Metrics That Matter Connect the dots between measuring employee performance and establishing a compensation policy that rewards what matters most. For nearly a decade, Bob Winn could track each of his employees easily. He helped them set performance goals driven by high expectations. But as his employer, Engineering Systems Inc. (ESI), grew to exceed 100 employees about four years ago, Winn and other ESI managers could no longer monitor each individual with precision. Winn, a principal and director of ESI's Colorado operations, worked with president Nelson Koopman to develop metrics to measure productivity. "When we started to get big enough where tracking every employee became a management issue, we created metrics to quantify how they performed," says Winn, who's based in Colorado Springs, Colorado. Because compensation and performance go hand-in-hand, executives at fast-growing companies often seek to measure staff productivity in a fair, thorough and credible way. They want to foster a pay-for-performance culture where everyone understands what they must do to excel. By removing the mystery from compensation and setting goals and benchmarks to assess performance, an employer can send a message that it rewards superior effort and results. This can, in turn, boost morale and increase retention. The challenge in crafting a comprehensive compensation plan is to choose metrics that matter. In order to get what you measure, you must begin by picking the right yardstick and rallying everyone to appreciate its significance. To devise the best metrics to measure performance, ESI modeled itself on law firms. The full-service forensic engineering company, which investigates accidents and performs failure analysis on behalf of its clients, wanted to orchestrate a similar pathway for its employees to advance from novice to high-level professional with the overriding goal of making every employee a star. Winn and his colleagues thus created what he calls "a series of steps that we expect our employees to pass through." Establishing a well-defined, incremental career path helps newcomers understand the road they must travel to advance within the firm. This approach can also influence compensation. At many companies, each step that employees complete along a continuum of measurable accomplishments instantly triggers a pay increase. When ESI hires new engineers, they learn that the company expects them to join a professional society and progress up the ranks. They may be initially evaluated in part on their attendance at society meetings and conferences. In subsequent years, ESI may reward engineers who submit a paper to a society journal or who join a technical committee and ultimately serve as its chair. "Setting these steps helps us quantify their learning and involvement on an annual basis," Winn says.
As a result, the company sets targets for billable hours based on each employee's job duties. The firm may expect an individual to bill between 40% and 90% of a 40-hour workweek depending on that employee's role, Winn explains. A project manager has greater responsibility to generate activity, followed by a lead engineer, second engineer, technician and so on. "Our metrics quantify ESI's expectations of each employee in terms of professional development, marketing, developing talent within the company and contributions toward providing a quality product to our clients," Winn says. Articulate Clear, Concrete Performance Measures In fact, ambiguity and fuzziness are among the most common flaws that characterize performance measures. From commitment to cross-selling, some strengths or desirable traits do not translate well as tracking mechanisms. Smart managers reduce seemingly abstract performance drivers into concrete metrics. For example, a committed employee may complete a higher number of complex or demanding assignments. Tracking the quality and quantity of completed projects provides a potentially valuable measuring stick. Similarly, a salesperson who aggressively engages in cross-selling may generate a greater number of product transactions per customer. If you can quantify something, you can measure it. In trying to define what constitutes positive performance, search for evidence of the kind of results that flow from superior effort. That evidence, entered on a spreadsheet, presents the kind of reliable analytics you need to construct a well-aligned compensation and bonus policy. The most appropriate metrics are so clear that two different managers will inevitably reach the identical conclusion when analyzing the same data. There is no room for subjectivity. Another benefit of using simple metrics based on transparent, easy-to-track activity is that you avoid human error in judging performance. In many organizations, managers mistakenly wind up rating performance rather than tracking it. That almost always throws compensation for a loop, because issues of favoritism cloud the process. Even otherwise fair-minded, careful managers can get into trouble when rating employees' work product. Examples of rating traps: The Overly Generous Judge. Managers who prefer a calm, conflict-free status quo may dole out undeservedly high ratings to everyone instead of scrutinizing each person's performance. This saves time but ignores truly outstanding workers' contributions. The Bell Curve Cluster. In the absence of reliable metrics, managers might clump everyone in the middle of the pack. This sends a message that "we're all doing decent work but we can all improve." Both stellar and underperforming employees wind up bunched in the middle along with everyone else. employees against each other—instead of how each person performs actual job responsibilities— invites multiple problems. Consider General Electric's experience under Jack Welch, when employees were deemed A, B, or C players and the lowest group lost their jobs. That fostered a divisive culture. Welch's replacement, Jeffrey Immelt, ranks employees on a series of leadership traits. This new emphasis enables individuals to compete against themselves to improve their performance, rather than against each other to preserve their jobs. At their best, metrics help drive your performance-based compensation. The numbers indicate whether someone merits more or less pay. To choose measures that wield the greatest impact, involve your management team in drafting a list of possible benchmarks to evaluate output, quality, or some other key performance driver. Then sift through your list to identify the most compelling, revealing and easy-tounderstand metrics. Resist the urge to overcomplicate the process. Once you start categorizing and subcategorizing groupings of metrics, you can wind up with multi-tier systems that grow unwieldy. Tying pay to performance only works when workers at all levels can easily grasp what they must do to earn more. Too many formulas and layers of analysis can breed cynicism. Reward Employees Who Add Value In his speeches to business groups, Fred Whittlesey often asks, "How many of you can articulate how you created profit today for your employer?" If he's addressing salespeople, almost everyone's hand goes up. But with other audiences, the typical response is less than 10 percent. "A business owner must know how each employee creates value and must make sure that the employee knows too," says Whittlesey, principal consultant at Compensation Venture Group Inc., a Seattle-based consulting firm. Whether the worker contributes to customer satisfaction, monitors shipments so they arrive on time, inspects products to eliminate defects or confirms that the company extends credit to appropriate buyers, the best performance measures begin with a clear understanding of that individual's role. For those workers who can articulate how they add value at their organizations, Whittlesey follows up with a second question: If you do a fantastic job this year Pay Trends Highlight Need for Strategic Compensation adding value, will you make more money? "Most companies develop all these matrices to measure performance and break it down," he says. "Then they differentiate pay among employees by a fraction of a percentage point, which insults the best performers." The top stars at any organization produce two to eight times more value than the average performer, depending on the nature of their jobs. But managers typically pay these superior workers only negligibly more than the also-rans, Whittlesey adds. When advising owners of fast-growing businesses, Whittlesey urges them to choose metrics that are tied to a clear organizational goal. If cost reduction is a priority, for example, the CEO can measure performance by rallying each employee to save $5 a day. "That way, the metric isn't merely a number but something that the CEO actively lives every day," he says. "It works to raise the performance level because the CEO stands behind it and pays people accordingly." Opinions expressed are those of the author(s) and do not necessarily represent the opinions of Compass Bank. June 2008 |
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Another set of metrics focuses on activity goals. Like many companies with in-house experts, ESI bills clients by the hour. Its revenues are tied to the amount of time its employees spend on a client project.
