Employees’ performance is always more likely to be optimised when they have clear objectives and, if possible, linked financial incentives.
Frequency – annual with mid-year review.
Key participants – at least direct reports.
Leadership rating ***
Objective
In leading an organisation with a clear vision and strategy, you must ensure that:
- the strategies and actions of your teams and individuals are aligned to overall goals so that the organisation gives itself the best chance of success;
- individuals have clear performance targets and rewards so that they can share in success, their strengths can be enhanced and their weaknesses addressed.
Setting integrated objectives and incentives is not a formulaic approach designed to satisfy only the needs of the HR department. It really is true that organisations can be significantly undermined when teams and individuals have goals that are inconsistent with their organisation’s overall ambitions. By having a clear and documented structure for objectives and related incentives, you ensure that the power of your Vision and strategy – however well communicated – is translated into the detail of daily behaviour because this is often where a difference is made.
You should not be satisfied unless and until you are sure that your overall strategies are reflected in what teams and individuals are actually asked to do, and are rewarded for doing, on a day-to-day basis.
Context
Post-credit-crunch bank bonuses have been the subject of huge attention, not least because of the widespread perception that banks reward failure. While the bank bonus issue is actually related to an extremely small number of people in the overall workforce, it does highlight a very real challenge about the relationship between performance and reward.
The leader of any organisation will confront the following questions.
- What part of a team member’s role is core – i.e. part of the basic ‘job description’ – and what they are fundamentally paid for?
- What objectives should be added on a regular basis (usually annually) above and beyond the core role?
- What is the role of these additional objectives in assessing the individual’s performance?
- How much should the individual be paid for their core role?
- How much more should the individual be paid for performance above the core role?
- To what extent should the individual’s incentives be linked to personal, team and overall organisation performance objectives and performance?
Many of the answers to these questions are driven by cultural context – broader challenges about the nature of the organisation, its ethos and the business sector within which it operates.
Challenge
It is easy as a leader to overlook the significance of objectives and incentives. You may think that:
- because the overall objectives of the business are well known, individual objectives are obvious;
- because incentive payments for many staff may be small in absolute terms, they are of little value.
This overlooks the reality that:
- without clear objectives, colleagues will often do what they prefer rather than what is necessary, and become unfocused;
- incentive payments that look small to one person may be very meaningful to families with tight finances.
You must be seen to take these issues seriously, and to ensure that objectives and incentives are set in a clear and timely manner.
Success
You will be setting objectives and incentives within a overall framework determined by your organisation and will be unlikely to have free rein to do anything you want. You are also likely to be obliged to manage the objective and incentive process with your HR team to ensure consistency and conformance with overall policies. It is an unavoidably detailed and arduous process if managed appropriately.
Objectives
- Annual objectives – these should be published as near as possible to the start of the team’s financial year. Objectives are always less effective if they are made known too long after the year has started.
- Team objective setting – these should be presented formally by you to your team and to wider colleagues through presentations (WebEx where needed) and be supported by clear information circulated to staff by e-mail or published on the organisation’s intranet. You should also reiterate the objectives relentlessly during the year, including why they have been chosen and how they link to your overall vision and strategy.
- Direct reports – you should arrange meetings with all your direct reports (and ensure that they do the same with theirs) to discuss personal objectives.
- Individual objective setting – it is usually more effective to ask someone to propose their objectives than to impose them, so the personal objective phase will likely have three stages:
- you suggest in advance of a meeting that your direct report proposes objectives for the year;
- a meeting is held to review the proposed objectives;
- the finalised objectives are agreed in a further meeting or by e-mail exchange depending on the level of agreement.
- Focused objectives – objectives are always best kept limited (by definition they have to be focused to be achievable) and no more than five or six in a given period is advisable.
- Mid-year review – after objectives are agreed, a mid-year review point should be set to assess progress.
- Recording objectives – nowadays many organisations use electronic systems to record, amalgamate and monitor objectives and progress (this enables the leader to see who has not set objectives).
Incentives
- Incentive plans – should be issued as early as possible in the financial year so that recipients have maximum opportunity to deliver success against them.
- Incentive details – the incentive arrangements should clearly set out the balance between company, team and individual performance.
- Personal objectives – where there is a personal element, they should refer to the agreed personal objectives (above).
- Incentive criteria – any criteria that affect entitlement to incentives should be stated clearly because they can lead to misunderstanding. For example:
- Is there an override that no payments are made for personal performance if the organisation fails to meet certain financial targets?
- Does the employee have to be in employment on a certain date to receive a bonus? This is usually the case, and sometimes the date falls after the end of the bonus period.
- Recording bonus plans – bonus plans should be signed and recorded formally.
- Progress reports – you should not be embarrassed about reporting back to staff during the year about progress against bonus milestones where they affect the whole team – this should not be a subject that attracts silence for 12 months.
For both objectives and incentives, you must also ensure that where these are being set by your direct reports, they too are following all the guidelines applied by the organisation and that their implementation processes are overseen by the HR team.
What is evident is that successful objective and incentive schemes rely, above all else, on attention to detail.
Leaders’ measures of success
- All direct reports have agreed objective and incentive plans.
- When the plans were issued in the financial year.
- Mid-year review dates were set.
Pitfalls
Very often a simple acronym is used to describe objectives – SMART.
- Specific – objectives should specify what they want to achieve.
- Measurable – you should be able to measure whether you are meeting the objectives or not.
- Achievable – are the objectives you set achievable and attainable?
- Realistic – can you realistically achieve the objectives with the resources you have?
- Time – when do you want to achieve the set objectives?
That this summary is so familiar does not lessen its significance – ‘objectives’ will fail in their own objective of managing and aligning performance if they are not useable. By extension, if objectives give an inaccurate guide for performance, then incentive programmes will themselves become ineffective.
Leaders’ checklist
- Remember that objectives and incentives are not worthy of the name if they are not linked to the overall vision and strategy.
- Take objective-setting seriously – as leader you should regard it as an integral and not peripheral part of performance management.
- Manage the objective-setting process with your team in a structured manner with at least one mid-year progress review.
- Regard objectives and incentives as part of the overall performance management system and ensure they are linked to specific corporate goals.
- Ensure that objectives follow SMART principles.
- Ensure that incentives are specifically linked to corporate and personal goals and do not deliver something for nothing.