Although organizations may think they have a pay for performance environment, in actuality, they may not have a pay system that drives employee performance. This article, written by Dan Cafalo for WorldatWork uses ideas from Mercer Consultant Dan Marcus and others to illustrate the importance difference between measuring and driving workplace performance.

A summary of the article is included below. You can also download a copy of the complete article in PDF format, with WorldatWork's permission.

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"Are you wearing a blue shirt today?" Marus asked audience members int he breakout session.

Those few attending wearing blue shirts raised their hands.

"That's measurement," Marcus said.

"Would you have worn a blue shirt if you knew you would receive $100?" Marcus then asked coyly.

Nearly everybody in the room raised their hands, with one attendee saying he "would have painted" his shirt blue for a hundred bucks.

"That's management . . . driving desired behavior," Marcus said.

Marcus continued the blue shirt analogy to explain that management breaks down without sufficient employee motivation ($1 award instead of $100), understanding (a blue dhoti instead of a blue short) and control ($100 award only if exactly 50 percent of the crowd was wearing a blue shirt).

A dhoti, by the way, is the long loincloth worn by Hindu men. Without defining dhoti for the average reader (especially those of you unlikely to refer to a dictionary), this writer's effort to communicate may well fail for lack of understanding, The same goes for clarity in an incentive plan.

"It's not the measurement, but the management that makes it fail," Marcus said. "It's not that complicated to design, but it's complicated to make it work."

Marcus, a Mercer Human Resources principal, helped underscore the message of the three-day conference – creating the performance-driven organization – during his breakout session, "Building and Sustaining a Performance Culture: The Bridge from Measurement to Management."

Science and art and why the twain should meet

The fundamental difference between measurement and management is that measurement is transactional, calcuable and definable while management is transformational.

Measurement ("after the fact") can be likened to hardware with its focus on:

• Data;
  
  
• Key indicators;
  
  
• Targets; and
  
  
• Linkage.

Management ("the software") needs to focus on:

• Communication;
  
  
• Motivation;
  
  
• Understanding;
  
  
• Control; and 
  
  
• Alignment with value creation.

"Human capital today has outpaced financial capital as a way to create value," Marcus said. "(But) we often design programs to not get in the way instead of creating a competitive advantage."

Prior to the 1990s, pay programs focused on benchmarking (how much to pay?) The 1990s placed a priority on measurement and demonstrating pay for performance (what to pay for?). The current environment should emphasize managing pay to drive performance (how to perform?).

"You can demonstrate that you have pay for performance, but that doesn't mean that you have pay drive performance," Marcus said. One (pay for performance) is a variable expense while the other (pay to drive performance) is an investment.

Bad data in, bad decisions out

Measurement and management, of course, are inextricably linked. Consider the following cliches:

• "You can't manage what you can't measure."
  
  
• "What gets measured gets managed."
  
  
• "Be careful what you measure because you will get a lot of it."

Using the wrong measures can cause a "disconnect" between the goal and the measure. You may have an effective implementation with employees focused on delivering performance, but because you are using the wrong measure, performance does not result in value creation.

More often, the right measure is used, but because of ineffective execution, the wrong behavior causes the disconnect between the measure and the operating decisions. In this case, employees do not know where to focus their efforts.

This may result in misguided budgeting, inefficient allocation of resources and/or ineffective long-term planning. In turn, because of this dysfunctional behavior, employees are unable to achieve performance goals, which leads to value destruction.

Strategically simple

It is critical for organizations to articulate their business strategy, define metrics that support the strategy and then communicate the measurement so employees understand it.

For example, if the strategy is to maximize the profitability of existing customers, any measure of customer profitability should help guide decisions such as which customers to emphasize, maintain or exit.

Clearly, performance measurement selection required multiple inputs and is influenced by many variables (e.g., industry economics, competitive positioning, strategic alignment, etc.), but ultimately, "making measure understandable gets you to management," Marcus said.

The goal is to have your managers provide your employees a clear line-of-sight understanding and attach a specific value for each strategic measurement (e.g., sell more, cut costs, keep the plant full, be customer focused, protect margins, reduce inventory) in a performance schedule. 

Contact Mercer for more information.

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