M a n a g i n g P e r f o r m a n c e
A c h i e v i n g O u t s t a n d i n g P e r f o r m a n c e
T h r o u g h a “ C u l t u r e o f D i a l o g u e ”
If managers think giving annual performance reviews is like delivering
a newspaper to a house with a growling dog, you have a problem.
Spreading rewards should not be like spreading peanut butter.
Dialogue aligns performance with goals.
P A P E R
W O R K I N G
M a n a g i n g P e r f o r m a n c e
This working paper is the product of research conducted by Katie Lemaire
and Larry Reissman.
Copyright © 2002 Hay Group, Inc. All rights reserved.
Creat ing a “culture of dialogue” 2
Three keys to managing performance 2
A c h i e v e R a d i c a l C l a r i t y A r o u n d G o a l s 4
Without c lar i ty, employees lack conf idence in management 5
Why clar i ty matters 5
Narrowing pr ior i t ies 6
Gett ing buy- in at the top 6
E s t a b l i s h S y s t e m s a n d P r o c e s s e s
To C r e a t e C l a r i t y 8
What GDDS did 8
I t ’s about behavior change 10
Creat ive ways to bui ld a cul ture of dialogue 11
“Hands-off” management means not being “on-message” 12
M a k i n g R e w a r d s C o u n t 1 3
Aligning rewards with goals 13
Dif ferent iat ing rewards 14
Find new ways to di f ferent iate meri t pay 16
C o n c l u s i o n 1 7
A c h i e v i n g O u t s t a n d i n g P e r f o r m a n c e
T h r o u g h a “ C u l t u r e o f D i a l o g u e ”
P A P E R
W O R K I N G
Peter is Chief Executive Officer for a medical supply multinational. His compa-
ny had just crafted a new plan to counter competitive threats. It stressed the
need to cut cycle time, concentrate sales on higher-margin products and devel-
op new markets. All in all, this was a pretty classic, very sound strategy.
Four months after circulating the plan, Peter did a “walkaround” to see how
things were going. He was appalled. Everywhere Peter turned, people, depart-
ments — whole business units — simply didn’t “get it.”
First surprise: Engineering. The group had cut product design time 30%, meet-
ing its goal to increase speed-to-market. Good. Then Peter asked how manu-
facturing would be affected. It turned out the new design would take much
more time to make. Total cycle time actually increased. Our message is not
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 had 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 is it being carried out. Why?”
The reason is poor performance management.
But what does that really mean? It means that the leaders of the company —
from the CEO to the executive team to middle managers to shop-floor supervi-
sors — did not recognize the importance of gaining clarity of goals, discussing
ways to accomplish those goals, and following through to make sure behaviors
were aligned with desired
Poor performance management
means that the leaders of the
company did not recognize the
importance of gaining clar i ty of
goals, discussing ways to
accomplish those goals, and
fol lowing through to make sure
behaviors were al igned
with desired outcomes.
P A P E R
W O R K I N G
Leaders at many organizations make this mistake. They assume that because
they understand the objective, everyone else will, too. It doesn’t work that
way. People don’t get it.
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.
C r e a t i n g a “ c u l t u r e o f d i a l o g u e ”
Just like a nervous system, organizations also have gaps that block and distort
messages. The gaps can be hierarchical, between boss and subordinate. They
can be functional, between departments, for example. Or they exist between
two peers who sit right next to one another. Crossing these gaps sounds sim-
ple, but it’s not. The reason is that the “neurotransmitters” in organizations are
human beings — primarily executive team members, senior managers, middle
managers and supervisors — whose job it is to make sure that people do the
right things. Doing what it takes to achieve alignment is very difficult. It is
what management guru Ram Charan calls the “heavy lifting” of management,
and it’s the key to effective performance management.
As we’ll see later, there is an important difference between companies that suc-
cessfully align behavior with goals and those that do not. Companies that exe-
cute effectively 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 goals; and 2) engage in regular per-
formance dialogue to monitor behavior and ensure it is aligned with goals.
T h r e e k e y s t o m a n a g i n g p e r f o r m a n c e
A culture of dialogue doesn’t happen instantly, any more than a fluid tennis
stroke does. It takes practice, persistence and hard work. The three keys to
managing performance effectively are:
2
Leaders at many organizat ions
assume that because they
understand the object ive,
everyone else wi l l , too. I t
doesn’t work that way.
P A P E R
W O R K I N G
1. Achieving radical clarity around goals. 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 hap-
pened with Peter’s top team. Elsewhere, leaders often have too many
“top”priorities — we’ve seen as many as 100 in one case — which results
in mixed signals and blurred focus. To enable effective performance man-
agement, it’s important to winnow priorities down to a manageable num-
ber as little as five. This is true for the organization as a whole, for each
department, for each team and for each individual.
2. Establishing systems and processes to ensure clarity. Once goals are
clear, organizations must create processes to ensure that people get the
right messages. These processes include: budget and planning sessions;
staff and team meetings to discuss goals; performance management meet-
ings; and talent review sessions. Dialogue drives all these processes. Each
represents a “transmitter opportunity,” where managers reiterate goals and
monitor behavior to ensure it’s aligned with goals.
3. Aligning and differentiating rewards. Leaders must make sure rewards
encourage behaviors consistent with goals, 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. Lack of effective performance dialogue is a key con-
tributor 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 of an organization or
the head of a department. 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 va luat ion
Companies that manage performance well — General Electric comes to mind
— have higher market valuations. Why? Because, more and more, institutional
investors view management’s ability to execute as a vital factor influencing
stock
Once goals are clear,
organizat ions must create
processes to ensure that
people get the r ight messages.
P A P E R
W O R K I N G
Just a few years ago institutional investors relied almost exclusively on financial
measures for company valuations. Now 35 percent of a market valuation is
influenced by nonfinancial, intangible factors, according to a study by Ernst &
The study showed that “execution of corporate strategy” and “manage-
ment credibility” ranked number one and number two in importance to institu-
tional investors out of 22 nonfinancial measures. John Inch, a managing direc-
tor and analyst at Bear Stearns, notes that in some sectors, such as diversified
industrial companies, intangibles account for even more — up to half a compa-
ny’s value. “You can take even a mundane asset and inject good management
and have something pretty strong,” says Inch.
A c h i e v e R a d i c a l C l a r i t y A r o u n d G o a l s
he first step toward effective performance management is for man-
agers to clarify their own goals and objectives. But a recent Hay Group
study2 shows how difficult that can be. The study showed 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). Figure 1 shows dramatically
higher levels of clarity on outstanding vs. average teams. In fact the biggest sin-
gle difference between great top teams and typical ones was in the level of
internal clarity. 4
Measures organizat ional c l imate
dimensions for outs tanding top
teams vs. typ ica l ones. For each
dimension of c l imate we asked
how the team was per forming in
rea l i ty and how i t should be
per forming. Then we measured
the d i f ference or “gap” in the i r
answers. Gaps over 20% hur t
per formance. The “c lar i ty ” gap for
typ ica l teams was 58% compared
wi th 18% on outs tanding teams.
TotalTeamClarityRewardsStandardsResponsibilityFlexibility
Typical vs. Outstanding Teams
Pe
rc
en
til
e
G
ap
Typical
Outstanding
18%
58%
Performance
Figure 1: Organizational Climate and Teams
Gap Between Actual and Desired
Commitment
0%
20%
40%
60%
80%
100%
1 Based on a study conducted by Sarah Mavrinac and Tony Siesfeld for the Ernst & Young Center
for Business Innovation.
2 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 perform-
ance. 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.
T
W i t h o u t c l a r i t y , e m p l o y e e s l a c k
c o n f i d e n c e i n m a n a g e m e n t
Workers at lower levels strongly feel this lack of clarity. Figure 2 looks at satis-
faction levels for workers planning to leave their organizations within two
years versus those planning to stay This study showed that a key rea-
son people leave their jobs is that they feel their companies lack direction.
Even among employees planning to stay more than two years at their compa-
nies, only 57% felt their organizations had a clear sense of direction.
W h y c l a r i t y m a t t e r s
Why do employees crave clarity? Think about it. What could be more demoral-
izing than the realization that your hard work is not focused on achieving over-
all company goals, or at least the narrower operational goals of your depart-
ment? 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 lack the
means to dialogue effectively about goals. An oil refinery client, for example,
set a goal to cut costs. To see how well the message had gotten through, an
operations team leader held a meeting where he quizzed his team members on
what they felt was the chief priority. Ten team members produced four differ-
ent “top” objectives, including cost-cutting, safety, environmental compliance
P A P E R
W O R K I N G
5
Figure 2: Key Reasons Why Employees Leave Their Companies
Satisfaction with:
to stay more than
two years (%)
3. Company has clear
sense of direction
83%
74%
57%
2. Ability of top
management
1. Use of my skills
and abilities
Employees planning
to leave in less than
two years (%)
Employees planning
(%)
GAP
Total % Satisfied1Total % Satisfied
49%
41%
27%
34%
33%
30%
3 The results are from Hay Group’s Employee Attitudes Survey, which sampled some 300 compa-
nies 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.
and reducing sales processing time. The message hadn’t gotten 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 asked.
“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 enthusi-
astically cut costs by five cents per gallon over the following year while contin-
uing to maintain good safety and environmental records.
N a r r o w i n g p r i o r i t i e s
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 enter-
prise. The good news was that the KPIs gave the top team metrics for measur-
ing 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 impor-
tant ones,” says AeroMexico CEO Arturo Barahona. “So we discussed which
ones connected most directly with our 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.
G e t t i n g b u y - i n a t t h e t o p
Hay research on teams has shown that it’s not uncommon for team members
to nod their heads in agreement when new goals 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 essen-
tial to effective execution, and dialogue is what makes it happen.
IBM created an executive team consisting of six at an applied research
unit. Their mission: build strong relationships with top research universities so
that IBM could recruit innovative scientists capable of developing break-
through products. The problem was that the , all world-class scientists, P A P E R
W O R K I N G
6
Employees want to do the
“r ight” thing, but they can
only do so i f they know
what the r ight things are.
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 unit head simply assigned accountabilities to the
various team members. “I could see the digging in their heels,” says
Harris Ginsberg, an internal IBM 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 unit head’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 talking to each other. So he coached the unit head to
change her behaviors. Rather than hand out directives, he suggested ways she
could stimulate team dialogue about how to meet objectives. Ginsberg also
coached other team members about the need for a “consensus process” on an
interdependent team.
They all “got” it. At the next meeting the unit head said, “Our mandate is to
create breakthrough products. Without access to talent at the top universi-
ties, 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 relation-
ships 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.
P A P E R
W O R K I N G
7
Gaining buy- in is essent ia l
to ef fect ive execut ion,
and dialogue is what
makes i t happen.
P A P E R
W O R K I N G
E s t a b l i s h S y s t e m s a n d P r o c e s s e s
T o C r e a t e C l a r i t y
hy is execution so difficult, even when the goals are clear? Because
good execution only happens when employee behavior is aligned with
goals. And many managers can’t, won’t or don’t create the “transmitter oppor-
tunities” required to achieve clarity and 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 uncomfort-
able to give candid feedback; or, simply don’t realize that successful 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, Mass., 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, earn-
ings and profit margins doubled.
W h a t G D D S d i d
In 1999 the $200 million plus defense contractor challenged its employees to
improve the company’s negotiating leverage on bids, and thereby increase mar-
gins 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 originate.
Carmen Simonelli, director of facilities and security, says his department’s goal
was to push labor costs five percent below budget, with a “stretch” goal of six
percent. That was ambitious given that direct applied labor costs had been
running 10 to 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.
8
Good execut ion only happens
when employee behavior is
al igned with goals.
W
P A P E R
W O R K I N G
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 Learn ing Map
The company made it easy for employees to understand its broad goals by cre-
ating 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 five to seven personal annual goals. For example, the goals for ship-
ping and receiving supervisor Tom Molleur included plans to capture all incen-
tive payments for early delivery and to cut direct costs five percent. 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 goals. And they work. Molleur’s group ended up cutting
direct costs by 50 percent — not just five percent. What was the key thing
that made it happen? Molleur points to the dialogue workers engaged in at his
weekly progress meetings. When the group was behind schedule, Molleur used
the meetings to make sure the workers understood, through the Learning Map
and Scorecards and other processes, how meeting or beating delivery sched-
ules could increase competitiveness and win more contracts.
Top management did simple things to make sure messages were getting
through. For example the president held monthly “pizza meetings” with every-
one whose birthday fell that month. At these “transmitter opportunities,” he
would ask attendees to list their top three goals, and their boss’ top three goals.
Within months, everyone could answer the questions.
9
“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 f i rst place.”
P A P E R
W O R K I N G
In a culture of dialogue, 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 meeting to discuss
misalignment of goals and behavior. Workers themselves were creating trans-
mitter opportunities!
I t ’ s a b o u t b e h a v i o r c h a n g e
The processes GDDS installed 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 plan to expand sales with existing customers. The presi-
dent 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 under-
sell 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. “Her
boss 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 consult-
ant. “As a result, her behavior was out of sync with the business outcomes the
company wanted.”
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
10
“I t was only af ter repeated
dialogue, including feedback
and coaching, that the
underwri ter ’s behavior a l igned
with company goals.”
P A P E R
W O R K I N G
time — to identify unfulfilled customer needs. “It was only after repeated dia-
logue, including feedback and coaching, that the underwriter’s behavior
aligned with company goals,” explains the consultant (see Figure 3).
C r e a t i v e w a y s t o b u i l d a c u l t u r e o f d i a l o g u e
Organizations committed to managing performance 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
between 1994 and 2000, chose 70 “growth development leaders” (GDLs) from
all levels of the company to help align behavior with goals.
One goal was to recruit better talent. The GDLs moved through the organiza-
tion to see what people were actually doing to meet the recruitment objec-
tives. They found serious misalignment 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.
11
Poor TeamsTypical TeamsOutstanding
Teams
60%
41%
8%
Figure 3: The Coaching Style on Top Teams
Percentage Indicating
0%
20%
40%
60%
80%
100%
Teams that re ly on a “coaching”
manager ia l s ty le get bet ter
per formance — percentage of
team members who observed the
team leader us ing a coaching
manager ia l s ty le .
P A P E R
W O R K I N G
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 receives a thor-
ough company overview. Finally, the group created interviewer-report forms
that must be sent to the manager who might ultimately work with the candi-
date. As a result, Chickarello says the company slashed its open-job rate in half,
from 10 percent to 5 percent.
“ H a n d s - o f f ” m a n a g e m e n t m e a n s n o t b e i n g
“ o n - m e s s a g e ”
For years experts have emphasized the importance of dialogue in performance
management. But too many managers avoid it. One veteran says annual per-
formance appraisals “are like delivering a newspaper to a house with a growl-
ing 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 mar-
keting. “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 become 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, feed-
back is given candidly and consistently in small doses — like an IV — and the
annual review becomes a non-event.
Don’ t over look the people factor
In sum, goal clarity and performance feedback occur when top management
creates systems and ensures that line managers are trained to use them.
Companies often do a good job with the former, but underestimate the impor-
tance of the latter. Many managers got where they are through intellectual and
12
In a t rue culture of dialogue,
feedback is given candidly and
consistent ly in smal l doses —
like an IV — and the annual
review becomes a non-event .
P A P E R
W O R K I N G
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 18 for advice on what managers need to do to deliver
performance messages effectively.)
M a k i n g R e w a r d s C o u n t
essages get distorted when managers fail to provide direction and
when they lack — or don’t use correctly — systems and processes to
ensure that performance dialogue takes place. Wrong-headed reward policies
complete the triple-whammy that leads to disappointing profits, low growth
and poor stock performance.
A l i g n i n g r e w a r d s w i t h g o a l s
It sounds obvious that rewards have to be aligned with goals. In fact the idea
that a company would reward behavior that’s “out of sync” with goals seems
ludicrous. But it happens all the time. The reason is that creating reward sys-
tems is complex, and the critical importance of reward, which is just one piece
of the equation, is often overlooked.
A health 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 cus-
tomer needs, and upselling skills. Yet the company kept the same reward sys-
tem as before, basing incentive pay on the number of calls completed. When
management got its first set of customer satisfaction surveys, the results were
bleak. Customers widely agreed that although the staff was courteous, it was
remarkably unhelpful in resolving problems. Why? Because, as one rep 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.
13
M
Wrong-headed reward pol ic ies
complete the tr iple-whammy
that leads to disappoint ing
prof i ts , low growth and
poor stock performance.
P A P E R
W O R K I N G
Before AeroMexico clarified its strategy, it had an incentive scheme that unin-
tentionally rewarded the wrong behavior. Pilots received 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.
D i f f e r e n t i a t i n g r e w a r d s
Standard management theory says high-performing workers should get higher
rewards than average or below-average workers. But at most companies it
rarely works that way. Figure 4 shows the narrow difference separating the
merit pay of high performers — stars — from low performers in a Hay survey
of 75 US companies.
A Hay Employee Attitudes survey shows the tragic consequences of failing to
differentiate rewards. In surveys conducted at 335 companies worldwide, only
35 percent of employees said they believed they’d earn more if they improved
their performance (see Figures 5 and 6).
Top-performing companies believe that well-differentiated rewards — even
forced ranking of employees — leads to better execution. Former GE CEO
Jack Welch, for example, says of top performers in his memoir:“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.”
14
Despi te a l l the ta lk about the
impor tance of d i f ferent i ta t ion in
recent years , organizat ions s t i l l do
not d i f ferent ia te sa lary increases
very much.
Figure 4: Average Merit Increases
2001
Increase to highest performers (Stars)
Average increase
Difference
%
%
%
P A P E R
W O R K I N G
Welch makes it sound so easy. Of course it’s not. Without a “culture of dia-
logue” and managers willing to do the required “heavy lifting,” effective reward
policies, and eventually great execution, will never happen. At many organiza-
tions 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 rea-
son 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 Boston-based John Hancock Financial Services, Inc., had precisely
this problem. “Our culture six years ago was accepting of being nice to every-
one 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 was no limit on what stars could earn in merit increases,
though more than 20 percent would be rare. Poor performers got nothing.
15
The company’s performance-
based reward system helped the
company’s stock pr ice double
two years af ter going publ ic .
DisagreeNeutralAgree
35%
27%
38%
Figure 5: If my performance improves, I will receive better compensation.
Percentage Indicating
0%
20%
40%
60%
80%
100%
P A P E R
W O R K I N G
Palmer says that among managers who had to make decisions on merit increas-
es, 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 com-
pany’s stock price double two years after going public.
F i n d n e w w a y s t o d i f f e r e n t i a t e m e r i t p a y
Sometimes there is little or no money available for merit pay increases. Re-
ward 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
16
A less- than-average
per formance of ten gets
an average reward.
Near ly a th i rd o f workers
surveyed agree that poor
per formance is to lerated.
NeutralDisagreeAgree
45%
32%
23%
Figure 6: Is poor performance tolerated at your company?
Percent agreeing that poor performance is not tolerated
0%
20%
40%
60%
80%
100%
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 percent 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 percent
— enough to keep up with the cost of living and maintain competitiveness.
The other one percentage point ( percent less the percent paid to most
“good” workers) went to the top 25 percent of performers. That allowed
“superior performers” to get seven to 15 percent increases. In the end, the
overall “pot” remained the same. But the best performers got more of it.
C o n c l u s i o n
ialogue is at the center of effective performance management. It
enables managers to cross the “synapses” in organizations where mes-
sages get blocked or distorted. As we saw in our opening vignette, Peter’s
organization had clear goals that no one paid much attention to. Performance
dialogue was missing from the equation. The result was a complete disconnect
between goals and the behaviors of those entrusted with achieving them. Not
to mention extreme frustration for Peter.
Failure to execute everything from big-picture strategic goals to narrow indi-
vidual objectives is a problem shared by many organizations today. When com-
panies get it right — when they have the systems in place to create a culture
of dialogue — research shows that they increase revenues, shareholder value,
interest from institutional investors and employee satisfaction. The good news
is that the sub-par performance caused by poor execution is fixable. And it
must be fixed.
P A P E R
W O R K I N G
17
When companies create a
culture of dialogue, research
shows that they increase
revenues, shareholder value,
interest f rom inst i tut ional
investors and employee
sat isfact ion. D
P A P E R
W O R K I N G
FFoouurr KKeeyyss ttoo DDeelliivveerriinngg
EEffffeeccttiivvee PPeerrffoorrmmaannccee FFeeeeddbbaacckk
11. PPuutt tthhee iinnddiivviidduuaall ffiirrsstt.. 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.
22.. AAiimm ffoorr sseellff--eevvaalluuaattiioonn.. When managers create ongoing 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 overly 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.
33.. TToolleerraattee ddiissccoorrdd bbuutt bbee ssppeecciiffiicc.. 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 behav-
iors 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 pro-
vide “hosted collaboration software to connect businesses requiring project-
based resources.” Do you remember? John Smith didn’t appear to under-
stand. Did you notice how he behaved for the rest of the presentation?
18
P A P E R
W O R K I N G
Not this: You know you really turned everybody off when you started to
use jargon in that presentation.
44.. SSeett oobbjjeeccttiivveess,, mmaakkee aaccccoouunnttaabbiilliittyy eexxpplliicciitt,, aanndd rreeiinnffoorrccee.. Ongoing dia-
logue, 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 moni-
toring 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 present.
Not this (immediately before the presentation): I hope your graphics are
better this time than last time.
19
Argentina
Buenos Aires
Australia
Brisbane
Melbourne
Sydney
Austria
Vienna
Belgium
Brussels
Brazil
Sao Paulo
Canada
Calgary
Charlottetown
Edmonton
Halifax
Montreal
Ottawa
Regina
Toronto
Vancouver
Winnipeg
Chile
Santiago
China
Hong Kong
Shanghai
Colombia
Bogota
Czech Republic
Prague
Finland
Helsinki
France
Lille
Lyon
Paris
Strasbourg
Germany
Berlin
Frankfurt
Munich
Greece
Athens
Hungary
Budapest
Indonesia
Jakarta
Ireland
Dublin
Italy
Milan
Rome
Japan
Tokyo
Malaysia
Petaling Jaya
Mexico
Mexico City
The Netherlands
Zeist
New Zealand
Auckland
Wellington
Norway
Oslo
Poland
Warsaw
Portugal
Lisbon
Singapore
Spain
Barcelona
Madrid
Sweden
Stockholm
Switzerland
Zurich
Thailand
Bangkok
United Arab
Emirates
Dubai
United Kingdom
Birmingham
Bristol
Glasgow
London
Manchester
Windsor
United States
Arlington,VA
Atlanta
Boston
Charlotte, NC
Chicago
Dallas
Kansas City, MO
Los Angeles
New York Metro
Norwalk
Philadelphia
Walnut Creek, CA
Venezuela
Caracas
Hay Group Headquarters
100 Penn Square East
The Wanamaker Building
Philadelphia, PA 19107-3388
USA
Tel +215 861 2000
Fax +215 861 2111
