Masterclass Perspectives: Organisational Performance Improvement by Corporate Research Forum

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CORPORATE RESEARCH FORUM

September 2017

ORGANISATIONAL PERFORMANCE IMPROVEMENT MASTERCLASS PERSPECTIVES

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“HR got into bad habits, and forgot to relate individual performance to the organisational context”. Wendy Hirsh, Researcher and Consultant

“Strong performance feedback cultures succeed even with outdated tools. Weak performance management cultures fail even with the best techniques”. Gerry Ledford, Senior Research Scientist, Center for Effective Organizations USC

Contents INTRODUCTION 3 CONTRIBUTORS 4 THE KEY INGREDIENTS OF PERFORMANCE IMPROVEMENT 5 WHAT DO WE MEAN BY PERFORMANCE? 7 HOW COULD PERFORMANCE DISCUSSIONS CONTRIBUTE MORE TO IMPROVING PERFORMANCE?

REWARD TRENDS 18 RECENT RESEARCH ON PERFORMANCE MANAGEMENT: DOES ANYTHING WORK?

CASE STUDY

CLOSING COMMENTS

APPENDIX: PERFORMANCE MANAGEMENT: RESEARCH REVIEWS AND EVIDENCE SOURCES

INTRODUCTION

Introduction Organisational performance improvement is a topic of perennial interest, debate and importance. It is critical not only for the organisations themselves, but also for the contribution those companies make to the economy as a whole. It needs to avoid short-term measures, and be developed over the long term, in order to build sustainable businesses. This long-term perspective can be difficult in an environment of increasing pressure and short-term investor concerns. Looked at holistically, all areas of a business contribute to this, and all have their part to play. But to what extent does everyone understand what needs to be done? How smart are organisations at getting their messages across and generating coherent responses and improvements? To what extent do the complexities of organisational improvement get short-circuited down to looking once again at individual performance improvement, and the introduction of another new approach? The area is rife with fads, and seemingly less underpinned by robust evidence. Even evidence that has been known for some time still has difficulty in gaining traction – why do we need to keep re-learning the same lessons? And what is the latest research now telling us? This Masterclass day aimed to provide a variety of academic and practitioner perspectives on the topic, including: • a clear and compelling model for Organisational Performance Improvement • exploring what is really meant by performance in a business context • what we really know about performance discussions • learning from recent US West Coast research • case study experience • time to plan how to use these perspectives back ‘in the real world’. We asked our academics to share their perspectives in a pre-written position paper; this document collates their wisdom, together with highlights from the day itself. We hope it stimulates all organisations to consider how to improve their own performance. It certainly seems to have worked for Kim Edwards! @KimSEdwards “Already have great takeaways from #crforum & feel like I’m taking a crash course in organisational performance!”

CONTRIBUTORS

contributors David Birtwistle is HR Director, Performance Reward & Engagement for Jaguar Land Rover. David is responsible for strategy and policy relating to performance management, employee engagement, executive and manager compensation, international assignments and employee benefit plans worldwide. David also has responsibility for the HR shared service team of 120 professionals.

Mike Haffenden is a Director of CRF. He has worked in Senior HR roles in the US and Europe with major international businesses including Avon, Rowntree, Unilever and Hewlett Packard. He founded CRF as a research consortium to investigate the principles and practices that make a difference in people management, PARC, a research group investigating good practice in performance, reward and governance and Strategic Dimensions, a leading HR recruitment business.

Wendy Hirsh is a researcher and consultant, specialising in the future-oriented aspects of people management - workforce planning, succession, talent and development and has conducted a number of studies in the area. In 2015, Wendy was voted number 9 in HR Magazine’s Most Influential UK HR Thinkers.

Dr Rebecca Homkes is a Teaching Fellow at the LBS’s Department of Strategy and Entrepreneurship as well as its Centre for Management Development. She is a Fellow at the London School of Economics’ Centre for Economic Performance (CEP) and a Director at the Ashridge Strategic Management Centre. Through her consultancy firm, she works with global CEOs and executive teams on strategy and execution.

Gerry Ledford is Senior Research Scientist at the Center for Effective Organizations at USC. He is a recognised authority on aligning human capital practices to business strategy. Areas of interest include total rewards, employee engagement and involvement, talent management, design of work, large-scale organisational change, and HR technology. Gerry is leading several projects on performance management practices, including ratingless appraisal, continuous feedback, and crowd-sourced feedback.

David Wreford is a Partner at Mercer and European Practice Leader for Workforce Rewards. He helps clients across Europe maximise the value from their rewards by increasing the efficiency and effectiveness of their reward programmes. He is particularly interested in helping organisations develop the broad proposition that attracts and excites the best people. He works across most sectors but particularly enjoys working with organisations with a high sense of social responsibility (in the private, public and third sectors) and what this means for their reward and talent programmes.

O1 The key ingredients of performance improvement Mike Haffenden, Director, CRF

1.1 position paper Our sister organisation PARC (Performance and Reward Centre) published a research report in November 2015 Improving Organisation Performance – A Systems Approach. This provided a holistic framework for looking at performance management, and avoided the all too frequent HR trap of just looking at individual performance management trends. There are certainly some themes arising from that, but for HR to make a real difference, it needs to play in a bigger game. The model, shown right, provides an overview of the components of a systemic approach, but with a focus on the people related issues. It looks at inputs as well as outputs; the shaping of performance and the factors that affect it are as key as evaluating what has happened. Much of the model could probably be categorised as ‘good management’ – but to what extent does this happen in practice?

Organisation Performance Improvement - a systems approach

Strategy and direction • What is competitive advantage? • Is it agreed? • Is it written? • Is it communicated? • Is it understood? • It is differentiated? • Does it enable clear line of sight? • Is it realistic? • Is it broken into component parts? • What are the must win battles?

When it comes to applying the model, there is no ‘one size fits all’ approach possible, and it needs to be tailored to the specifics of the organisation concerned. One big question is whether HR is involved in gaining improvements via smart working across these interlinked

Performance culture • Appropriate leadership • Can translate strategy to action • Good organisation design • Silos and bureaucracy minimised • Are there clear accountabilities? • Tone set from the top • Positive purpose, values, behaviours • What is good performance?

People and capability • Are they of good quality? • Well trained • Well motivated • In right jobs • Is there a process for reviewing performance, potential and position? • Sound psychological contracts • A reward system that motivates • Right resources to be effective

Review and evaluation • Is there a process for reviewing strategy, culture and people? • Have group departmental and individual targets been met? • Are we within budget? • Are stakeholders involved? • Is there an improvement orientation? • Is success recognised?

o1 THE KEY INGREDIENTS OF PERFORMANCE IMPROVEMENT

areas - not attempting to adopt a ‘cluster of 1’ type solution. A second big question is whether HR is up to asking the right questions, of the right people – and having sufficient influence to affect what happens, rather than taking instructions. With this in mind, there are some areas that HR can start to look at to demonstrate that it can make a real difference, and be a catalyst, for enhanced performance. 1. Understanding performance management Articulate and embed a systemic and best fit approach to work, people, technology and information, in the reality of a clear outside-in driven agenda. 2. Addressing senior leadership Gain influence at the top of organisations, build strength and good leadership. Have courage, and hold a mirror up to the organisation.

championed, and there is a sense of accountability and empowerment at all levels. Do leaders understand the drivers of positive and negative cultures, and role model what is needed? Rigorously review organisation, team and individual results, provide honest feedback and a joined-up performance story. 7. Strategic talent management Place high performers into critical roles, and act swiftly on poor performance. Ensure rewards target long term success, and cover both the ‘what’ and the ‘how’. Work on attracting high performing talent, and developing capabilities throughout the organisation. 8. HR’s purpose and credibility Address the capability of the function itself, such that it can be recognised for genuine performance improvement expertise, and future-focused but business grounded contribution.

3. Adding value to strategy Facilitate strategy by asking tough questions, and offering genuine insight from organisation psychology, structure, culture, engagement and capability – in the context of the external conditions. 4. Embedding strategy and aligning objectives Ensure communication and alignment right through the organisation – and get feedback upwards as well as top-down. Bring focus and clarity to the big things that will make a difference, not fritter attention across multiple complex targets. 5. Teamwork and collaboration Eliminate silos, and enhance teamwork and collaboration – including across central functions. 6. Performance culture and performance review

1.2 session highlights Mike introduced the day, and got the buzz going by asking everyone to introduce themselves at their tables, and discuss what they wanted to get out of the day. He talked through the PARC Organisation Performance Improvement model, and framed how the follow-on sessions would give deeper dives into all aspects of the model. He encouraged participants to do three things during the day – listen out for and take away new ideas; network and meet new people; and take time and the opportunity to reflect.

Create a high performance climate where excellence is 6

O2 What do we mean by performance? Dr Rebecca Homkes, Teaching Fellow, LBS’s Department of Strategy and Entrepreneurship. Fellow at the London School of Economics’ Centre for Economic Performance. Director at the Ashridge Strategic Management Centre

2.1

position paper I. Introduction: Performance Performance. What is it and what matters for organisational performance? While this question sounds banal to some, and intimidating to others, performance certainly matters. Unfortunately it has become one of those everything / nothing words, in that because it can mean just about everything, it can end up meaning little. But precisely because it is so opaque, every management team needs to answer the question of what performance means in their context. It is easy to confuse cause and effect, and to seize upon a simple solution like ‘growth’, which may be a good measure in some cases and a bad one in others. In what follows, I will take you on a quick tour of some possible answers, explain why you should be suspicious of anyone who claims to have easy ones, and pose some questions you should be able to answer regarding your organisation’s performance. II. What matters for performance?: A brief journey across views What matters when it comes to your organisation’s performance? The first

thought is that it must be about making money. Some of the first so-called management gurus such as Alfred Sloan reminded us the goal of any corporation was being as profitable as possible. One of the most popular quotations, and perhaps also the most controversial, is that of economist Milton Friedman, who told us in his September 1970 essay in The New York Times that the main purpose of a business is to maximise profits for its owners (stockholders are owners for a publicly-traded company). Friedman’s view was that pursuing any goal other than making money rendered managers guilty of “analytical looseness and lack of rigour1”. While Friedman’s views were not collectively accepted even then, they were readily embraced by a great cadre of managers. Many of these managers were facing heightened global competition and perhaps welcomed the focus that such a command granted them. That said, the ruthless focus on making money at all costs did not – and does not – sit well with all. A few years after Friedman’s article, Kenneth Mason, the president of Quaker Oats, responded in Business Week that: “Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life’s purpose, one would hope, is somewhat broader and more challenging. Likewise with

business and profit2”. Mason argued that discussions of the possible conflicts between business and society should be encouraged, not evaded. Despite varying views of the ultimate performance measure, many organisational leaders embraced the charge of making money for shareholders in the decades that followed, perhaps none more famously (or infamously) than Jack Welch. Welch, who reigned over General Electric from 1981 to 2001, grew shareholder value in an order of magnitude during that time: the company’s market value increased from 14 billion to 484 billion. In 1999 he was named ‘Manager of the Century’ by Fortune magazine. Whilst one should not detract from Welch’s successes at the helm of GE, this focus on performance (some would say borderline earnings management) did not necessarily translate into longlasting success. Within a decade after Welch left, GE had lost around 60% of its market capitalisation. In later years, he even came out against this sole performance view, saying in a 2009 interview: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term

Friedman, Milton. (1970) The Social Responsibility of Business Is to Increase Its Profits, The New York Times Magazine, September 13, 1970.

Mason, Kenneth. (1979) Responsibility for What’s on the Tube, Business Week, August 13, 1979.

o2 WHAT DO WE MEAN BY PERFORMANCE?

profits should be allied with an increase in the long-term value of a company3”.

best estimate of how much cash the company will generate over time.

For those organisations following shareholder value, most tracked metrics are quarterly earnings per share (EPS) as well as the price-earnings ratio (PE ratio).

Understanding and calculating value management involves the following:

Leaving Welch and his admirers aside, many other CEOs embraced a different measure of performance, what has been called value management (also value based management or managing for value). Value management is not about managing for shareholders’ expectations or the share price, but rather about managing in a way that the organisation seeks new strategies, ideas, and other opportunities to increase its intrinsic value over time. While its focus is not on short-term quarterly earnings, managing for value should lead to consistently higher earnings per share growth. Perhaps the most well-known champion of this approach is Warren Buffett. Buffett operates according to two rules which he expresses as: “Rule No 1: Never lose money. Rule No 2: Never forget rule No 1”. This subtly shows the difference between maximising profits and intrinsic value creation. Losing money is always a bad idea, but maximising profits is not always a good one, and nor is maximising the share price. Buffett has described the stock market as a popularity contest in the short run, but a weighing machine in the long run. Good value managers do not care about popularity, but they care deeply about how much their business will weigh in the ultimate balance of the scales, and they are passionate about not being found wanting. Value management is about long-term intrinsic value creation. Intrinsic value is the present value of the earnings power a business has over its remaining life, and as Warren Buffett stated is “a number that is impossible to pinpoint but essential to estimate”. In its simplest, it is our

• Intrinsic value: The present value of the earnings power a business has over its remaining life • Value today of a company based on our best estimates of its expected free cash flows (economic profits) • This is different from market value (number of shares outstanding multiplied by current share price) • Free cash flow: Portion of earnings that are available to be paid out to investors after taking care of all of its investment needs, or the difference between earnings and retained earnings • When investment needs exceed earnings, this is negative

• Total shareholder return (TSR): Change in a company’s stock price for a given period plus its free cash flow over the same period as a percentage of the initial stock price Ultimately, intrinsic value is what matters, but it is clear from the above that intrinsic value is very hard to measure. In general, the best way of weighing the value of a business is the long-term TSR. Anyone can play games to give TSR a hike for a year, and sometimes it enjoys a spurt because of events which have nothing to do with the way the business is managed. In order to optimise TSR in the long run, however, a business must have a strategy which creates economic profit by sustaining a gap between the cost to serve and customers’ willingness to pay, and as a result generates free cash flow. Long-term TSR is therefore probably the best way of judging whether other performance criteria have been fulfilled.

When Friedman told us to measure performance by our ability to make • When a company does not issue money and deliver to shareholders, he or repurchase equity, this is the had other contemporary critics. Perhaps dividends paid to shareholders as frequently quoted when it comes to • Economic profit: Difference between performance is management guru Peter revenue received from sale of output Drucker, who reminded us: “Because and the opportunity cost of the inputs the purpose of business is to create a customer, the business enterprise has used, or the difference between two – and only two – basic functions: earnings and the cost of invested marketing and innovation. Marketing and capital innovation produce results; all the rest • Economic profit is not required to are costs. Marketing is the distinguishing, be disclosed, whereas accounting unique function of the business4”. profit is Performance, and the likelihood of lasting • Takes opportunity cost into success, is whether or not the enterprise consideration – value of the trade- could create a market for customers off when a decision is made and maintain this market over time. • Company earning at least its cost Thus, organisations should measure performance not by shareholder value, of capital is generating positive economic profit; a business that is but on their ability to delight customers earning less than its cost of capital profitably. Of course happy customers also tend to be repeat customers and has negative economic profit, a company’s most valuable marketing even if its earnings are positive machines. Many companies, such as

Guerrera , Francesco. (2009) Welch condemns share price focus, Financial Times, March 12, 2009.

Drucker, Peter. (1954) The Practice of Management.

o2 WHAT DO WE MEAN BY PERFORMANCE?

Apple and Toyota, have proven that by continuing to delight customers, they can also continue to grow shareholder value. Indeed, there should be no choice to make: creating value for shareholders should come via creating value for customers. One way to measure performance via customers is through standard metrics such as customer satisfaction and net promoter scores (NPS). However, publicly traded companies are still public and being watched by market analysts. HR professionals should not just look at internal metrics of how satisfied customers are, assuming their organisation is tracking them (though too few companies do so systematically), but by market-based indicators. Across industries there are industry-specific metrics that are being tracked the most. That is, beyond turnover and profit, we tend to look to how competitors in certain industry compete on a core set of specific metrics; and some analysts focus narrowly on these metrics when judging performance.

Alfred Sloan, who had no doubts that businesses had to make money, recognised the need to sustain that ability through creativity. “The greatest thrill that life offers”, he claimed, “is to create, to construct, to develop, something useful. Too often we fail to recognise and pay tribute to the creative spirit. It is that spirit that creates our jobs”. Sustaining performance means innovating. But it is not just about coming up with new ideas. As Sloan observes, they have to be useful; in other words, they have to create customer value.

reduce their future innovation pipeline. Doubts are continually raised that Apple is no longer capable of the previous impactful innovation the organisation saw under Jobs. And even young darling Facebook is being called out by innovation sceptics, accusing it and founder / CEO Mark Zuckerberg of only copying competitors (such as Instagram’s stories) rather than being capable of innovating itself.

Innovation is handled poorly in too many organisations, being supported by general programs and insufficient or unclear policies. Unfortunately, too many Performance is about creating value not internal programs focus on generating just for current customers, but for future ideas for innovation, but most companies ones as well; it is about growing existing are not seeing tangible performance markets and future ones. Thus, for from innovation. More so, while most many organisations innovation metrics organisations desire future growth and success from innovation are the from innovation, these ideas struggle key performance metrics that matter. to overcome internal market blockers Some organisations set specific metrics and are never tested in the external they will measure. 3M, for example, has market. For many looking to boost its New Product Vitality Index to track revenue from newly introduced products. performance, examining the formal and informal processes, support, and Multiple organisations track innovation culture surrounding innovation in the performance. Consultancy BCG organisation is a place to start. Examples of some of the most surveys thousands of executives and commonly mentioned are like-for-like combines these rankings with financial For some this discussion of performance sales or same store sales (retail); revenue data, including TSR. Forbes ranks by so far will not sit well, as we have yet to per available seat mile (airlines); return the innovation premium5, which is the discuss company purpose. Many want to on capital or return on equity (banking); difference between a company’s market consider performance as not just making and value of pipeline (pharmaceutical). money but rather how organisations capitalisation and the net present value Of course, multiple performance metrics of cash flows from existing businesses. are improving the lives of customers, matter, but industry benchmarking and employees, communities, and society The metric assumes that this difference comparisons are often made on only a is the bonus given by investors regarding as a whole. How do we account for this handful of metrics, so mindful managers the future innovation pipeline. Fast when thinking about performance? Some should know which ones matter for their Company6, among others, also publishes organisations do so more systematically, industry, and keep abreast of these. adapting ‘triple bottom line7’ reporting. annual rankings. This refers to the three different and While many companies consistently earn If we return to Drucker’s quote, perhaps separate bottom lines firms should top places, even the most innovative less discussed is his insight related to the be tracking: profit (financial), people companies get punished occasionally. necessity of innovation. Performance is (employees), and planet (sustainability). When Google dropped its 20% flex time not just about how well the company is Despite its appeal, and the increasing allowance (where it asked employees doing today but how well it will do in the amount of sustainability tracking, it is still future. While intrinsic value measurements to allocate up to 20% of time to work less frequently used, especially as many on innovative, new ideas), its share price capture this to an extent, it is worth managers find reconciling the bottom dropped as investors felt this would focusing on innovation explicitly. lines against each other difficult. 5

https://www.forbes.com/sites/innovatorsdna/2017/08/08/how-we-rank-the-most-innovative-companies-2017/#7d563e945c46

https://www.fastcompany.com/most-innovative-companies/2017

http://www.economist.com/node/14301663

o2 WHAT DO WE MEAN BY PERFORMANCE?

“accounting metrics are like swimsuits... what they reveal is interesting, but what they hide is critical”.

Rebecca Homkes, attributed to a Bloomberg analyst

But even triple bottom line doesn’t explicitly address purpose. Previously, I have written that purpose is the intersection of an innovative approach to meeting unmet market need, strategic insight, unifying commitment, and a distinct reason for being, with strategy often being a mid-term expression of this. It is about what do as an organisation to achieve, and what are we willing, and not willing, to do to achieve it. While purpose and profit are often presented as choices, there is a different view of them as fitting together as part of a system. Making a profit is a basic requirement of survival. A business which goes bankrupt creates no value for anyone. In order to create value for shareholders, a business must earn above its cost of capital. In order to do that it must create products and services which are valued by customers. In order to provide those products and services, it must be able to attract employees and suppliers and so create jobs. If it works as a system, it will generate profits and so pay taxes, helping to sustain society as a whole. Despite its many problems, perhaps no better process has yet been found for creating prosperity. Ultimately, whether a business is successful or not is a matter of judgement. We must make that judgement by looking through many lenses, and thus it is critical that management teams have these conversations explicitly. There is no ultimate measure of the truth. Longterm intrinsic value may be the best single proxy, but how long is ‘longterm’? Most businesses only survive for a few decades, only a few today have lasted a century. Business organisations are a means to an end, not an end in themselves. Given all of these view on performance, which matters the most? It depends of course. However, what is important is that HR professionals understand the gamut of possibilities by which

organisational performance is measured and judged, and critically, which matters the most at that particular point of time. III. What matters for performance: Metrics that matter To those without a financial background, this section provides a brief introduction to some of the key performance metrics most frequently utilised. It is important to note that when measuring performance, we want to compare organisations against industry peers as well as the

same organisation over time. Most ratios are less helpful across industries, as different industries have different characteristics, such as typical margins (grocery retail has very low margins whereas software often has higher ones) and capital intensity (automotive and chemical companies are highly capital intense whereas professional services are less so). While ratios related to valuation are more commonly used cross-industry, any such comparisons should be done with caution. Some more intangible

Profitability Ratios: How are we doing? • Gross margin: Tells us: How cost disciplined are we? How profitable are we? Insight into: How well a company controls its cost; operating efficiency • Calculate: Revenue – cost of goods sold / Revenue • Return on sales (Operating profit margin): Tells us: How profitable are we? How operationally efficient are we? Insight into: A company’s pricing strategies and how well it controls costs • Calculate: Gross profit (Profit before interest and tax) / Total sales (Total revenue) • Return on assets: Tells us: How profitable a company is relative to its total assets? Insight into: A how efficient management is at using its assets to generate earnings • Calculate: Net income / Total Assets • Return on equity: Tells us: How efficient is the firm at generating profits from each unit of shareholder equity (net assets or assets minus liabilities)? Insight into: How well a company uses investments to generate earnings growth • Calculate: Net income / Total Equity • Earnings per share: Tells us: The portion of a company’s profit allocated to each outstanding share of common stock Insight into: How profitable is the company • Calculate: Net income – Dividends on preferred stock / Average shares outstanding Capital budgeting decisions / investments: Should we do this? • Payback period: Payback is the amount of time that it takes for a capital budgeting or other project to recover its initial cost. • Discounted cash flow analysis (DCF): DCF projects future cash flows and discounts them (using weighted average cost of capital) to arrive at present value. • Net present value (NPV): NPV is the difference between the present value of cash inflows and the present value of cash outflows. • Internal rate of return (IRR): The internal rate of return is the rate at which an investment project promises to generate a return during its useful life.

o2 WHAT DO WE MEAN BY PERFORMANCE?

“strategy is an articulation of how you’re going to create value over the mid-term”.

Rebecca Homkes

Valuation / price ratios: How much are we worth? Is our stock price reasonable or not? • Price to Earnings ratio (P/E Ratio): Ratio that measures current share price relative to its per share earnings; also known as the price multiple or the earnings multiple. • Calculate: Market value per share / Earnings per share • PEG Ratio: Stock’s price-to-earnings (P/E) ratio divided by the growth rate of earnings for a specified time period; used to determine a stock’s value while taking the company’s earnings growth into account (thus provides a more complete picture than the P/E ratio). • Calculate: Price per share / Earnings per Share • Price to Sales Ratio: Compares a company’s stock price to its revenues; this ratio is a helpful indicator of the value placed on each dollar of a company’s sales or revenues. • Calculate: Market capitalisation / Turnover (last 12 months) OR Stock price / Turnover per share (last 12 months) • Price to Book ratio: Compares market value of stock to its book value; Book value per share is calculated as follows: (Total assets – Total liabilities) / Number of shares outstanding. • Calculate: Market price per share / Book value per share Valuation metrics - The measure the overall value of the firm • Total value, or Market Capitalisation: • Market capitalisation is equal to the stock price multiplied by the number of shares outstanding. • Provides measure of company size, via basic determinant of asset allocation and risk-return parameters. • Firm value, or Enterprise value: • Enterprise value is calculated as the market capitalisation plus debt, minority interest and preferred shares, minus total cash and cash equivalents. • Considered as the takeover value of the firm: If you acquired a firm, you would acquire its debt as well, but you would then own the cash! aspects of performance, such as future innovation capability, are harder to value that more tangible ones, like value of physical assets, but these figures can be buried in the final valuation figures, which is why markets sometimes diverge as much as they do on how they value companies! In its most simple form, performance metrics can be broken down into a few main categories: profitability ratios, capital budgeting or investment ratios, and valuation or price ratios. A few key ratios are described in the box outs. While one should be familiar with these metrics and what they show, one must treat all of these numbers with caution.

Financial metrics can be managed through multiple means to tell certain stories. Indeed, as a frequent Bloomberg commenter once quipped: “Accounting metrics are like swimsuits. What they reveal is interesting, but what they hide is critical”. Good analysts must go beyond the individual numbers to get to the underlying story they are telling, or trying not to tell. IV. Performance and your organisation: What you should be able to answer What should one take away from the above? What is critical to know about your organisation? While it is recommended that HR professionals have a basic grasp on the performance

metrics, what is critical is that you know what matters most to your organisation and what will determine success. If one wants to be able to discuss performance, I challenge you to answer the following questions. IV.1 What is your company’s strategy? Many companies lack a strategy for growth, or use a strategy that is complicated, vague, or poorly understood. The most effective strategies are simple and clear to drive decisions and action throughout the company. Strategies are an articulation of value creation (see below), and I have found that effective strategies answer the following questions, to tell the strategy story. • What is the situation, and how will this change? • Where will we play? • How will we win? • What could stop us? • So, what should we do? IV.2 How does your company create value? Economic value is the difference between what a customer is willing to pay for your product or service and the cost of all resources (including the risk-adjusted cost of capital) required to produce it. Thus an articulation of your company’s value creation story explains how you will increase willingness-to-pay for a segment of customers, decrease costs relative to competitors, or both. Value creation, often measured through the lens of long-term free cash flow, helps us judge alternative strategies and subsequent performance. IV.3 What does success look like? One of the biggest obstacles I find to successfully executing strategy is that organisations are not clear on what it would look like if they actually did. That is, if your current strategy is successful, what will this look like? What

o2 WHAT DO WE MEAN BY PERFORMANCE?

“strategy is about making choices in uncertainty. pillars are not a strategy - they’re sometimes just used as an excuse to do whatever you want”.

Rebecca Homkes

is the ultimate measure of success for your company over its strategy cycle (typically three years)? How will you know you did it? The best definitions of success are clear, simple, concrete and unambiguous, that is we all agree whether or not we were successful. Having these conversations is critical, as often Board and Executive Team members disagree about the ultimate measures of success – be it market share, margin, customer satisfaction, etc. Having these conversations, and reaching a success definition that is ambitious but achievable for the organisation can be a motivating and driving force for increased performance. IV.4 How much is your company innovating, to succeed in the next? Your company’s ability to innovate, and execution on that innovation, is a key determinant of future performance. How well does your company do here? Do you know what kind of innovation your company is pursuing? Is it innovation within, outside, or against the current business models? How is it tracking or measuring this? How does your function support this innovation (and not distract with competing priorities)? IV.5 What does the market and investors expect from your company? If your company is publicly traded, do you know what market analysts have priced into your current share price? If it is public, do you know what the market would value your company at? IV.6 So, why would someone invest in you? All of the above begs the final question: Why should anyone invest in your company? Can you make a case for your organisation’s performance?

2.2

session highlights Rebecca asked attendees to discuss: • What are the top performance metrics that matter most to your organisation overall? • How are they measured? • How are they communicated? • How are they used? Rebecca’s first session took us on a rapid journey through the meaning and measurement of organisational performance, and how views of what was most important had changed over time, from Friedman (generate profit), through Mason (purpose), to Welch (who conceded that shareholder value is a consequence, not a strategy). Rebecca illustrated the pitfalls of not innovating, by giving three examples of how companies had been overtaken / bankrupted by innovation by others – Kodak by Insta, Blockbuster by Netflix, and Nokia by Apple. She outlined the various different financial metrics associated with all these different aspects of performance, the performance beyond profits concept of ‘triple bottom line reporting’, together with a number of industry specific measures such as: • Airlines – revenue per available seat mile (RASM) • Retail – same store sales / like for like sales • Pharmaceutical – value of pipeline, particularly the Phase 3 stage • Banking – return on capital, return on equity But which of all these measures matters most? The answer is that ‘it depends…’. And it is also important to remember that no one metric will give all the answers – you need several to build a full picture.

After a much needed coffee break, Rebecca’s second session took us through how to look at strategy and performance in our own organisations, using questions IV.1 - IV.6 as a guiding framework. Through all of this, she emphasised that strategy involves making choices, and that this can be difficult. She liked a sign in a Cambridge print shop that said “We will deliver your project FAST, ACCURATE & CHEAP (Pick any two)” – which illustrated that perfectly. In contrast, many organisations have so many ‘pillars’ that in effect they could do anything and say it was in line with their strategy. She gave Ducatti as an example of a company that had developed real clarity about where they would play, and Apple as an example of focus – generated by taking things off the table. Knowing what success looks like is key – and it needs to be clear, simple and finite. NASA / Kennedy’s 1962 “Land a man on the moon and bring him back safely before the end of the decade” certainly fits those criteria. Other notable examples included GE – “Be number one or number two in every business globally” and Airbus in the 1990’s with “Beat Boeing”. Table discussions then tried to answer the killer question – “So, what is the number one reason an investor should invest in your company right now?” Final questions included the mismatch between long-term strategy and quarterly investor expectations. Rebecca gave the example of Tesla, where Elon Musk has consistently missed the numbers he has forecast, but investors still had confidence in him. It all depends on the levels of confidence, and who the shareholders are. She also illustrated that the principles could be applied in the public and charitable sectors – translate ‘winning’ to ‘success’, and then define what success looks like in granular, rather than ‘making the world a better place’, terms.

O3 How could performance discussions contribute more to improving performance? Wendy Hirsh, Researcher and Consultant

3.1

position paper Human beings managed pretty well without formal performance review conversations for thousands of years. But during the second half of the twentieth century the annual performance appraisal discussion became a widespread ritual in western employing organisations. For those who like a quick bit of history, Cappelli and Tavis (2016) review the development of performance appraisals over many decades of shifting economic pressures and organisational change, right up to the current experiments in getting rid of them altogether. By the 1990s, HR had a fairly formulaic approach to performance appraisal based on setting annual individual objectives, assessing (or rating) their achievement and the identification of training needs (often expressed as a personal development plan or developmental objectives). There is a huge literature, spanning well over fifty years, on why annual performance appraisal conversations are often demoralising and frustrating both for individual employees and their managers, and why they do not necessarily lead to improved organisational performance. A new century gave us a new terminology. HR’s shift from performance appraisal to performance

management was supposed to fix some of the flaws in old style appraisal, especially its backward looking focus and the way it was ‘done to’ employees. “Performance appraisal has a reputation as a punitive, top-down control device, an unloved system. Performance Management is a holistic, total approach to engaging everyone in the organisation in a continuous process, to improve everyone and their performance, and thereby the performance of the whole organisation.” Armstrong and Baron (2004). For more than a decade HR rhetoric has advocated performance conversations that align individual objectives with organisation strategy, take place throughout the year and are primarily developmental in focus. However, many organisations still require a formal, documented annual performance review, often including a performance rating and a link to individual reward. Fashions in elements of the design of annual reviews come and go, especially around how to define and assess skills and behaviour, but annual performance reviews are, in essence, still old style appraisals – but rather more complicated and of course now computerised. How conversations can improve performance CRF analysed narrative accounts of effective appraisal conversations (from both appraisers and appraisees) and

Critiques of performance appraisal discussions “Performance review interviews as a rule are seriously deflating to employees’ sense of importance and self worth. Not only is the conventional review failing to contribute, in many executives’ opinion it can do irreparable harm”. Likert, (1959). “Rarely in the history of management can a system have promised so much and delivered so little”. Grint, (1993). “The traditional assessment-oriented approach to appraisal, with its emphasis on comparing people and linking assessment with rewards, fails to deliver on almost every count. Appraisal has a valuable function in developing people and that this is where its motivational value lies”. Fletcher, (1995). “Not only do managers dislike carrying out performance appraisals but many admit that it is the most dreaded task in their calendar. Too often it leads to a shallow discussion, with both parties colluding to meet the organisation’s prescribed administrative procedure and, in doing so, avoiding the more fundamental issue of performance improvement”. Cunneen, (2006).

o3 HOW COULD PERFORMANCE DISCUSSIONS CONTRIBUTE MORE TO IMPROVING PERFORMANCE?

“performance appraisal is an affectation of the second half of the 20th Century”.

Wendy Hirsh

found that they often highlighted just one thing that would make a real difference to the individual’s performance (Hirsh, 2006). What that one thing was depended on the individual, the type of job, length of tenure in the job and level of performance. In other words effective performance conversations were contingent, as Cederblom said in 1982. The commonest pattern of effective conversation in the CRF study identified a clear area for improvement and then led to practical follow-up support to achieve this. CRF found that most ineffective conversations felt empty: “going through the motions”, “ticking the boxes”, “filling in the form”.

process of giving personalised attention and offering praise as well as practical suggestions for change is motivating in itself. 3. Agreed actions, including skill development, to bring about improvement in contribution. This element only improves performance if the action is followed up after the conversation. For some individuals, development planning may need to focus on addressing poor performance or career development rather than skill development in the current job.

4. The conversation itself needs to be a motivating experience. This is both about understanding West and Dawson (2012) showed that the motivational potential of the well implemented, developmental three elements above, but is also appraisal systems in the NHS were a result of how the conversation associated with better patient outcomes, is conducted. Without this fourth but also that badly conducted component, the other three do not appraisals were worse for employee work. engagement than having no appraisal If we look at the thought habits at all. This chimes with research on high and behaviour of leaders who get performance work practices (including exceptional business results, we see Purcell et al, 2003) which shows that them consciously using all these levers organisational performance is only (Tamkin et al, 2010). They invest effort in improved when HR practices are well getting to know their staff and creating integrated with each other and well a climate of trust and openness in the implemented at all levels. team. They focus on the realism of The mechanisms through which conversations can improve performance Research highlights four main ways in which we might expect conversations to improve individual and organisational performance: 1.

Helping employees to understand expectations of their performance in the context of organisational priorities. This alignment should help them know what to prioritise. There is also evidence that goal setting can in itself be an effective motivator (Locke and Latham, 1990).

2. Constructive feedback helps employees identify what they can do to perform better. Again the

work priorities as well as their clarity and business alignment. They use frequent informal discussions of problems and events to give feedback and to coach individuals, often by rehearsing challenging tasks beforehand and reviewing them afterwards. They adopt a personalised approach to talent management, giving individuals career development attention finely tuned to their capacity for development and pace of growth. A striking feature of the most effective leaders in this study was their use of team meetings to set priorities, identify actions to improve performance and also to develop capabilities. This use of team conversations alongside individual 1-1s saved them time and also led to a more open team climate.

What helps or hinders effective performance conversations? There is a reasonable consensus about what makes performance conversations more or less effective, as summarised in the table (see also Hirsh and Reilly, 2012). Many of these features are well understood, although they are not always remembered and acted on by HR. Opinion is still deeply divided on whether the use of ratings and individual performance related pay actually improves performance. But it is clear that if these outputs loom too large in the performance conversation itself, then the conversation shifts to an adversarial dynamic as the individual feels they need to argue their case for a high rating or pay increase. Recent attempts to make ratings fairer through so-called calibration or moderation processes may lead to greater objectivity, but are often not perceived as fair – and we know it is perceived fairness that affects the motivational impact of such systems. One of the things we knew in the 1990s but have tended to forget again more recently is that performance conversations are more effective when the employee is an equal partner in the whole process. In particular, goal setting only motivates when employees have a significant input into their own goals. This does not conflict with strategic alignment of work priorities, but argues for careful discussion with individuals and teams of how business priorities translate into priorities and goals. HR’s own behaviour all too often appears to value the completion of end year review documents more than the quality and impact of performance conversations. This undermines the function’s own message that it is the conversation that counts, not the paperwork. We still have limited evidence about whether simply stopping formal annual

o3 HOW COULD PERFORMANCE DISCUSSIONS CONTRIBUTE MORE TO IMPROVING PERFORMANCE?

“a bad performance conversation is worse than not having one at all”.

Wendy Hirsh

What hinders effective performance conversations?

What should help?

Focus on compliance, resulting from emphasis on backward-looking annual assessment and form filling

Focus on action to improve performance. Foreground frequent, future-looking 1-1s

A ‘one size fits all’ process, with a complex agenda

Conversation agendas relevant to employee and their situation – employee has input to agenda setting

SMART objectives not appropriate for very routine or open ended jobs. Objectives mechanically cut and pasted or artificially selected – not reflecting the job

Priorities openly discussed and expressed in form relevant to job, individual and organisation. Clear understanding of desired behaviour, role modelled from the top

Top down approach to performance. Employee ‘done to’ by manager

Employee an active partner in all aspects of performance management, especially goal setting

Managers who do not know their people or how they really perform

Constructive, well informed feedback from valid sources

Ratings and their use for individual reward shift the dynamic of conversations used to generate them. Trust damaged if ratings / rewards perceived as unfair

If ratings are to be used they do not dominate performance conversation and are decided with minimum fuss

Weak development action, especially for ‘normal good’ employees. Development as a list of courses

Coaching conversations with the manager and others. Careful delegation, rehearsing new or challenging tasks and reviewing them afterwards. Coaching skills mainstreamed for managers and employees

IT systems driving performance management practice by determining data to be collected. HR measures process compliance: data completion

Practice driven by research evidence, organisational needs and evaluation of the quality and impact of performance conversations

reviews can lead to a blossoming of more effective real-time performance conversations. Cappelli and Tavis (2016) cite some recent examples of midground or ‘third way’ approaches, with more real-time conversations but also modified approaches to ratings and various forms of merit pay. They also rightly raise some future challenges including identifying poor performers and managing what they call the ‘feedback firehouse’ that may result from social media tools simply spraying individuals with feedback, not all of

management appears almost exclusively on the individual employee. This feels oddly dislocated from what we know about how the work environment enables or blocks the contribution an employee can make. A range of factors affect how the individual does their job and how they contribute to organisational performance: • Team performance and its discussion in team meetings can take some of the load off individual performance conversations, especially in exploring how local performance contributes to organisational goals. Relationships within the team are also a key enabler or blocker of individual performance. Good managers deal rapidly with relationship problems within and between teams. • Work systems, job design and deployment are central to how the individual contributes and have been woefully neglected by HR. In Purcell’s Ability, Motivation, Opportunity model of performance (2003), an able and motivated employee only contributes effectively to organisational performance if their job provides the opportunity to use their skills in a way that supports business goals.

Individual performance in its organisational context

• Change is ever-present and yet we persist in setting annual objectives and April reviews. The standard performance review process deals poorly with objectives that need to change during the year and with how employees should be helping to drive change.

The HR agenda now includes organisation development, organisational effectiveness and employee engagement. Several other business functions focus on business systems capable of delivering quality improvement and efficiency – crucial work given the UK’s apparently poor and declining productivity. Yet the focus within HR’s approach to performance

• Resources – the tools to do a good job – include time and technology, but also support from the manager and others. The upward feedback aspect of performance conversations was advocated in earlier decades but seems to have got lost. Engagement surveys are useful, but do not give the individual an opportunity to explain how their

which will be valid or constructive.

o3 HOW COULD PERFORMANCE DISCUSSIONS CONTRIBUTE MORE TO IMPROVING PERFORMANCE?

“the whole process can be profoundly demoralising for the ‘good average’ performer”.

Wendy Hirsh

manager could help them perform better and agree actions for the manager as well as for themselves. • Personal issues affect performance and there is often a blurred boundary between work and personal life. Issues such as stress, mental and physical health and work-life balance need careful and often confidential discussion outside the formal performance management process. Such conversations may lead to more specialist sources of help or advice.

behaviour, skill assessment or review, performance rating, development planning, talent identification, career development and probably more besides.

Conversations are the very essence of how people are managed at work and how organisations get the best contribution from them. But HR contradicts its own message about the importance of performance conversations by prioritising managerial compliance with a ritual, annual bureaucratic exercise. It makes this worse by calling performance How to make performance conversations ‘difficult’ (why would you conversations more effective - a simple want more of those?) and by purchasing model for managers ever more bossy and inflexible information systems that managers are The STAIR graphic (albeit with required to feed. We do know quite initial letters not quite in this a lot about what good performance order!) summarises five important characteristics of effective performance and development conversations look like and can achieve. After fifty years conversations for managers and of failure with an overly bureaucratic individual employees to remember. approach to managing performance, it If more performance conversations seems worth redirecting some of this were relevant and timely with genuinely effort into talking to our people about shared ownership, they would lead to themselves and their work. greater insights and in turn to more Questions for HR and business leaders appropriate actions, more likely to be followed up. Semi-formal conversations, If you are an HR professional or business like regular one-to-one meetings, can leader, you might like to ask yourself be focused through the use of mutual some questions about your own agenda-setting but also be flexible in organisation’s approach: addressing a range of issues and actions • What might help your employees to over time. This moves us away from have more conversations that really the daunting agenda of the typical improve individual and organisational annual review conversation which is performance? often supposed to cover goal-setting, feedback on both goal attainment and • Is the information you collect

How to make performance conversations more effective Action Insight Timely Shared Relevant

Action agreed and followed up

Understanding gained by employee and / or manager

At the appropriate time to reflect and act

Adult-adult: shared ownership of agenda, goals, insights and action

Relevant to business priorities, job and situation of the individual and / or team

about individual performance and development valid? Is it actually used to improve performance? Do these benefits outweigh the costs of the information collection process? • Where should you focus your own performance management effort? • Are there things HR now needs to let go?

See Appendix: Performance Management: Research reviews and evidence sources.

3.2

session highlights Wendy started by challenging us about performance discussions – “You already know it, but forget it and don’t do it”, and proceeded to debunk myths and focus on what effective performance conversations really entail. She outlined the long history of disappointments with performance appraisals / reviews, from Likert as early as 1959, through Grint in 1993 (“Rarely in the history of management can a system have promised so much and delivered so little”), to Fletcher (1995) and Culleen (2006). It doesn’t work, can encourage collusion in evading real conversations, and can be demotivating and toxic. But was performance management a new dawn, or no better? She thought that HR wanted it to be like this quote from Garrison Kieler: “Welcome to Lake Woebegon, where all the women are strong, all the men are good looking, and all the children are above average”. The problem was that all the systems tell people they’re not as good as they

o3 HOW COULD PERFORMANCE DISCUSSIONS CONTRIBUTE MORE TO IMPROVING PERFORMANCE??

should be, and “the whole process can be profoundly demoralising for the ‘good average’ performer”. Effective performance conversations do exist, and have four commonalities – one clear thing that has impact; they are contingent on the individual and their context; the context includes role, tenure, motivations; and identifies a clear area for improvement and help to achieve it. Getting it wrong can lead to lack of engagement – research by the King’s Fund in 2012 found that engagement was lower in those who had a poor quality discussion, than in those who had no appraisal at all. Wendy summarised the four levers through which conversations can improve performance: • A conversation that motivates – without this, the others don’t work • Understand and align expectations, priorities and goals. And goal setting can only be motivational if the person has been involved in setting the goals • There is constructive feedback • Development / improvement actions are agreed. She looked at empirical evidence (from The Work Foundation) of what effective leaders actually do – they get to know their people first, they have a sense of realism around work priorities, and they set challenges but coach through rehearsal and debriefs. She thought that “HR got into bad habits, and forgot to relate individual performance to the organisational context”, and that the accepted performance management narrative neglected team performance and team dynamics; the whole area of work systems, job design and deployment; change; resources and personal issues including mental health.

performance conversations were being put in context – Surrey and Sussex Police, and Associated British Ports. In ABF, the direction is for frequent, informal Individual ‘check-ins’ based around standard questions, together with quarterly Team check-ins. She shared a simple model for managers to make performance conversations more effective – this is shown in full in her paper. Q&A’s prompted the following observations: • HR had an ‘illusion of control’ from all the documentation that surrounded performance management, but often looking in other places (e.g. engagement surveys) would show what was really going on. • There is contradictory evidence around using a strengths based approach. Good conversations can be had about the negatives too – managers need help to do both. • There is recognition that ratings can be demotivating, although it helps prevent the ‘everyone is awesome’ syndrome. Some like ratings, some hate them – but the numbers are frequently not valid – they’re ‘false numbers’. And they can cost a fortune to produce – are you getting any benefit for that spend?

Wendy concluded by talking through two case study organisations, where

O4 reward trends David Wreford, Partner, Mercer

4.1

• Do you know what you should be paying?

session highlights

• Are you consistent?

David kicked off by sharing some stats on ratings from Mercer’s Talent Trends 2017 report. A short version is available at https:// www.mercer.com/content/dam/mercer/ attachments/global/webcasts/global-talenttrends-2017-europe.pdf). The full report (which requires registration to view) is available at https://www.mercer.com/ourthinking/career/global-talent-hr-trends.html

Getting this right has become more rigorous in a low-money environment – around 6 years ago, only about 60% of employers thought what they were paying was about right - this is more like 70/80% today. Pay too much, and fixed costs are increased – pay too little and there’s a risk to retention. Hipos are typically underpaid – they progress faster than pay catches up with them. It was a truism though that you can only get reward ‘roughly right or precisely wrong’.

• To rate or not – 61% had eliminated ratings, or were planning to • Numbers or words – 75% had moved from numbers to words • Forced rankings – 39% had added or removed in the previous year, and were now doing the opposite • Do employees value it – no! He saw a big drive for the simplification of programmes. A telling story was the work that the US Airforce did on trying to understand what questions and assessments were the best correlations with success – the only question that was a predictor turned out to be “As a child, did you ever make a plane that flew?” David looked at four key aspects of reward: legacy practices, the future of work, the compelling proposition and reward engagement. Looking at legacy practices, he said that there were three killer questions to ask: • Do you know what you’re paying?

Governance was an issue too – there were swings between global and local, and HR and line control, and the big question of differentiation vs sameness. Do you steepen the line (e.g. for hipos), or flatten the line to encourage collaboration? And as David said, “Nothing is more unequal than the equal treatment of unequals”. In all of this, communication and understanding was still difficult – let alone getting to the stage of managers being advocates. David examined the future of work through two lenses – the future of jobs (e.g. globalisation, AI, digital, robotics etc), and the future of talent (e.g. multiple generations in the workplace, digital social world, the rise of the free agent etc), and suggested that now is the time for employers to take a fresh look at their employee experience. Creating a compelling experience had to be data driven – not just by what people said, but also through how they

behave, picked up from measures such as engagement, turnover and rewards programme utilisation. Taking a holistic view was important, and a talent strategy has to come before a reward strategy. Companies who ‘buy’ their talent need a big focus on a competitive comp. and ben. strategy. Those who focus on development and careers need more emphasis on wellbeing. But all need to focus on purpose – creating staying power through a unique proposition. Obviously this was easier for organisations such as the Red Cross, or MSF (Médecins Sans Frontières), but not impossible for others. This compelling experience needs to be targeted to the individual; this is made easier by the creation of typical ‘personas’ e.g. the starters, the long-term loyals, the strivers etc. Reward engagement was still an issue – we have mostly become very good at telling and explaining, but not so much at answering the ‘why’ question. There is a move to more transparency, but there are still some no-go areas for most – the open publication of salaries, for example. But more openness can be linked to potential career pathways and the potential rewards that might then accrue. David finished with an eclectic list of innovative rewards being tried by organisations. These included time off for volunteer activities, 9 day fortnights, paying for gender re-assignment surgery, gyms / acupuncture / massage type offerings, travel benefits, and sabbaticals of varying durations.

O5 Recent Research on Performance Management: Does Anything Work? Gerry Ledford, Senior Research Scientist, Center for Effective Organizations USC

5.1

position paper It is hard not to be discouraged about the value of performance management. Its problems are familiar, and have not changed for decades. Reviews of the research literature are discouraging, and indicate that on average performance management does not have strong positive effects. Are we learning anything new from research on performance management? I have led a series of research projects on performance management during the past several years, working at the Center for Effective Organizations (CEO) at the Marshall School of Business, University of Southern California. My colleagues on these projects have included Ed Lawler, George Benson, and Ben Schneider. The work builds on research on performance management that CEO has conducted for almost 40 years. This paper summarizes some of the key findings of our studies. Study of 244 Companies Using Cutting-Edge Practices With support from WorldatWork, we examined the adoption of three cutting-edge practices (ratingless reviews, ongoing feedback provided at least four times a year, and crowd-

sourced feedback using social media) in a sample1of 244 companies. These are some of the hottest practices in all of HR, not just in performance management. We have published a series of papers from those data, which may be found at: https://ceo.usc.edu/ active-research/articles-performancemanagement/. Here we summarize some of our key findings. 1.

Why are companies adopting these practices? Cutting-edge practices have many possible goals that collapsed statistically into three categories: strategic alignment (e.g. increasing the organization’s performance, supporting company values, and supporting the business strategy); effectiveness of the performance management process (e.g. providing useful feedback, a good experience for employees and managers, increasing the time managers spend on coaching), and traditional reward system objectives (e.g. motivating, developing, rewarding, and attracting employees). This reminds us of the complexity of the goals of performance management and the difficulty in assessing the process. Interestingly, the primary reasons for adoption were strategic alignment and increasing process effectiveness. Reward system objectives, which usually get most

of the attention in assessments of effectiveness, were much less important. 2. H ow effective are cutting-edge practices? Cutting-edge practices were marginally effective at meeting their objectives. Respondents gave their practices an average score of 5 on a 7-point scale (equivalent to ‘slightly effective’) for the first two goal categories, while reward goals received a rating only slightly above the ‘neutral’ midpoint of the scale. We also found that ratings of the effectiveness of cuttingedge practices on a number of outcomes in this study were modestly but were significantly higher than ratings of more traditional practices in prior CEO studies, notably in providing useful feedback, motivating performance, and developing employee skills and knowledge. In other words, cutting-edge practices represent an improvement but a minor one. 3. T here were some surprises in the adoption of cutting edge practices. Although ratingless reviews have received widespread media attention, only half of our sample adopted them. Instead, the real driver was ongoing feedback; all but 8 of 244 companies adopted it. The least widely adopted practice was the newest practice, crowd-sourced

Center for Effective Organizations - Marshall School of Business - University of Southern California Los Angeles CA 90015 (213) 740-9814 Fax (213) 740-4354 http://ceo.usc.edu 19

o5 RECENT RESEARCH ON PERFORMANCE MANAGEMENT: DOES ANYTHING WORK?

“strong performance feedback cultures succeed even with outdated tools. weak performance management cultures fail even with the best techniques”.

Gerry Ledford

feedback, which was adopted by 27% of the sample.

Key findings of the study:

1. Ratingless appraisal had no 4. D ifferent combinations of significant effect on attitudes practices have different or behavior. The number of effects. The three practices are feedback sessions per year did not complementary and together they change, there was no increase in are more effective, especially for coaching by managers, no increase strategic alignment and creating an in developmental feedback, no effective process. We looked at the change in satisfaction with the level of effectiveness in meeting performance management process, each goal versus whether the firm and no change in outcomes such adopted only one of the practices, as organizational commitment two practices, or all three. The most in the pilot units compared effective combination was always to controls. Not surprisingly, the adoption of all three practices employees were generally very or, in a few cases, the combination neutral in their reactions to of ongoing feedback and crowdratingless appraisal (although sourced feedback without ratingless interestingly, high performers reviews. This suggests that preferred it). specific practices cannot be easily 2. Two other variables were examined in isolation; they interact strongly related to effectiveness: in important ways. more frequent feedback and Quasi-Experimental Study of Ratingless developmentally oriented Appraisal feedback. This provides clear, actionable guidance to Our second study was a quasimanagement. Employees want to experiment for ratingless appraisal in hear from their managers more an insurance company. We conducted rather than less, and they want to this during the past two years. The know not only how well they are company already used a very effective doing, but what they need to do performance management process better. with many advanced components. For example, it used ongoing feedback (a minimum of four times per year, with an average of eight times), a simplified rating scale (Not Performing, Performing, and Exceeding), and a solid goal setting process. One indication of how effective this process was: 85% of employees were satisfied with the performance management process before the pilot change. That is rare indeed. To investigate whether ratingless appraisal would make a good process even better, the company implemented ratingless appraisal in several pilot units. We collected before and after data from employees, managers, and organizational records both in the pilot units and in a large comparison group.

3. R atingless appraisal may change the goal setting process and tone of the review. An analysis of goals set in the pilot units indicated that employees set fewer goals overall, and more of the goals that they set were oriented toward development than before ratingless reviews. Also, an analysis of the text of reviews using a text analysis engine found that managers’ reviews after the adoption of ratingless appraisal were far less likely to include the word “I” and were almost twice as likely to use the word “we”. This may indicate a changing mindset. Overall, the results suggest that the absence of ratings is not the key to an effective process. Rather, the frequency of feedback and the degree to which it

is developmental are key. The findings reinforce the conclusion that ratingless appraisal is not a strong intervention by itself, and that other changes to performance management have stronger effects. Note: when we have a paper that we can share, we will post it on the CEO web page linked above. Performance Feedback Culture: Why We Think It Matters Decades of practitioner and research literature on performance management lead to a striking conclusion. The field of performance management is obsessed by technique and pays little attention to the context for performance management. The current obsession with cutting-edge techniques is part of a pattern that is 70 years in the making. Yet hundreds of studies indicate that changing the rating scale, the training program, the technology, or the number of raters may have some minor positive effects, and the effects typically are marginal at best. The essence of good performance management is open, honest, twoway communication about past performance and future expectations. What causes managers to undertake the difficult, time-consuming, and even painful process of providing high quality feedback to employees? Apparently, providing such feedback is an unnatural act in most organizations. Technique usually has little to do with whether managers offer high quality feedback. Rather, the organization’s performance feedback culture overwhelms the effects of technique. Organizations with a strong, positive performance feedback culture inculcate in managers the belief that delivering quality feedback is part of their job and they are failing if they do not deliver it. Such organizations often have relatively primitive processes. Conversely, companies with all the latest bells and whistles will fail if the performance feedback culture is weak. Organizational culture is well established as a key force in governing behavior

o5 RECENT RESEARCH ON PERFORMANCE MANAGEMENT: DOES ANYTHING WORK?

“Its ratingless appraisals that get all the ink, it’s not just what people do in practice”.

Gerry Ledford

and performance in organizations. One of our colleagues, Ben Schneider, has spent decades studying the effects of customer service culture on customer service and the effects of safety culture on accidents. The average effect sizes found in these studies are enormous compared to those in studies of performance management techniques. Therefore, we are conducting studies to examine (1) the importance of performance feedback culture in managerial feedback and employee attitudes and behaviors, and (2) the ways in which companies can best create a strong performance feedback culture. We believe that companies can create a strong culture by communication and training, good selection and promotion into managerial roles, rewards for good feedback behavior, manager monitoring, and modeling by executives. We are conducting two major studies of these issues. Performance Feedback Culture in an Accounting Firm We studied performance feedback culture and its effects in a global accounting firm earlier this year. We collected data from a large sample of units in the firm, defined by line of business and geographic territory, with approximately 1,000 employees and managers participating. This permitted us to examine variations in performance feedback culture across units, and to see the relationship between performance feedback culture and employee attitudes and manager behavior. We are still analyzing the results and eventually we will have several papers based on the data that we will post on our web page. However, we have some interesting preliminary findings. 1.

We replicated the finding that frequency of feedback and the degree to which feedback is developmental are strongly related to performance management effectiveness. Again, this is a very useful and practical finding.

2. We found support for the importance of performance feedback culture. Our statistical modeling indicates that, as predicted, the performance feedback culture of a unit as reported by managers is related to employee reports of the feedback behavior of managers and the effectiveness of the performance management process. Multi-Company Study of Performance Feedback Culture In September 2017, we will collect data for a multi-company study of performance feedback culture. This study will be done in collaboration with the Institute for Corporate Productivity (i4cp). We hope to collect data from a large sample to examine the importance of performance feedback culture to the effectiveness of performance management and corporate performance, as well as to take an indepth look at how companies build a strong performance feedback culture. The previous study in an accounting firm examined how performance feedback culture varies within a large, complex corporation and how such internal variation is related to important outcomes. This capitalizes on the prevalence of subcultures in any large, complex organization. The new study will look across firms, providing a complementary perspective on the importance of performance feedback culture. We think the study is likely to be especially important in understanding how to build an effective corporate culture. The ways in which managers receive communication, training, modeling, monitoring, rewards and punishments, and are selected for their roles probably vary much more across rather than within companies, giving us a better opportunity to examine which action levers are the most important. We will publish results from the study with i4cp in 2018. The study report will be posted on CEO’s performance 21

management web page that was linked above. Conclusion Our recent studies have found that performance management techniques, no matter how popular, have modest effects on process effectiveness. We see more promise in ongoing feedback and crowd-sourced feedback than the darling of the press, ratingless appraisal, but all of these techniques have limited effects. More recently, we have investigated the importance of organizational context – namely, the performance feedback culture that governs managerial behavior. Our research indicates that culture is more powerful than specific techniques in leading managers to provide regular, high quality feedback to employees. We now are looking at which action levers are most important in promoting an effective performance feedback culture.

5.2

session highlights The CEO (Center for Effective Organizations) has been researching performance management for many years - their first study was 36 years ago, with several follow-on studies since. Today, Gerry summarised four recent studies (examined in detail in his paper), and highlighted some simple, but occasionally uncomfortable, truths. Study 1 was a large-scale, on-line survey of organisations using at least one of the three practices often referred to as ‘leading edge practices’ – ratingless appraisals, ongoing feedback and crowd-sourced performance feedback. 244 unique organisations took part – far in excess of what they had hoped for.

o5 RECENT RESEARCH ON PERFORMANCE MANAGEMENT: DOES ANYTHING WORK?

“many companies are seeking to simplify performance ratings - and we’ve seen 2 that went to ‘walks on water/swimming/sinking’”.

Gerry Ledford

“Its ratingless appraisals that get all the ink, it’s just not what people do in practice”. Ongoing feedback was the most common approach, and ongoing feedback together with ratingless reviews the second. But how effective are the practices? The most effective is to use all three, ongoing feedback plus crowdsourced came second – but “ratingless came nowhere”. There is some evidence that these new approaches are also an improvement on ‘traditional practices’ – but not by much. Study 2 was carried out with a health insurance and services company, with a good existing PM system. They found no significant benefit from using ratingless appraisals; the key predictors of success were how often feedback was provided, and the degree to which feedback was developmental. Gerry went on to talk about the need for many companies to simplify their ratings, particularly in the low pay - increase environment of the past few years. One of the worst organisations he had seen was a defence contractor, which used 15 factors and a 10 point scale for each! At the other end of the spectrum were 2 organisations which had simplified their scales to “walks on water / swimming / sinking”. Perhaps ‘exceeding / performing well/in trouble’ might be better. Study 3 is looking at performance feedback cultures in a global accounting firm. Gerry and team are testing the key assumptions that the most important factor in effective PM is manager behaviour – good, open, honest conversation. This involves both skill – and will. Unfortunately, the endless focus on forms, techniques and technology undermine this. Their observation is that “Strong performance feedback cultures succeed even with outdated tools. Weak performance management cultures fail even with the best techniques”.

related to the frequency of feedback, and the degree to which feedback is developmental. Study 4 – this is where CRF members can get involved! Gerry outlined a new study in conjunction with i4cp, where they hope to get several hundred company participants. They will look at several factors, including company performance outcomes, and how they are building strong performance feedback cultures. Data collection is in October 2017. You can participate by taking a 12-15 minute survey at: https://uscmarshall.qualtrics. com/jfe/form/SV_0kwDJ7FLYuBVg8t If there is enough data, Gerry will do a cut of European vs US companies, for distribution via CRF in 2018. Gerry’s session generated much questioning and debate. Key points from this are: • Crowd-sourcing – works well in teambased/project-based organisations, where the manager maybe doesn’t work closely with the individual all the time. Much less clunky than typical 360’s. It’s fast, focused, public and transparent – so sometimes can overemphasise the positives. • Generational differences are sometimes overblown - but what is different is the ease of use of technology by those who have grown up with it. • Feedback needs both the skill to give it, and the ability to hear it. Employees need to ask themselves ‘How can you get the most out of your feedback?’ For further reading visit: https://hbr. org/2015/08/ges-real-time-performancedevelopment

Preliminary findings replicate earlier work – that the effectiveness of PM is strongly

O6 Case study: jaguar land rover David Birtwistle, HR Director, Performance Reward & Engagement, Jaguar Land Rover

session highlights Mike interviewed David about the resurgence of Jaguar Land Rover (JLR), since Tata acquired them from Ford in 2008 - they had moved from a poor quality, discounted marque to a high quality, bigger production, full priced marque. David made these key points. He agreed that demand had grown exponentially, and quality had drastically improved too – this was entirely down to how the business had been run by Tata. Under Ford ownership JLR was a small part of a massive empire, starved of investment, and micromanaged. Leadership merely executed on decisions from Detroit. Tata had trust and belief in the leadership team, and recognised that there were good people and good designers. Tata had trusted the business as a whole – but interestingly, David said that perhaps JLR needed to believe in themselves as much as Tata had. Tata Chair the Board, but do not micromanage, nor have they put a layer of Indian management in place. JLR actually had many Germans in the team – that’s where they had to go to find the talent they needed for success. They had made significant investments in design and quality, and also developing the brand itself, which had been key to their success in markets such as China. Tata were in it for the long term (another example of that was their investment in Tata Steel), and automotive is a long-term game. JLR is looking ahead way beyond 2020, and out of internal combustion engine cars. It sees itself increasingly as a technology company - “software with 4 wheels attached”.

Closing comments Wendy Hirsh: she found Gerry’s session fascinating; it was really strongly evidenced material that aligns with what we’ve known for some time. The trick is how to translate this into things that managers and employees can and will do – make it really simple. Recognition, and not just reward, is important. David Wreford: along the way, by formalising appraisal we seem to have lost performance management. We need to create the right environment and guide people, and not just for reward. Rolls Royce: recognise that engineers are engineers – they don’t ‘do’ freedom and relaxed. They like boxes and process. We need to look again at career paths, and who becomes managers. We need a new programme to train them – and it will take time. Balfour Beatty: from being in bad shape 3 years ago, a new CEO had now fixed the basics e.g. cash flow, controls, safety. They now need to build in purpose. It’s not been easy, and people don’t always like it. Gerry Ledford: you can reward for performance, but it’s how you do it appropriately. 10 point scales don’t work, paying the same doesn’t work, and high performers are highly attuned to differentiation.

APPENDIX: PERFORMANCE MANAGEMENT: RESEARCH REVIEWS AND EVIDENCE SOURCES

APPENDIX: PERFORMANCE MANAGEMENT: RESEARCH REVIEWS AND EVIDENCE SOURCES The literature on performance management is vast. The list below includes several overviews or literature reviews (*) as well as specific sources of evidence referenced in the paper. Armstrong M and Baron A, Managing Performance: Performance management in action, CIPD, 2004 * Bevan S, Performance Management: HR Thoroughbred or Beast of Burden? The Work Foundation, 2014

Likert R, Motivational approach to management development, Harvard Business Review, Vol. 37, pp. 75-82, 1959 Locke E A and Latham G P, A Theory of Goal Setting and Task Performance, Englewood Cliffs, NJ: Prentice Hall, 1990 Purcell J, Kinnie N, Hutchinson S, Rayton B, Swart J, Understanding the People and Performance Link: unlocking the black box, CIPD, 2003

* Brown D, Performance management: can the practice ever deliver the policy? IES Opinion paper, 2010

Tamkin P, Pearson G, Hirsh W, Constable S, Exceeding expectation: the principles of outstanding leadership, London: The Work Foundation, 2010

* Cappelli P and Tavis A, The Performance Management Revolution, Harvard Business Review, October 2016

West M and Dawson J, Employee Engagement and NHS Performance, King’s Fund, 2012

Cederblom D, The Performance Appraisal Interview: A Review, Implications, and Suggestions, Academy of Management Review, Vol. 7, No 2, pp. 219-227, 1982 Cunneen P, How to…improve performance management, People Management, 12 January, pp. 42-43, 2006 Fletcher C, New Directions for Performance Appraisal: Some Findings and Observations, International Journal of Selection and Assessment, Vol. 3, Issue 3, pp.191-196, 1995 * Gifford J, Could do better? Assessing what works in performance management, CIPD, 2016 Grint, K, What’s wrong with performance appraisals? A critique and a suggestion, Human Resource Management Journal, 1993 Hirsh W, Improving performance through appraisal dialogues, CRF, 2006 * Hirsh W and Reilly P, Top 10 tips for implementing performance management, IES Perspectives on the HR Year Ahead 2012 * Lambert A, Furnham A, Lincoln D, Bringing Clarity to Performance Management, CRF, 2003

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