Beware of target setting

Setting targets for employees and assessing their performance sounds simple, but often isn’t: measuring sales per worker is easy, but how do you measure less tangible elements such as the value of their ideas, their teamwork or “emotional intelligence”?

Setting measurable performance targets is a perennial challenge for businesses of all types and sizes. No wonder performance management has become a complex industry: from technology and business techniques such as balanced scorecards and key performance indicators (KPIs) to setting objectives for employees and motivating performance.

But when it comes to improving the performance of workers, picking the right manager is probably more important than any business target, according to new research by Gallup Business Journal, which suggests that good managers are rare.

The research, which involved studying performance at hundreds of organizations and measuring the engagement of 27 million employees and more than 2.5 million work units over the past two decades, found that, 82% of the time, companies fail to choose the candidate with the right skills and experience. But don’t junk all your business targets just yet. One expert says they can be useful if applied in the right circumstances.

Wilson Wong, Head of Insight and Futures at the UK’s Chartered Institute of Personnel and Development (CIPD), says targets can be a useful way of measuring performance if the activity is “straightforward and within the clear control of the person.”

But if the task is more subjective and complex (such as coming up with ideas, reviewing a company’s strategy or updating its brand or “innovating”), targets may act as a “disincentive [for the worker to improve their performance] or may lead to unintended consequences,” Wong says. And in that case, it’s not just the targets, but the way they are monitored and applied, that can lead to disaster.

One example is the rail industry in Japan. Post-privatization, rail-operating franchises were measured not on customer service, but on profitability, which was directly linked to punctuality. At first glance, a reasonable approach: making the trains run on time is a central part of the challenge. But Japanese managers, unused to more modern management techniques in the private sector, used the punctuality targets as a punishment rather than an incentive. Drivers were required to report, in real time, even delays of just five seconds and bosses harangued and harried drivers to make up the time.The result was stressedout drivers pressured to meet impossible targets, making poor judgements and pushing safety limits just to avoid criticism from above. In 2005, 23-year-old Ryujiro Takami crashed his commuter train into an apartment block, killing 107 people. Later, investigation revealed Takami had been punished for failing to meet his punctuality targets.

The recent financial crisis offered further proof of the danger of poorly applied targets. Several banks used targets linked to the value of trades in investment banking. It seems clear and fair, but these targets can reward behavior that has disastrous consequences.

Bankers were so keen to hit their targets and achieve their bonuses that they ignored or disregarded external factors such as systemic risk. “It just wasn’t their problem,” Wong says.

In his view, targets work when they focus behavior into a narrow measurable band of actions. Those that leave greater opportunity for abuse and misinterpretation will normally result in negative effects beyond the scope of the original effort. “It can be good or bad, but the unthinking application of targets usually ends up not so positive.”

The article was written by:

  • Nick Huber

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