The Unintended Consequences of Setting Performance Targets
Setting targets and subsequently measuring performance against those targets is a common management practice in many organisations. When done properly it can be an effective way to motivate people to deliver a level of performance that is required by the organisation.
You should, however, be aware that this practice of using performance targets as a way to motivate people to take the actions that are required by the organisation can back-fine and can have the opposite effect – making performance worse rather than better.
This happens when people take actions to attain the targets they have been set that are not aligned with their intended purpose. This is best explained using an fictitious example:
A consultancy company is made up of a number of teams and each team has responsibility for delivering financial results (sales) in different markets. Each team is made up of a senior consultant, one or two consultants and up to four junior consultants. The nature of the business is such that each team works in a specialised area of consultancy but there are often opportunities to refer work internally to teams with expertise in areas that their clients need. The work done by the junior consultants tends to be research-based and while they work primarily for a specific team, they can be utilised on projects managed by other teams within the organisation.
The management decided to set each person an individual billing target, as well as setting a billing target for each team. These targets were based on the one-third rule whereby the target is made up of 1/3 their salary, 1/3 to cover overheads and 1/3 profit. The results were closely monitored and remuneration was directly linked to their attainment.
While this may seem like a perfectly logical (if simplistic) way to encourage people to perform to a desired level and achieve the financial results that they required to generate a profit for the business, the reality was very different.
An analysis of the business found the following issues in the business:
- Poor profitability
- Large variation in individual performance levels
- Low levels of internal referrals
- High levels of staff turnover, especially at the junior level
Further investigation found that the primary causes of these issues included the following:
- Work being done at the wrong level (i.e. senior people doing work that could be done by more junior people) as a result of poor delegation
- Low value work being done (made worse by the above issue)
- A ‘my client’ attitude resulting in a reluctance to refer work internally
Deeper investigation revealed that the root cause of these issues was the performance targets that had been set. These targets meant that senior consultants tend to keep work to themselves rather than delegating as much as they should which means that the low value work is bring done by the people who are being paid the most, leading to profitability being lower than it should. The lack of delegation also means that more junior staff are not getting work that will help them to develop resulting in them leaving and hence the high level of staff turnover.
In order to fill their time and in an attempt to reach their targets, junior staff take on/are given low value work that is not profitable and, in some cases, run at a loss.
It also results in people being unwilling to look for opportunities for others within the company as they are afraid that the work will not be done to a sufficiently high standard and may result in problems with their client. The net result is that the company suffers as they are losing the opportunity to sell more services to the client and the client suffers because they are not been given the most holistic advice/service from the company.
The solution to these issues was to change the way in which targets were set and what was measured. Instead of measuring billing (which is effectively turnover) they measured profit. Instead of setting targets for individuals they set profitability targets for the team as a whole. In addition a new target was added for each team – resource utilisation. This measures the extent to which the time of each member of the team is utilised for the benefit of the team and, consequently, for the company as a whole. In addition new metrics and incentives were introduced to encourage the referral of work among the teams within the organisation.
Hopefully this relatively simple example gives you so idea of how setting targets to drive a certain behaviour can result in a completely unintended set of behaviours. When developing any target-driven performance system you should consider the following:
- What behaviours are you trying to influence – in other words, what outcomes do you want to achieve?
- Is setting performance targets the best way to achieve the desired behaviours?
- What targets are most likely to result in the desired outcomes being attained?
- What incentives should be put in place to encourage the performance targets to be met?
- How might the performance targets be manipulated?
- How might the performance targets and incentives drive unwanted behaviours?
When the proposed performance system has been agreed it should be tested on a small scale if possible in order to identify any flaws before it is implemented company-wide.
Once the new system has been implemented it should be carefully monitored to ensure that it is creating the desired outcomes.