Your shareholders know your company objectives - but what about your employees? Do they do their jobs with one eye on your strategic goals, and does their pay reflect their true performance?
If you're running a tech start-up, you're already familiar with the financial compromises that come with setting up your own business - the loans from friends and family; the personal credit card debt that keeps the company afloat when cash gets tight; the fact that you're usually the last person to draw a salary. But what about everyone else in the company? You're paying them - but are they really pulling their weight, and more importantly, are they helping drive your company in the right direction?
Measuring individual and company performance isn't rocket science, but it's often one of the hardest management tasks to get right. Some components are straightforward - it's not difficult to calculate if you've hit your monthly revenue and cost targets, for example - but others tend to be a mixture of hard and soft measures that can be tricky to manage. Assessing individual employees' contributions is particularly difficult, given that it usually combines specific task-based objectives with fluffier qualities such as attitude, team-working and motivation. Assessing those contributions in the context of your broader company objectives can be even trickier.
Some of the world's largest companies now take a formalised, top-down approach to performance management, setting objectives at board level and then 'cascading' them down through different management tiers, ending in departmental and individual goals that are each tied to the organisational layer above. Smaller companies have far less complex hierarchies and there's often an assumption that because they have their finger on the pulse, this kind of alignment happens naturally - but that's not always true. For one thing, priorities quickly get out of shape - some of your employees may be devoting too much time to non-essential or non-strategic activities at the expense of more critical work, for the simple reason that they're easier to do. Likewise, you can't always assume that your managers and senior employees are perfectly tuned in to your long-term strategy, particularly when short-term practicalities and day-to-day crises get in the way.
In fact, performance management is most effective when it's applied as a formal process. As with any management discipline, the real value comes not from measuring, but from drawing conclusions and following through on them. It's best thought of as a continual loop built around goal-setting, regular reviews (both informally and through regular appraisals), employee development initiatives such as training, and ongoing refinement of your high-level objectives as your business needs change.
In addition, performance should be closely linked to how you pay people. Many professions have a long tradition of linking pay to performance, from commission-based salespeople to senior managers working on quarterly bonuses. The problem is that their goals are often too short-term. A salesperson who's rushing to meet a quarterly revenue target, for example, is more likely to close a deal early to meet their numbers than pursue a more lucrative long-term agreement.
Similarly, it's still common to reward employees on revenue rather than profitability. But if you sell multiple products with different profit margins, why not pay more commission on the ones that add most to your bottom line? In some cases, you might even want to incentivise your salespeople to sell nothing - if you've landed a big deal from a customer, you may be better off cementing the relationship for a few months than trying to upsell them.
It's also important to bear in mind that not everyone is motivated by cash. For many people, as long as their pay is competitive and covers their practical needs, 'softer' factors such as job satisfaction, creative stimulation, learning opportunities and the chance to advance their careers are more significant. Some of them may be just as interested in other parts of the compensation package - like healthcare, pensions or a company car - and it may be worth adopting a 'cafeteria'-style approach that allows them to mix and match their own packages. Share options, of course, are also a common tool in the high-tech world, and despite the current furore over 'backdating' scandals in the US, many investors will expect to see them used to lock in key employees and senior managers.
Finally, bear in mind that performance goals change over time, and if they're no longer relevant, they quickly become disincentives. If your company strategy changes, so should your incentive schemes. In a small business, objectives set at the start of the year will often be out of date by the summer.
By Keith Rodgers, Webster Buchanan Research