The establishment of effective performance-based systems requires the establishment of Key Result Areas and Key Performance Indicators. What you need to know follows.
One of the most frequent errors made by business owners is to evaluate and reward employees based on an unquantifiable or subjective judgment of their work performance. For instance, in one of the businesses I know, the owners evaluate their managers' performance using a subjective scale of excellent, very good, average, and poor rating.
In another business, the owners are evaluating managers using a template assessment form that included questions such as (1) Did the manager supervise his team properly? (2) Was the manager punctual in his or her reporting? (3) Did the manager submit reports on time? (4) Did the manager accomplish his or her objectives?
And so forth.
The Problems of a Subjective Evaluation
The issue with this process is that it evaluates all managers using the same set of criteria (or questions)—which may not accurately reflect their actual job performance. For instance, if a sales manager is always late or missing but manages to exceed his objective by 200 percent, will he be assessed as "average" overall due to his absences or will he be regarded as "outstanding" because to his enormously exceeded target? Or how about an accounting manager who is never late and always files reports on time, but is frequently criticized by the staff? Will the manager's overall rating remain "excellent"?
Often, this type of appraisal results in employees' envy, distrust, and dissatisfaction with the company's management. Additionally, workplace favoritism or patronage politics will become the norm in the absence of a quantifiable method or guide for evaluating employee performance.
Key Performance Indicators and Key Result Areas
How can business owners handle these concerns? One of the finest strategies for evaluating employee performance is to assign each employee a unique set of Key Result Areas (KRAs) and measurable Key Performance Indicators (KPIs).
While this procedure is time consuming, once completed, you can use the data to create a comprehensive performance management system. This way, you can motivate your employees to perform better, which should result in a big increase in the company's performance. Obviously, each manager's (or employee's) KRAs and KPIs will be unique, as they will be determined by the nature of the work performed.
However, take notice that the majority of firms who use this systematic review process modify their KRAs and KPIs every two years.
Key Result Areas, Explained
To clarify, Key Result Areas, or KRAs, are specific areas of concern or opportunity for improvement within a business. Profits, procedures, locations, markets, customers, accounts, structures, and assets are all examples of operational items. What are some examples of KRAs? If you work in sales, your key performance indicators are sales, repeat orders, and customers. On the other side, if you work in manufacturing, key performance indicators (KRAs) include accidents, production costs, and products produced. Additionally, if you work in human resources, hiring time, employee turnover, and training are all considered KRAs.
As you may picture, each person has a unique set of KRAs based on the nature of their employment.
Explanation of Key Performance Indicators
KPIs, or Key Performance Indicators, are corporate indicators that can be numerical or quantitative in nature. These are used to assess an organization's and its workers' accomplishments. KPIs can take the form of attaining an increase or decrease in certain variables, percentages of accomplishments, specific target numbers, or the amount and completion of specific timelines.
KPIs may include a 20% rise, a PHP 100 million increase, a zero, a 10% drop, or 1,000 bags of items.
Measuring Your Organization's Key Performance Indicators (KPIs)
To begin measuring performance, you must combine your KRAs and KPIs—which will become your Performance Measures (or "Targets"). As a result, KRA + KPI equals Performance Measures.
By combining the KRAs and KPIs described previously, you can achieve a 20% increase in sales, zero accidents, a 10% cost reduction, and 1,000 bags produced each week. By combining applicable KRAs and KPIs, you can develop manager-specific performance measures.
(Note: To facilitate data collection, you can educate your employees about the procedure and require them to submit their own KRAs and KPIs. You can then evaluate, discuss, and determine which KRAs and KPIs are most suited for each person. This manner, your staff will feel valued and will have no reason to complain, given the majority of the information originated with them.)
A Synopsis of Your Performance-Based Metrics
The next critical task for your business is to compile a summary of the performance measurements or targets allocated to each employee. From there, you may create separate Performance Scorecards for each employee.
Additionally, a basic grading system should be developed to track each target's achievement. For instance, a three-point grading system might be used: 1—failed to fulfill the objective, 2—met the objective, and 3—exceeded the objective.
For the geeks out there, consider the following scenario: a sales manager has two objectives: a PHP 2 million increase in revenues and an average of ten new clients per month. If he increased sales by merely PHP 1.9 million, his grade for this KRA would be 1. (below target). On the other hand, if he acquires an average of 12 new clients, he earns a 3-star rating (exceeded target). When all are added together, his total rating will be four. Divide 4 by two KRAs to obtain his average rating of 2. And so forth. If your other managers earned a 2.5, 3, or 1.5, you can now determine who is performing better.
(Note: To prevent going overboard on this one, I recommend limiting performance metrics to ten key performance indicators or KRAs per employee. However, ensure that the KRAs being scored are the most critical. Additionally, some firms that use this system assign a higher proportion or weight to the most critical targets in comparison to the least critical ones.)
The Benefits of Performance Scorecards
The advantages of performance scorecards are immeasurable. Performance scorecards can be used to accomplish the following:
- Provide employees with a clear grasp of the objectives set by management.
- Utilize monthly performance scorecards to provide management with a powerful tool for monitoring the performance of important personnel throughout the year.
- Ascertain fairness in the allocation of incentives or perks to key personnel, since they will be compensated on the basis of their actual accomplishments.
- Encourage employees to perform at their best by measuring them against mutually agreed-upon performance standards.
- Ascertain that the output or results of management's evaluation of employee performance are freely accessible for review or audit, so avoiding conflicts and favoritism.
Finally, you can link the performance scorecards of your staff to your reward system. For instance, you may provide the employee with the highest monthly score a small gesture or reward—an ice cream, a food basket, or dinner—to motivate others to catch up and do better.
Additionally, you can summarize employees' annual performance rankings and use the results to determine whether to award bonuses or merit increments. Whatever you do, you can be certain that your employees will be treated fairly and equally, as subjectivity is minimized or eliminated. At the end of the day, what counts most is that your employees were recognized and compensated appropriately for their actual performance.
Keep safe, everyone!
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