that the goals at each level are used as the basis for setting the goals for the level immediately below. This ensures that a clear line of sight is maintained and that goals at all levels are strongly aligned with higher level goals. The link to rewards ensures that employees understand that the organization is willing to reward them for the accomplishment of those goals.

The final element is performance feedback — giving employees at all levels feedback into how their performance actually supported the achievement of organizational goals. Value trees can be used in reverse to accomplish this. They show employees how the accomplishment of their own goals supports goals at each subsequently higher level in the organization. This feedback is an essential element of continuous improvement and organizational learning. Feedback is also a key factor in employee engagement.

While the most obvious application of this process is in the setting of goals for annual incentive plans, the same approach can be used in linking performance to changes in base pay or even recognition programs.

Additional benefits include improved employee engagement — employees willingly increasing their discretionary efforts, better decision-making and enhanced organizational alignment.

Robert Tarvydas is a compensation consultant in Towers Perrin’s Calgary office. He can be reached at (403) 261-1413. Claudine Kapel is a compensation consultant in Towers Perrin’s Toronto office. She can be reached at (416) 960-7515.

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