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Scorecards are the ''what" of performance reviews; the calendar is the "when." Reviews need to happen as part of a structured, repeating cycle, as this makes them an on-going part of management's agenda for the business. The length of the cycle should be chosen with care. While the default choice for most companies is one year, crucial KPIs may be best measured over a longer or shorter cycle depending upon their lead times. Finally, managers should coordinate the performance review calendar with other important events, such as capital budgeting and individual performance reviews. Carrying out business performance management apart from the normal flow of events often leads to a corresponding loss of impact.

The style and tone of performance reviews also affects their success. In some companies, performance reviews don't have any real impact because they are only "show and tell" presentations where no challenging questions are asked and no underlying issues addressed. One approach to enable true problem solving in performance reviews is to have peer groups meet on a regular basis. In such meetings, managers with similar degrees of responsibility in different areas of the business unit or of the corporation can share experiences.

If done well, business performance management is not an added burden on already busy managers. Instead, it can save time and effort by providing managers with clear objectives, motivation to achieve them, and support along the way.

Managing Individual Performance

In individual performance management, two value creation imperatives meet. One imperative is making managers think like owners by linking managers' rewards to behavior that creates overall shareholder value. The other is that in an increasingly knowledge-based economy, management talent is itself an important source of value, and therefore companies must attract and retain talent by offering attractive incentives. Companies need a process that will link individuals' behavior to overall value creation activities and incentives that will motivate and reward strong individual performance.

Just as in business performance management, the process of people performance management should include target-setting and performance reviews. Targets for an individual should link to the KPIs for which he or she is accountable, so that there is consistency between what the business is asked to achieve and what the individual is asked to achieve. Exhibit 6.7 shows how different layers of management within the company can be reviewed using measures that cascade down the organization, ranging from total returns to shareholders for top management to operational value drivers for mid-level managers. Targets related to accountability for group performance should also be included when collaboration is important to a given job.

Performance reviews for individuals should be held regularly and feature challenging, candid feedback. High-performing companies tend to move swiftly when they find that people are underperforming, either retraining them, moving them, firing them, or pushing them to leave through peer pressure. Making the consequences of low performance visible is important so that everyone in the organization realizes the seriousness of living up to targets.

When employees' performance meets or exceeds expectations, visible rewards are equally appropriate. Companies need to craft their reward Exhibit 6.7 Matching Performance Measures with Managerial Roles

systems to tap into the real sources of motivation for their employees. High-performing companies tend to combine the following three types of motivation levers, with a distinctive emphasis on one type of lever:

1. Financial incentives, such as a high percentage of compensation at risk through bonus schemes or stock options.

2. Opportunities, such as fast-track career paths that rotate strong performers through positions of increasing responsibility.

3. Values and beliefs, in which employees gain inherent satisfaction from living up to a distinctive ''XYZ Way" of doing business.

Most companies that want to make value happen will use at least some financial incentives to reward value creation and to retain top performers. The following principles can be useful in designing a financial incentive system:

• Consider setting the base level of compensation higher than the median in comparable companies. Our research shows that high-performing companies tend to offer a higher base level of compensation than their competitors, which combined with incentive pay means that their employees also receive a higher total overall compensation package.

• Variable pay should include a meaningful level of differentiation based on performance. Meaningful differentiation is more important to many executives than total pay, particularly to high performers.

• Bonus caps can lead to managers' ceasing to give their all once they have attained the results needed for their maximum compensation.

• Make clear what constraints (e.g., safety or environmental) people must not ignore as they seek to achieve their targets and what the consequences will be for doing so. Link at least some of the incentives to long-term value creation by using mechanisms to defer compensation (e.g., bonus banks).

Ideally, the individual performance management process personalizes the overall value creation goals of the company. In so doing, it should align the interests of owners and managers and thus enhance long-term performance of the company.

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