Category Archives: Executive Assessment

Posts in this category relate to evaluating and communicating executive performance.

Compensation, Executive Assessment, Focus, Grow, Manage to Lead, People Matters

How to set up and run an Executive Incentive Compensation Program.

Each year, a well-run organization’s leadership completes a planning and budgeting process. Achievement of the resulting annual business plan is dependent on each organizational unit meeting or exceeding its established goals as part of that plan. This requires that individual leaders take ownership of their part of the plan.

The objective of the Executive Incentive Compensation Program (EICP) is to allow executives who meet or exceed annual performance goals, both financial and non-financial, to participate in the organization’s overall success. The more a given individual or group is responsible for the organization’s success, the greater their share of participation in the rewards.  Participation in the program is an important career milestone.

Participants

Executives with significant scope and scale of responsibility for achieving an identifiable portion of the organization’s financial plan and who are, and who are expected to continue to be, employees in good standing are eligible to participate in the program. All staff proposed for inclusion are reviewed and approved by the Core Leadership Group.

Participation is not required. To indicate their desire to participate, each eligible executive submits to the Core Leadership Group, via their manager, a draft of his/her performance goals. The draft is reviewed and edited iteratively with the participant as necessary in order to arrive at agreed-upon, approved, signed, and filed performance goals.

Key staff who join the organization after a quarter of the performance period is completed may participate in the program on a pro-rated basis with the approval of the Core Leadership Group, and with an approved performance plan completed within 21 days of their start.

Award 

At the end of the year, participants review and evaluate their performance relative to the plan. Participants who have met both financial and non-financial goals receive their target award. If not quite all goals are met (e.g. 80 – 95 % attainment) then a portion, (e.g., 50%), of the target Incentive Compensation (IC) is awarded. In cases of truly extraordinary performance against financial goals, there may also be the possibility for additional awards to be earned.

Payment

Executive Incentive Compensation awards are paid within two months of closing the organization’s fiscal accounts for the performance period.

Guidance on setting performance goals

The organization’s financial plan includes an operating budget that allocates resources to implement the plan. This planning and budgeting process is simultaneously both top-down and bottom-up so that by the end of the process, each part of the plan is clearly the responsibility of a specific individual or group. To complete the process, upon final approval by the firm’s leaders and board, individual and group financial and non-financial responsibilities are explicitly recorded as Executive Performance Goals.

At the end of the performance period, each participant determines whether they have earned all or part of their target incentive compensation award based on how actual performance compares to financial and non-financial targets that were approved at the beginning of the period and recommend a corresponding reward.  Recommendations are then reviewed and approved by their manager and the Core Leadership Group.

The following provides guidance on how performance goals are set and how the program is managed.

Objectives

It is important to keep in mind the objectives of the Executive Incentive Compensation Program. When in doubt about how to handle a specific situation, refer back to these objectives. In evaluating a participant’s performance, The Core Leadership group will judge any specific situation in light of these objectives:

  • Provide Clear Direction: Performance goals are to provide clear communication about what an executive or group is expected to accomplish.  Difficulty in setting goals generally reflects indecision or lack of clarity on the part of the executive and his or her unit leader. It is their responsibility to drive the process until clarity and specificity are achieved.
  • Provide a Means of Measuring Accomplishments: Clear goals, both financial and non-financial, ensure a way of measuring whether an individual, or a group, has accomplished what it set out to do.  For the program to serve this objective, goals must be defined so that their achievement is measurable.
  • Provide a Means for Rewarding Accomplishments: If key people meet their goals, the organization as a whole will meet its overall goals and can, therefore, afford to provide additional compensation in the form of individual bonuses. The objective is to reward individuals for accomplishments that contribute to the success of the organization.

The ideal outcome is for everyone in the program to meet his or her own goals and receive the full target amount. While a 100% success rate is unlikely, there is no ceiling or quota on the number of participants who can receive bonus awards by meeting their goals.

The success of a unit influences judgment as to the success of the individuals within that unit. Specifically, for example, it is unlikely that a large percentage of key individuals in a group will be judged to have met their goals if the group as a whole falls far short of its performance targets.

Development of Performance Goals

Annual Performance Goals are effective at the start of the fiscal year. Therefore, Performance Goals for program participants should be in development well in advance of budget approval and considered in effect as of the first day of the fiscal year even though they cannot be finalized until the planning process is completed with the annual budget approved by the board (which will generally occur at a board meeting one or two-months into the fiscal year).

Responsibility for Setting Goals

It is the responsibility of each organization unit leader to see that all key staff in their group have written, signed, and approved performance goals. Some unit leaders may prefer to have their key staff initially draft their own goals, while others may draft the initial goals for their participants themselves. Either method is acceptable, provided that each participant and his or her manager ultimately reach agreement on the written statement of the goals and that those goals are approved by the Core Leadership Group.

While managers have final responsibility for setting goals, each person in the program also has responsibility to be sure that he or she has, understands, agrees with, and is committed to achieving written goals for the year. Participants in this program are the senior staff and are expected to take the initiative to be sure that they have clear goals. A program participant who does not have, does not understand, or does not agree with their goals should take the matter up with their manager or directly with any member of the Core Leadership Group. Likewise, it is vital that every program participant do their part to make sure that key employees in their area have, understand, and agree with what they are signed up to do.

Bonus awards will not be approved for anyone who does not have written, signed, dated, and approved Performance Goals.

Setting Goals that are Measurable

To achieve their purpose, goals (both financial and non-financial) must be measurable. This means they must refer to specific accomplishments, even if judgment is required to determine whether something was accomplished. Quantitative measures, such as revenue, gross margin, project profitability, bookings, growth in backlog, or numbers of hires that have worked out well, retention rates, etc. are especially useful.

In order to make goals measurable:

  • Use quantitative measures where possible.
  • Keep goals brief and concise, with at most a few items cited.
  • When a goal cannot be directly quantified, specify the kinds of data that can be used instead (e.g. delivery dates, client reactions, or deliverable).

It is critical that both financial and non-financial goals be outcome-oriented. The specific purpose of this part of the compensation program is to measure accomplishments that drive organization performance and growth, not personal growth or hard work for its own sake.

Aggressive but achievable: Both financial and non-financial goals should be aggressive but achievable in light of the individual’s or group’s capabilities, training, and experience and the business circumstances that exist at the time goals are set. Superhuman feats are not expected (although they are certainly welcome!).

External factors partially or completely beyond the person’s or group’s control can result in not meeting goals that were realistic at the time they were set. While it is desirable to set goals that are as controllable as possible, it is impossible to eliminate external factors and external factors do not overwhelm a shortfall in performance to justify an award.

Financial Goals: Client Managers, Project Managers, and Market Leaders have goals that are closely linked to contributing to profits.  Managers of indirect activities, such as product development, recruiting, and marketing, have goals tied to producing target results within budget and on time.

Non-Financial Goals: Three to five specific goals to implement key initiatives either within that person’s unit or on an organization-wide basis. Typically, non-financial goals address areas such as recruiting, personnel development, product development, process development, business development, knowledge management, and solution offering development, and specify what an individual or group must do specifically (e.g. hiring four top-notch college graduates, develop two clients with revenue potential greater than $2M per year, develop a delivery strategy for a specific high-stakes prospective client).

Corporate Responsibilities: Certain performance items are a condition of participation in the Executive Incentive Compensation Program without any associated financial incentives. These items include timely and accurate expense reporting, invoicing, time-sheet, and earned revenue submissions; maintaining a current resume and project descriptions; establishment of written professional development plans for self and key unit personnel; on-time submission of plans, budgets, and projections; timely completion of performance assessments, help with proposal preparation and project reviews; and timely submission of salary and promotion recommendations. Sub-optimal performance along any of these lines is grounds for reduced payment of financial incentives or removal from the program altogether.

Handling Changes: Sometimes circumstances during the year change to make some or all of a person’s goals no longer appropriate. This is normal and is not a valid reason for not setting and measuring goals, or for reducing essential management flexibility. The guidelines for handling changes are:

  • Anticipate and plan ahead for changes whenever possible.
  • Address goals as soon as major changes occur. If a major change in assignments occurs, the area leader responsible for the new assignment sets new goals and asks for an evaluation of the performance against goals up to that point. Just as when goals are set initially, the person whose assignment is changing also has the responsibility to see that this matter is handled properly.  The Core Leadership Group finally approves evaluation against goals being closed-out and goals going forward.
  • When major changes occur, it is acceptable to sub-divide goals and awards into separate pieces related to each major segment of work under the guidance of the Core Leadership Group which will help determine how best to do so.

Approval of Performance Goals: All performance goals must be reviewed and approved by the Unit Leader and the Core Leadership Group.

Relationship of Goals and Incentive Compensation

Achievement of individual goals is the basis on which individual bonus awards are made for key employees. Achievement of substantially all goals, financial and non-financial, for a year results in the award of the full target amount of the person’s individual bonus, which may be factored by the total bonus pool available.  Achieving a major part of, but not all (say, 85%), goals is considered a “near miss” and may result in an award of half the targeted amount, and a failure to achieve a major part of the goals results in no award.

In some cases, it is possible to define achievements in excess of the base goal that are deemed extraordinary performance and may result in an award above the targeted amount. Upside performance levels are set only after base target levels are set and must be financially based.

Continued employment is a condition of award.

Upside Performance Tiers:

  • Always work out target performance levels before working on upside scenarios. Once the thinking about upside performance starts it is hard to ever get back to base target if it is not already worked out.
  • The downside threshold for half an award (.5 * Award at Target) varies but is never lower than 80% and usually 85-90%.  Uninitiated participants may think that if half a goal is achieved then half an award is due. Such thinking must be headed off from the start by making clear that only a near miss qualifies for a fractional award.
  • The upside tier varies considerably based on the stage and scale of the unit. An early-stage, small unit might need to hit 150% to hit the 1.5 X tier and a mature, large unit might need only 115% because it is harder to achieve larger percentages at greater scale and under different market circumstances.
  • The upside financial metric of performance must be NET of the incremental IC such that upside awards are funded by the results that cause them to be paid.
  • Performance tiers are treated as steps and not slopes. That is, a participant needs to accomplish a full tier’s worth of results before earning the next level of award in order to drive performance and avoid complacency, say, halfway through a performance tier.
  • Govern the amount paid to a group of people for the same accomplishment so as not to pay out in total more than the organization earns. A governor on group IC upside as a % of the total contribution increment such that the principle is properly applied, as an example, might be as follows, (where ∆ means “change in”; e.g., ∆IC = change in Incentive Compensation):
    • ∆IC/(∆Contribution + ∆IC) ) <= some reasonable % say 3% (which amounts to essentially a commission rate (or slope of the line) applied to a step function) for each participant; and where
    • ∑for all participants (∆IC/(∆Contribution + ∆IC) ) <= some reasonable % of the (∆Contribution + ∆IC); say 13%, to ensure that the organization itself sufficiently benefits from the achievement.

Sample Executive Incentive Compensation Participant Goals.

Compensation, Executive Assessment, Grow, People Matters

How to administer annual salary actions in a fair and rational manner.

Labor costs are the largest expense for many organizations and so should be carefully and responsibly managed; every salary action should be taken seriously.  Nothing affects organization culture more than how people are paid.

Less experienced managers and leaders may use salary actions as a way to keep staff happy thinking, perhaps, that they are doing someone a favor or following an easier path. It turns out, though, that the easy way out can leave employees confused, just as dissatisfied, and questioning management motives and decisions.

Figure-1 Performance Appraisal and Salary Action Processes

A good strategy is to use salary actions to communicate important information to employees and to help supervisors and unit managers become better leaders.  It takes significant time and effort to design, develop, implement, and institutionalize an effective salary administration process (see Figure 1) but is well worth it.  This post presents steps responsible leaders can take to administer a fair and rational salary action process (see Figure 2).

Continue reading How to administer annual salary actions in a fair and rational manner. →

Compensation, Executive Assessment, Grow, People Matters

How to give employees feedback while also showing they are known and appreciated.

Organization GroupIn order for an organization to grow, it is important for each person who works there to get and stay on track to career success. Towards that end, an annual appraisal process evaluates each employee’s performance and growth and provides employees feedback, guidance, and direction for development.

Less experienced leaders may count on managers to prepare and administer appraisals for those they supervise. Self-imposed pressure to “get the review right” can cause writer’s block and so it may be put off and eventually hastily pulled together with whatever comes to the manager’s mind at the time. Upon receiving such a review, employees may feel frustrated, confused, adrift, and not not at all known, appreciated, and guided towards success and career growth.

An effective appraisal process engages those who know and care about each employee on the subject of his/her strengths, contributions, growth, and areas for improvement. The reviewer identifies and works with reviewee stakeholders to collect input, consolidate, present to peers, iterate, and finalize a communication from the organization (not just from the reviewer) to the employee being reviewed.

Such an approach is called multi-rater, or a simple 360-degree review, because it collects data from multiple people who know and work with the reviewee. The process unearths a wealth of data from which to prepare a responsible appraisal, is relatively fast and easy to complete, and engages management in an effective review and guidance process that can be a major factor in driving employee and organization performance and growth.

Those involved in the appraisal process are depicted in Figure-1 and described below.

Reviewee: the person whose performance is being appraised.

Appraisal Preparation Process

Appraiser/Reviewer: the person who:

  • Works with the reviewee to identify stakeholders.
  • Solicits and collects input from stakeholders.
  • Prepares a draft consolidated appraisal based on their own judgment and experience together with collected input.
  • Shares the consolidated appraisal with peers in the Appraiser Review Meeting to ensure parity with peers and clarity on what should be the focus of the appraisal’s message.
  • Revises the appraisal accordingly.
  • Administers the completed appraisal in a one-on-one conversation with the reviewee.

Stakeholders: those with whom the reviewee works regularly and who therefore have a perspective from which to provide useful input to the appraisal. The following points apply:

  • Appraisers work with reviewees to determine stakeholders from whom to request input.
  • Shallow praise not backed up with supporting examples will be filtered out by the appraiser and/or the Appraiser Review Meeting and so should not be sought or provided.
  • There can be any number of stakeholders that provide input.  The ideal is to have only as many as are needed to provide a well-rounded assessment. Reviewees who work in many different modes with many different kinds of situations will likely need more stakeholders to get the full picture.
  • It is not useful to get the same data from many sources but redundant input is easily ignored so it is okay to have one or two more than is needed at the minimum, but it is generally pointless to have too many stakeholders.

Appraiser Review Meeting: the forum at which reviewers meet to compare notes on consolidated reviews that are related in a meaningful way (e.g., all are developers or all are consultants or all are account managers or all are unit leaders, etc.).

Performance Appraisal Process Initiation

Core Leaders enlist someone from Human Resources to support and drive the process and then prepare and communicate a Time Line that spans about a month in which to:

·         Solicit stakeholder input
·         Complete Performance Appraisal Forms
·         Conduct the Appraisal Review Meeting
·         Administer Appraisals.

The HR coordinator assigns every employee a reviewer and a list of suggested possible stakeholders.

Core Leaders announce that the appraisal process has started.

Performance Appraisal Preparation

The performance appraisal process engages the community of people with a vested interest in a person’s growth in making explicit that:

  • They know the person well,
  • Appreciate the person for their contributions, and
  • Have explicit suggestions that will guide the person to maximum growth and performance.

The following steps guide the preparation of the performance appraisal:

  • The reviewer notifies reviewees that the appraisal process has started and works with each to identify his/her stakeholders; that is, people who are familiar with the reviewee’s work over the performance period and those who otherwise have a stake in their success.
  • The stakeholders, reviewee, and reviewer each complete an Employee Appraisal Input Form distributed by the reviewer to summarize the reviewee’s strengths, contributions, and growth in the performance period just completed, and to identify opportunities for improvement in the next performance period. Stakeholders know the reviewee well and will likely have no trouble quickly filling out input the form with rich input. Avoid shallow praise and give detailed examples to bring points to light. Do not worry about careful editing or packaging which will be done later.
  • Stakeholders submit completed Performance Appraisal Forms to the reviewer.
  • The reviewer:
    • Consolidates an appraisal based on stakeholder input, past appraisals, and assessments of actual performance against period goals.
    • Destroys individual Performance Appraisal Forms other than the reviewee’s form.
    • Distributes the consolidated appraisal form to attending managers by the day before the Appraiser Review Meeting.

Appraiser Review Meeting

Objectives of the Appraiser Review Meeting are to:

  • Ensure consistency amongst and across managers and appraisals.
  • Make sure that each appraisal represents what the organization as a whole has to share with each employee about their performance and not just the views of a single reviewer.
  • Make managers are aware of how people in other parts of the organization are performing.
  • Check-in on and upgrade the thinking and perspective of reviewers.

At the meeting each reviewer presents, in-turn, a two to three-minute summary of each reviewee, including the overall ratings for performance and growth as being below, at, or above expectation.  If the reviewee being discussed is also a reviewer in the meeting, s/he leaves the room for discussion about their own performance.

The group discusses the reviewee for six to seven-minutes, adding additional points and challenging the draft appraisal. The goal is to arrive at a consensus on the one-to-three key messages the organization most wants to deliver in each section to the reviewee. Messages for each employee are captured to subsequently be incorporated into the final appraisal by the reviewer to reflect the collective managers’ input.

The managers in the Appraiser Review Meeting should all be of roughly the same executive level and should appraise only employees one or two levels lower than themselves.

The most senior leader in the Appraiser Review Meeting uses the forum to see what managers focus on and to profoundly impact their thinking and behavior relative to employee appraisal, review, guidance, and feedback. There is no better forum for leadership development than the appraisal review.

The process is repeated at as many levels as required to review every person in the organization.

The reviewer signs and dates the completed appraisal and then meets with the reviewee to administer the performance appraisal (See Exhibit H). The reviewer makes clear that what is communicated is from the organization as a whole and not from a single individual.

Performance Appraisal Administration

The following steps guide the administration of the performance appraisal:

The reviewer schedules an hour discussion with the employee being reviewed (the reviewee) at a convenient time and place to minimize the chance for distraction or disruption during the session.

Prior to the meeting the reviewer should let the reviewee know that the meeting is to cover annual performance appraisal and provide Tips for Reviewees. At the start of the meeting, the reviewer lets the reviewee know how much time is set aside for the discussion and generally behaves so as to put the reviewee at ease.

The reviewer walks through the reviewee’s self-evaluation and seeks to understand the employee’s perspective on him/herself and his/her performance. The reviewer pays close attention to what the reviewee has to say, practices assertive listening, and is diligent in efforts  to show appreciation for the reviewee’s preparation, performance, and perspective.

The reviewer discusses the reviewee’s strengths, contributions, and growth, as well as the one or two areas to concentrate on next. The reviewer leans-in to any discomfort in order to convey the most important messages that the managers came up with.

It is important to NOT cover salary actions while administering theappraisal principally because it is impossible to do a good job discussing both performance and compensation in the same conversation. Once the meeting opens up the topic of compensation attention never returns fully to performance. The subject of salary is so electrifying that it dominates consciousness to the point of distraction.  The better plan is for the entire process to be separate such that the output of appraisal is input to salary actions but separated in time as suggested by the illustration in the above figure.

The reviewer summarizes the meeting, and draws attention to the most positive aspects of the reviewee’s performance and reiterating again the key messages.  The reviewee signs the document stating that the appraisal has been read, discussed, and understood.

The reviewer records notes on key points covered and adds reviewee’s comments to the consolidated appraisal if requested. If there were any significant disagreements, or if modifications to the appraisal are required, the reviewer shares them with those at the the Appraiser Review Meeting. The reviewer delivers the completed and signed appraisal to the HR coordinator for filing.

Why this Performance Appraisal Process works so well

The Performance Appraisal Process is a practical way to reveal to a person important things that are is known about him or her that s/he does not yet know about him/herself. It works in a manner consistent with what Organization Development theorists call the Johari Window.  Review this note about the Johari Window from a leadership development class Dr. Hollander and Peter DiGiammarino designed and delivered for top students at the Commonwealth College of Massachusetts at UMass, Amherst to understand more about the connection between Johari Window and the Performance Appraisal Process.