Measuring Performance for Incentives

By John A. Haas
Management Strategies Group

Performance-based incentive compensation remains a valuable tool to help employees better focus their efforts. That means identifying good performance measures and goals, and rewarding participants based on actual results.

Measure-Setting Hints

• Criteria for good measures: Quantified or quantifiable; strategically important; credible; under participants' direct control or influence; easily tracked and reported; limited in number to 4 or 5; weighted to reflect relative importance; and relevant in the current performance period.
• Use and track only key indicators, the ones most important in running the business.
• Measure results, not processes. For example, measure "number of new customers" rather than "% of time sales reps' paperwork is in on time."
• Set common goals and measures to encourage teamwork or joint effort. E.g. pay both sales and A/R staff based on collected revenues.
• Don't ignore important subjective performance indicators just because they are not directly measurable. For these, consider:

Using Checklists to Quantify Judgment

It's relatively easy to track and report on dollars of revenue or cost, gross margin, units produced, productivity, etc. But "customer satisfaction" and "service quality" are two important performance elements that cannot be directly measured. A checklist not only communicates what you and customers feel is important, but also can be "scored" to produce quantifiable measures for use in a performance-based pay plan.

We developed checklists for several clients, to get both outside and internal customer feedback. Results were used to improve transaction quality with outside customers (e.g. access to product information, ease of ordering, product quality, delivery accuracy), and the quality of service provided by internal staff departments (e.g. finance, human resources, marketing).

Establish weighted scoring keys for all important factors, e.g. a 5-point Quality rating scale multiplied by a 3-point Importance scale. Thus, for each item the possible score can range from 1 (1 x 1) to 15 (5 x 3). An example follows:

Allow respondents to add factors.  Their comments can suggest improvement areas; and improvement goals for individuals or teams can become a partial basis for incentive earnings.

Spring 2001 - Volume 11, Number 2