Steve Sherretta
August 9, 2022
Performance Management:
Enhancing Execution Through a Culture of Dialogue
Peter is Chief Executive Officer for a medical supply multinational that recently
crafted a new strategy to counter competitive threats. The plan stressed the need
to cut cycle time, concentrate sales on higher-margin products and develop new
markets.
Four months after circulating the plan, Peter did a “walkaround” to see how things
were going. He was appalled. Everywhere Peter turned people, departments—
whole business units—simply didn’t “get it.”
First surprise: Engineering. The group had cut product design time 30%, meeting
its goal to increase speed-to-market. Good. Then Peter asked how manufacturing
would be affected. It turned out the new design would take much more time to
make. Total cycle time actually increased. “Our strategic plan message is not
really getting through,” Peter thought.
Second surprise: Sales. The new strategy called for a shift—emphasize high
margin sales rather that pushing product down the pipeline as fast as possible.
But just about every salesperson Peter spoke to was making transactional sales to
high-volume customers; hardly anyone was building relationships with the most
profitable prospects. Sales is doing just what it’s always done, Peter thought.
Worst surprise: Even his top team, the people who’d helped him craft the strategy,
was not sticking to plan. Peter asked a team member: “Why are you spending all
your time making sure the new machinery is working instead of developing new
markets?”
“Because my unit’s chief goal was to improve on-time delivery,” he answered.
“But what about company goals?” said Peter. “We came up with a good plan and
communicated it very clearly. But nowhere it isn’t being carried out. Why?”
Many organizations create good strategies, but only the best execute them effectively.
Fortune magazine estimates that when CEOs fail, 70% of the time it’s because of bad
Weak execution is pervasive in the business world, but the reasons for it are
largely misunderstood. Why is it that no one in Peter’s organization was acting in sync
with the strategy? Unless we understand the reasons, we can’t hope to solve the problem.
Imagine someone hitting a tennis ball. When the brain says “hit the ball,” it doesn’t
automatically happen. The message travels through nerve pathways down the arm and
crosses gaps between the nerve cells. These gaps, or “synapses,” are potential breaks in
the connection. If neurotransmitters don’t carry the message across the gap, the message
never gets through, or it gets distorted. When that happens, either the arm doesn’t move
at all, or it moves the wrong way.
Creating a “culture of dialogue”
Just like a nervous system, organizations also have gaps that block and distort messages.
The secret to effective strategy execution lies in crossing hierarchical and functional gaps
with clear, consistent messages that relay the strategy throughout the organization.
Sound simple? It’s not. The reason is that the “neurotransmitters” in organizations are
human beings—executive team members, senior managers, middle managers and
supervisors—whose job it is to make sure that people’s behavior is aligned with the
overall strategy. Doing what it takes to achieve alignment is very difficult. It is what
Ram Charan calls, the “heavy lifting” of management, and it’s the key to executing
strategy.
As we’ll see later, there is an important difference between companies that successfully
align behavior with strategy and those that do not. Companies that effectively execute
strategy create a “culture of dialogue.” A culture of dialogue encourages pervasive two-
way communications where individuals and groups 1) question, challenge, interpret and
ultimately clarify strategic objectives; and 2) engage in regular performance dialogue to
monitor behavior and ensure it is aligned with strategy.
Three keys to managing performance
A culture of dialogue doesn’t happen instantly, any more than a fluid tennis stroke does.
It takes practice, persistence and hard work. So how exactly can leaders ensure that
strategy messages go all the way down the line—that the tennis ball gets hit correctly?
The three keys to managing performance effectively are:
1. Achieving radical clarity by decoding strategy at the top. Many organizations
think they send clear signals but don’t. In some cases, managers subordinate broad
strategic goals to operational goals within their silos. That’s what happened with
Peter’s top team. Elsewhere, top team members often have too many “top”
priorities—we’ve seen as many as 100 in one case—which results in mixed signals
and blurred focus. Strategy decode requires winnowing priorities down to a
manageable number—as little as five.
2. Setting up systems and processes to ensure clarity. Once strategy is clear,
organizations must create processes to ensure that the right strategy messages cascade
1 “Why CEOs Fail,” by Ram Charan and Geoffrey Colvin, Fortune magazine, June 21, 1999.
down the organization. These include: strategy-centered budget and planning
sessions; staff and team meetings to discuss goals; performance management
meetings; and talent review sessions. Dialogue drives all these processes. Each
represents a “transmitter opportunity,” where strategic messages are conveyed and
behavior is aligned with goals.
3. Aligning and differentiating rewards. Leaders must make sure rewards encourage
behaviors consistent with strategy, which sounds easy but isn’t. Differentiation is
about making sure that stars get significantly more than poor performers. But almost
everywhere managers distribute rewards more or less evenly. As we’ll see, lack of
effective performance dialogue is a key contributor to dysfunctional reward schemes.
We list these three items separately but they are, of course, interconnected. Systems and
processes depend on clarity from the top. Differentiation and alignment of rewards
depend on managers using performance systems effectively. Dialogue is the glue that
holds it all together. But not just any dialogue will do. It must be dialogue with purpose,
focused on performance.
Link to company valuation
Companies that manage performance well—General Electric comes to mind—have
higher market valuations. Why? Because, more and more, institutional investors view
strategy execution as a vital factor influencing stock prices.
Just a few years ago institutional investors relied almost exclusively on financial
measures for company valuations. Now 35% of a market valuation is influenced by non-
financial, intangible factors, according to a study by Ernst & The study showed
that “execution of corporate strategy” and “management credibility” ranked number one
and number two in importance to institutional investors out of 22 non-financial measures.
John Inch, a managing director and analyst at Bear Stearns notes that in some sectors,
such as diversified industrial companies, intangibles account for even more—up to half a
company’s value. “You can take even a mundane asset and inject good management and
have something pretty strong,” says Inch.
2 Based on a study conducted by Sarah Mavrinac and Tony Siesfeld for the Ernst & Young Center for
Business Innovation.
1. Achieve Radical Clarity by decoding strategy at the top
The first step in successfully executing strategy is achieving clarity on the top team,
which is frequently the source of garbled signals.
Lack of Clarity at the Top
A recent Hay Group study3 shows a disturbing lack of clarity on top teams
(organizational clarity measures the extent to which employees understand what is
expected of them and how those expectations connect with the organization’s larger
goals). The chart below shows dramatically higher levels of clarity on outstanding vs.
average teams. In fact the biggest single difference between great and average top teams
and typical ones was in the level of internal clarity. See Figure 1.
Figure 1: Organizational Climate and Teams
[Change Hay/McBer to “Source: Hay Group, Inc.” in final version]
And a Lack of Clarity Below
Workers at lower levels strongly feel this lack of clarity. Figure 2 looks at satisfaction
levels for workers planning to leave their organizations within two years versus those
planning to stay longer. This study showed that a key reason people leave their jobs is
that they feel their companies lack direction. Even among employees planning to stay
3 Hay Group partnered with Richard Hackman of Harvard University and Ruth Wageman of Dartmouth
College to identify the dynamics of top executive teams and their impact on performance. From an initial
group of 48 teams, the researchers narrowed their study to 14 teams, many from large global organizations.
Each team member represented the head of an organization, a major business division, or a major
geography.
58
%
18
%
Figure 1: Measures
organizational climate
dimensions for outstanding
top teams vs. typical ones.
For each dimension of climate
we asked how the team was
performing in reality and how
it should be performing.
Then we measured the
difference or “gap” in their
answers. Gaps over 20% hurt
performance. The “clarity”
gap for typical teams was
58% compared with 18% on
outstanding teams.
more than two years at their companies, only 57% felt their organizations had a clear
sense of direction.
Figure 2: Key reasons why employees leave their companies
Total % Satisfied4
Satisfaction with: Employees planning to
stay more than two
years (%)
Employees planning
to leave in less than
two years (%)
GAP
(%)
1. Use of my skills and abilities 83% 49% 34%
2. Ability of top management 74% 41% 33%
3. Company has clear sense of
direction
57% 27% 30%
[NOTE; HIGHLIGHT SECTION 3; MAKE IT POP GRAPHICALLY]
Clarity matters
Why do employees crave clarity? Think about it. What could be more demoralizing than
the realization that your hard work is not contributing to overall company goals?
Employees want to do the “right” thing, but they can only do so if they know what the
right things are.
Unfortunately, as we saw in our opening vignette, companies often don’t communicate
strategic goals effectively. An oil refinery client, for example, set a strategic goal to cut
costs. To see how well the message had gotten through, an operations team leader held a
strategy decode session where he quizzed his team members on what they felt was the
chief priority. Ten team members produced four different “top” objectives, including
cost-cutting, safety, environmental compliance and reducing sales processing time. The
message hadn’t got through. The team leader called his team together and created a
“transmitter opportunity.”
“Don’t you guys realize that if we can’t cut our refining costs by three cents a gallon,
they’re going to shut us down?” he said.
“Is that all you need us to do?” replied the team members, taken aback. United by a clear
direction and shared ownership of the cause, team members enthusiastically cut costs by
five cents per gallon over the following year while continuing to maintain good safety
and environmental records.
Narrowing priorities
4 Source: Hay Group, Inc. The results are from our Employee Attitude Survey, which sampled some 300
companies representing more than 1 million workers. Our survey queried management, professionals,
salespeople, information technologists, and clerical and hourly workers. The “gap” referred to in the table
is the “satisfaction gap” between workers planning to leave within two years and those planning to stay
longer.
Having too many priorities can lead to lack of clarity. AeroMexico, for example, had
worked with a strategy consulting firm that delivered a 249-page report listing key
performance indicators (KPIs) for measuring progress by the enterprise. The good news
was that the KPIs gave the top team metrics for measuring success. The bad news was
that there were 100 of them, and they weren’t prioritized.
“It was clear that execution would suffer unless we identified the most important ones,
says AeroMexico CEO Arturo Barahona. “So we discussed which ones connected most
directly with our strategic priorities and where we were in the business cycle, and each
team member settled on five chief goals.” By gaining clarity on key objectives, the team
greatly increased the odds that signals would transmit clearly down the line.
Getting buy-in at the top
Hay research on teams has shown that it’s not uncommon for team members to nod their
heads in agreement when new strategies are set in meetings, then go back to their division
or department and carry on exactly as they had before. In effect, they end up sabotaging
the plan. That’s why gaining buy-in is essential to effective execution, and dialogue is
what makes it happen.
IBM created an executive team consisting of six -level technical leaders at an
applied research unit. Their mission: build strong relationships with top research
universities so that IBM could recruit innovative scientists capable of developing
breakthrough products. The problem was that the , all world-class scientists, were
used to competing for research dollars and dismissing each other's ideas to advance their
own. Getting them to work jointly and be held accountable for business results was
going to be very difficult.
In the first group meeting, the vice president simply assigned accountabilities to the
various team members. "I could see the scientists digging in their heels, says Harris
Ginsberg, an internal leadership consultant who attended the meeting. "No one was
going to dictate to them what they should do." Even if they'd said yes to the VP's
directives, adds Ginsberg, they would never have followed through.
Ginsberg, who helps IBM business units clarify and execute strategy, knew the key was
to get the scientists talking to each other. So he coached the vice president to change her
behaviors. Rather than hand out directives, he suggested ways she could stimulate team
dialogue about how to meet objectives. Ginsberg also counseled other team members
about the need for a "consensus process" on an interdependent team.
They all "got" it. At the next meeting the VP said, "Our mandate is to create
breakthrough products. Without access to talent at the top universities, we won't succeed.
How are we going to get it?" At first, Ginsberg recalls, she met silence. Finally one team
member raised her hand. She was willing to "get out there to the universities, and be
more visible, go out with the recruiter and the senior human resources people," said
Ginsberg. She also agreed to help some up-and-coming scientists learn how to develop
relationships with universities.
A second team member said he would "help her make some calls." The ice was
broken and all the team members eventually took on group responsibilities. "It
was all about dialogue," says Ginsberg. "Until the individual leaders embraced the
unifying elements of the strategy for the good of the enterprise, they only attended to
their own mission. The dialogue helped them buy-in, agree to some shared activities, and
begin to work more collaboratively."
2. Set up systems and processes to create clarity
Why is executing strategy so difficult, even when the plan is clear? Because good
execution only happens when employee behavior is aligned with strategy. And many
managers can’t, won’t or don’t create the “transmitter opportunities” required to get
people to do the right things. Managers: can’t because they don’t know how to talk with
their subordinates about change and/or poor performance; won’t, because they find it
uncomfortable to give candid feedback; or, simply don’t realize that successful strategy
execution will never happen without ongoing performance dialogue.
Part of the solution to this problem is creating systems and processes that force
performance dialogue. General Dynamics Defense Systems (GDDS) in Pittsfield, MA, is
one company where creating such systems has contributed to dramatic results. From
1999 to 2001, attrition among its valued software engineers dropped from 20 percent to
percent. Union grievances dropped from 57 to zero, saving hundreds of thousands of
dollars. And, best of all, earnings and profit margins doubled.
What GDDS did
In 1999 the $200 million plus defense contractor challenged its employees to improve the
company’s negotiating leverage on bids, and thereby increase margins and profitability.
To accomplish this goal, senior management directed all departments to chase out costs,
and created numerous processes to transmit the cost-cutting strategy down the managerial
ranks right to the shop floor, which is where they felt many of the best cost-cutting ideas
would come from
Carmen Simonelli, director of facilities and security, says his department’s goal was to
push labor costs 5 percent below budget, with a “stretch” goal of 6 percent. That was
ambitious given that direct applied labor costs had been running 10-15 percent over
budget. But Simonelli’s team slashed applied labor hours to an unthinkable 20 percent
below budget. Annual savings amounted to about $440,000 on a $2 million budget, or
nearly $10,000 per worker.
How did they do it? The key, Simonelli says, was the processes the company put in place
to enhance dialogue and carry the message to the shop floor. For example:
The Learning Map
The company made it easy for employees to understand its broad goals by creating a
“learning map,” which graphically outlined how each department and team linked
directly to core objectives. All employees saw at a glance how their jobs fit in.
Supervisors and assemblers in Simonelli’s group, for example, could readily see that by
reducing applied labor hours in a project, GDDS could increase margins, shorten delivery
schedules and raise the chances for winning new contracts.
The Scorecard
Managers and direct reports at GDDS meet one on one to create Scorecards, which set
out five to seven personal annual goals. For example, the goals for shipping and
receiving supervisor Tom Molleurs included plans to capture all incentive payments for
early delivery and to cut direct costs 5%. Once a manager and subordinate reach
agreement goals, they both sign the Scorecard as if it were a contract. From the worker’s
perspective, this was a dramatic shift, says Newell “Tom” Skinner, at the time director of
product delivery. “In the past we just set the goals and beat up employees to try to make
them, but they probably didn’t even know why we had that goal in the first place.”
Scorecards are “transmitter opportunities ” that clarify expectations and link day-to-day
activity to company goals. And they work. Molleur’s group ended up cutting direct costs
by 50 percent—not just 5 percent. What was the key thing that made it happen?
Molleurs points to his weekly progress meetings. When they were behind schedule,
Molleurs used the meetings to make sure the workers understood, through the Learning
Map and Scorecards and other processes, how meeting or beating delivery schedules
could increase competitiveness and win more contracts.
Top management did simple things to make sure strategy messages were getting through.
For example the president held monthly “pizza meetings” with everyone whose birthday
fell that month. At these “transmitter opportunities,” he would ask attendees people to
list their top three goals, and their boss’ top three goals. Within months, everyone could
answer the questions.
When effective dialogue pushes strategic imperatives downward in an organization,
extraordinary things happen. Skinner extended an open invitation to any employee who
wanted to attend his weekly budget meeting with his supervisors. One day an assembler
showed up and said a part design was forcing assemblers to work by hand with “dozens
of tiny screws, lock washers and nuts.” Skinner had the assembler meet with process
control engineers for a redesign. The result: a job that had taken 12 hours was cut to four.
“The best ideas come from the people doing the job,” says Skinner. Once the
“conversation” got started, it took on momentum. Soon, people were coming into
Skinner’s office without waiting for the weekly to discuss misalignment of strategy and
behavior. Workers themselves were creating transmitter opportunities!
It’s about behavior change
The processes GDDS installed forced performance dialogue and ultimately changed
behaviors. The message got through. But, like a tennis stroke, it didn’t happen quickly or
automatically. It took coaching and practice.
Sometimes you have to get it wrong, then make corrections through feedback and
dialogue, before you get it right. One North American insurance company embarked on a
new strategy to expand sales with existing customers. The president created nine core
value statements and broadcast the ideas repeatedly organization-wide. Soon, every
manager could recite them by heart. Employees even had cards with the core-value
statements right at their desks.
The message, however, wasn’t sinking in. An outside consultant saw one of the value
statements on an underwriter’s desk that read “Never knowingly undersell a customer.”
But the consultant listened to several of her calls and realized that she consistently failed
to explore customer needs or try to up-sell. “The company had told her what to do, but
didn’t follow through with the necessary rationale and appeals that would result in
behavior change,” says the consultant. “As a result, her behavior was out of sync with
the company strategy.”
So the insurer put together a training session and coached its underwriters on ways to
explore customer needs and broaden the sale. When the consultant visited the same
underwriter a few months later, he noted that she was sending birthday cards to
customers and calling during the year—not just at renewal time—to identify unfulfilled
customer needs. “It was only after repeated dialogue, including feedback and coaching,
that the underwriter’s behavior aligned with company goals,” explains the consultant.
Figure 3: The coaching style on top teams
[EDITOR’S NOTE: Vertical or “Y” axis needs to be labeled as “Percent indicating”
Cutline: Teams that rely on a “coaching” managerial style get better
performance— percentage of team members who observed the team leader using a
“coaching managerial style.
Creating opportunities to transmit strategy down
Organizations committed to executing strategy devise innovative ways to make
connections and circulate key messages. Alberto-Culver North America, the $600
million division of a $ billion company whose profits tripled in 1994-2000, chose 70
0
10
20
30
40
50
60
70
Outstanding
Teams
Typical Teams Poor Teams
“growth development leaders” (GDLs) from all levels of the company to create clarity
about strategy.
One strategic goal was to recruit better talent. The GDLs moved through the
organization to see what people were actually doing to meet the recruitment objectives.
They found serious disalignment between goals and behaviors, says Jim Chickarello,
group vice president of worldwide operations and one of the GDLs. For example, when
job candidates came in for interviews, nobody gave them a basic overview of the
business, Sometimes candidates would be left standing around because hand-offs
between various interviewers were poorly coordinated. And no one had consolidated
interviewer evaluations, so there was no central location where Alberto-Culver managers
seeking new people could get a snapshot of all candidates the company had interviewed.
The top team and the GDLs devised a plan and created simple systems to carry it out. For
example they created forms outlining an “agenda” for candidates that specified where
hand-offs took place. No more waiting around. The GDLs developed take-home
materials so that every candidate now gets a thorough company overview. Finally, the
group created interviewer-report forms that must be sent to the manager who might
ultimately work with the candidate. As a result, Chickarello says the company slashed its
open-job rate in half, from 10 percent to 5 percent.
“Hand’s-off” management means not being “on-message”
For years experts have emphasized the importance of dialogue in performance
management. But too many managers avoid it. One veteran says annual performance
appraisals “are like delivering a newspaper to a house with a growling dog. You throw
the paper on the porch and get away as fast as possible.”
“Managers don’t want to deal with confrontation,” says Charlotte Merrell, senior vice
president for Boston-based Jack Morton Company, a leader in event marketing. “Even
when employees are not doing the right things, they’re usually working hard. Managers
are concerned they might demoralize the employee or cause them to leave.”
In fact, the exact opposite is true. Employees get demoralized when they don’t get
candid performance feedback. When it comes to annual performance reviews, the issue
is not what goes unsaid on the day of the review, but what goes unsaid the other 259
working days of the year. Ironically, with the right kind of performance-based dialogue,
managers could eliminate the onerous annual performance review altogether. In a true
culture of dialogue, feedback is given candidly and consistently in small doses—like an
IV—and the annual review becomes a non-event.
Don’t overlook the people factor
In sum, strong execution occurs when top management creates performance management
systems and process (“transmitter opportunities”) and ensures that line managers are
trained to use them. Companies often do a good job with the former, but underestimate
the importance of the latter. Many managers got where they are through intellectual and
technical abilities—not through their people skills—and need help to become effective
performance managers. In particular, they need the skills to help make those tough
performance review sessions go more smoothly. But the good news, according to Linda
Johnston, vice president for human resources at Berkshire Bank in Massachusetts, is that
“performance coaching is not rocket science. With practice, most managers can become
quite adept at it.” (See sidebar on page xx for advice on what managers need to do to
deliver performance messages effectively.)
3. Making rewards count
Strategy and execution signals get distorted when top teams lack clarity and when
managers lack—or don’t use correctly—systems and processes to force performance
dialogue. Wrong-headed reward policies complete the triple-whammy that cripples
strategy execution.
Aligning Rewards With Strategy
It sounds obvious that rewards have to be aligned with strategy. In fact the idea that a
company would reward behavior that’s “out of sync” with the company strategy seems
ludicrous. But it happens all the time. The reason is that creating reward systems is
complex, and the critical importance of reward, which is just one piece of the strategic
equation, is often overlooked.
A health care insurance company, for instance, wanted to improve customer service, so it
invested heavily in a program to train customer service representatives. The reps learned
better voice technique, interviewing skills to ferret out customer needs, and upselling
skills. But the company kept the same reward system as before, basing incentive pay on
the number of calls completed. When management got its first set of customer
satisfaction surveys, they were bleak reading. Customer widely agreed that although the
staff was courteous, it was remarkably unhelpful in resolving problems. Why? Because,
as one reps put it, “If we spend more than four minutes on a call we would never get our
bonus.” The strategy required that reps engage in longer, more in-depth conversations
with customers. But, as the rep pointed out, the dysfunctional reward system punished
reps for doing so.
Before AeroMexico had clarified its strategy, it had a reward scheme that unintentionally
rewarded the wrong behavior. Pilots got merit pay based on on-time arrival records.
This incentive helped give AeroMexico the best on-time record of any airline in North
America. But this good outcome came with unintended consequences. Pilots sometimes
left the gate before scheduled departure times to ensure their bonuses, leaving passengers
stranded and angry. AeroMexico later changed the key goal to overall customer
satisfaction, with on-time arrival as just one component. Continual dialogue prevents
such missteps.
Differentiating rewards
Standard management theory says high-performing workers should get higher rewards
than average or below-average workers. But at many companies it rarely works that way.
Figure 4 shows the narrow difference separating the merit pay of high-performers—
stars—from the average in a Hay survey of 75 . companies.
Figure 4: Average Merit Increases: 20015
2001
Increase to highest performers (Stars) %
Average Increase %
Difference %
(Cutline: Despite all the talk about the importance of differentitation in recent
years, organizations still do not differente salary increases very much
A Hay Employee Attitude survey shows the tragic consequences of failing to differentiate
rewards. In surveys conducted at 335 companies worldwide, only 35% of employees
said they believed they’d earn more if they improved their performance.
Figure 5: If my performance improves, I will receive better compensation.
[EDITOR’S NOTE” Vertical or “Y” access needs to be labeled as “Percent
indicating”; Series 1 and Series 2 must be removed. Also, scale needs to be 1-100]
Top-performing companies believe that well-differentiated rewards—even forced ranking
of employees—leads to better strategy execution. Former GE CEO Jack Welch, for
example, says in his memoir that top performers—“The As (the top 20%)—should be
getting raises that are two to three times the size given to the Bs. Bs should get solid
increases recognizing their contributions every year. Cs (the bottom 10%) must get
nothing.”
5 Source: Hay Compensation Report, involving some 75 companies in the .
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Series1
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Welch makes it sound so easy. Of course it’s not. Without a “culture of dialogue” and
managers willing to do the required “heavy lifting,” effective reward policies, and
eventually great execution, will never happen. At many organizations we find managers
who want to give stars bigger increases. But they see rewards as a zero-sum game.
Increasing one group means cutting another. Which means making tough choices. Over
and over leaders give the same reason why these tough choices don’t get made: managers
avoid conflict in those tough annual performance-review conversations. They haven’t
had ongoing performance dialogue with their people during the year, and workers assume
that their performance—even when below par—is good enough. At year-end, rather than
confront poor performers with the bad news, many managers choose the path of least
resistance, speeding through performance reviews and spreading merit pay out almost
evenly—“like peanut butter,” as one manager put it.
Managers at John Hancock Financial Services, Inc., had precisely this problem. “Our
culture six years ago was accepting of being nice to everyone and not wanting to deliver
bad news to anybody,” says Page Palmer, senior vice president for human resources.
A new CEO came in and championed a highly differentiated pay plan. Under the new
system, there is no limit on what stars could earn in merit increases (though above 20%
would be rare), and poor performers got nothing. Palmer says that among managers who
had to make decisions on merit increases, this change required a “willingness to tolerate
discord,” and those who had difficulty with performance-oriented conversations got
coaching to improve their skills. Now, Palmer says, Hancock “usually has some spike in
turnover” around bonus time, when disappointed poor performers leave voluntarily. But
that kind of turnover is good for organizations. It certainly was at Hancock. Palmer says
the company’s performance-based reward system helped the company’s stock price
double two years after going public.
Figure 6: Is poor performance tolerated at your company?
A less-than-average performance often gets an average reward. Nearly a third of
workers surveyed agree that poor performance is tolerated.
Percent agreeing that poor performance is not tolerated
[EDITOR’S NOTE” Vertical or “Y” access needs to be labeled as “Percent
indicating”; Series 1 and Series 2 must be removed]
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Agree Disagree Neutral
Series1
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Find new ways to differentiate merit pay
Sometimes there is little or no money available for merit pay increases. Reward really is
a zero sum game. But organizations must find creative ways to link rewards to behaviors
that bring better execution. For example they might offer high performers extra training
and development opportunities, or clearer lines to promotions. Take the case of two sales
managers. Both hit their stretch goals of $10 million in sales, but only one hit her staff
development goals. Each should get her bonus, of course. But the one who developed
staff might also get special training opportunities.
The Arbella Insurance Group, a $600 million regional company based in Massachusetts,
took another approach. Management believed that its reward system had become too
paternalistic and “not very motivating,” says Rochelle Powers, assistant vice president for
information systems. Under the old system, anyone with a year’s service and no
infractions was virtually guaranteed the average % increase. Outstanding performers
might get an extra half percent.
But then managers decided to pay “for performance instead of time on the job,” says
Powers. So the company reduced the average increase to %—enough to keep up with
the cost of living and maintain competitiveness. The other one percentage point (%
less the % paid to most “good” workers) went to the top 25% of performers. That
allowed “superior performers” to get 7%-15% increases. In the end, the overall “pot”
remained the same. But the best performers got more of it.
Conclusion
Dialogue is at the center of effective performance management. It enables managers to
cross the “synapses” in organizations where messages get blocked or distorted. As we
saw in our opening vignette, in Peter’s organization strategy messages failed to cross both
hierarchical and functional gaps. Performance dialogue was missing from the equation.
The result was a complete disconnect between the strategy and the behaviors of those
entrusted with executing it. Not to mention extreme frustration for the CEO.
Poor strategy execution is a problem shared by many organizations today. When
companies get it right—when they align behaviors with strategy through effective
performance management —research shows that they increase revenues, shareholder
value, interest from institutional investors and employee satisfaction. The good news is
that poor strategy execution is fixable. And it must be fixed.
[SIDEBAR]
Four Keys to Delivering
Effective Performance Feedback
1. Put the individual first. People who feel forced to defend their self esteem are less
receptive—messages do not get through so well. Create a safe atmosphere. Managers
should build trust, be empathetic and lead with the positive. How managers say what
they say is actually more important than what they say. The wrong tone can distort the
content of the message.
This: I asked Joan for feedback regarding your presentation skills. She said you were
very well prepared and extremely professional, but that your style was a little formal for
that particular audience. Let’s set up a meeting with Joan so we can work on this.
Not this: I thought you had better presentation skills. Joan’s feedback was that there was
something about you that makes clients uncomfortable.
2. Aim for self-evaluation: When managers create on-going dialogue year-round, people
will already know where their performance lapses are and will almost always raise them
themselves. That means no surprises, no feelings that the manager is being critical, which
generally raises defensive behavior.
This: (Immediately after the event.) This was the first time you represented the
department at the Executive Committee meeting. I noticed that you weren’t very
comfortable with the more technical aspects. Tell me why.
Not this: (Six months later, and in response to a question.) The reason you haven’t been
asked to represent the department again is that you lack the technical expertise to win
credibility.
3. Tolerate discord but be specific. Creating a safe atmosphere does not mean avoiding
disagreement. Just don’t let it get personal. That causes people either to shut down or
push back inappropriately. Focus on specific behaviors and their consequences. The
point of performance-oriented dialogue is to reset direction, not to point out inadequacies.
This: You used a bit of jargon in your presentations. You said that we provide “hosted
collaboration software to connect businesses requiring project-based resources.” Do
you remember? John Smith didn’t appear to understand. Did you notice how he
behaved for the rest of the presentation?
Not this: You know you really turned everybody off when you started to use jargon in that
presentation.
4. Set objectives, make accountability explicit, and reinforce. Ongoing dialogue,
including performance reviews (though not year-end appraisals) should be about the
future not the past. Find what is working and what is not and apply the lessons learned.
Workers should come away knowing how behaviors need to be adjusted, what they
should do next time. The best dialogue also will set specific objectives and follow-up
dates for monitoring progress. In other words, the end result is a decision.
This: So, we’ve agreed that you’ll spend more time developing the graphics for the next
presentation to give them the same impact you create with your text slides. Let’s meet
two days before so we can discuss them before you go live.
Not this: (Immediately before the presentation) I hope your graphics are better this time
than last time.
