The three questions you should ask yourself when working on your annual plan for 2021

Are you working on your annual plan for the coming year? Then you are about to make decisions that will have a huge impact on the behaviour of your employees. One subject you are sure to cover is your Performance Management System. After all, KPIs are an important driver of the behaviour of employees as they give guidance on how to act and what to prioritize. But what if these KPIs turn out to have an adverse effect and unintentionally push employees towards undesired behaviour? In this article, we cover 3 questions that you should ask yourself in order to make sure your KPIs lead to the desired behaviour:

1. What is the effect of KPIs on the intrinsic motivation of my employees?

2. Do my KPIs truly align with my strategic objectives and values?

3. What dilemmas will my employees encounter due to the current KPIs?

1. What is the effect of KPIs on the intrinsic motivation of my employees?

KPIs can reduce intrinsic motivation of employees as there is a major emphasis on extrinsic outcomes. Companies often create a “hedonic treadmill”: attaining good scores on KPIs is rewarded, which motivates employees to keep running until they reach their next quantified goal. No longer are employees driven by purpose, pleasure or personal development. The positive effects of intrinsic motivation in employees such as increased learning, increased engagement and willingness to go the extra mile can disappear if employees are fixated on these extrinsic motivators. For example, one study in 1997 attempted to answer why people have a harder time getting a taxi on a rainy day. Whereas most people expect it to be because the demand for taxis is simply higher, it actually has more to do with the KPIs of taxi drivers. The study found that the supply of taxis was more than enough to attend to the increased demand early in the day, however, because of this increased demand the taxi drivers hit their daily target for revenue more quickly when compared to sunny days. As a result, a lot of taxi drivers decided to go home early, significantly decreasing the taxi supply. When considering intrinsic motivation of employees, eliminating all KPIs is not the answer. A total lack of (challenging) goals can also have a negative effect on feelings of purpose and personal development, decreasing intrinsic motivation. Leaders should gain insight in the level of intrinsic motivation of their employees and reflect on how this relates to current KPIs. Is it low? Look for ways to increase it, for instance by increasing autonomy in attaining KPIs, making sure employees feel appreciated for their efforts or by creating KPIs more focused on personal development opportunities. It is high? Then make sure to reflect on current KPIs to make sure they are suited to maintain this level of motivation.

2. Do my KPIs truly align with my strategic objectives and values?

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Nowadays, many companies have identified their “core values” – values that lie within the heart of the organization and its employees. While these core values are often presented as an essential part of the business, they are regularly missing in KPIs. Quantitative outcomes are simply easier to measure. When companies do formulate these intangible outcomes as KPIs, there is often little focus on them in daily practice when compared to the more easily quantifiable goals. Unsurprisingly, “if it can’t be measured, it doesn’t exist” is a phrase that was often spoken by managers in the past. Leaders should firstly ask themselves to which extent they already consider intangible KPIs, such as core values, in their Performance Management System, but should secondly consider how much they are actually steering on these in practice. It’s not just about writing these KPIs down, but also about the amount of effort you put in to show your employees that you value these types of aspects just as much as the amount of revenue brought in. This means not just paying attention to the core values once a year in performance interviews, but investing in regular dialogue on the importance of these types of aspects.

3. What dilemmas will my employees encounter due to the current KPIs?

Drafting effective KPIs is a balancing act. Most of the time we want it all: quantity and quality, a shortterm and long-term focus and openness about errors as well as a perfect score. Wanting all of these outcomes does not mean companies always construct KPIs that indeed cover all important aspects. It has a major effect on the behaviour of employees when an aspect that the company wants employees to focus on is not formally formulated as a KPI. A company that claims to stand for quality but only has KPIs which focus on speed will drive their employees to focus on the latter. This can cause employees to fixate on the KPI, causing them to neglect anything that does not help them reach related goals. This can be detrimental to important factors such as team atmosphere or innovation, but can also motivate employees to cut corners. One well-known example of this comes from Wells Fargo. Former CEO John Stumpf regularly used the slogan “eight is great” in order to motivate employees to average eight “products” per customer. The difficulty of this target led employees to open over 1.5 million deposit accounts for customers without approval, racking up over 2.5 million dollars in fees for the bank. The scandal led to over 185 million dollars in fines, the firing of over 5300 people and the retiring of the CEO. In other situations, multiple desired outcomes are indeed formulated as KPIs, but this carries its own risks. While this does ensure that your employees pay attention to the full picture, employees may feel as if it’s impossible to have it both ways, leading to major confusion and frustration. When constructing a set of KPIs, leaders should always consider which undesired effects these KPIs could have. For example, are you setting a high target on a single outcome without accounting for other important aspects of the business such as safety or integrity? Or are you implementing contradictory KPIs by telling employees to focus on speed as well as quality? Take the time to consider how this could lead to negative consequences such as frustration, confusion or undesired employee behaviour and consider how this could be improved.

In sum

We’ve seen that KPIs and the way you steer on them can have a large (positive or negative) effect on the behaviour of employees. Unfortunately, there is not a single recipe for the most optimal set of KPIs. The success of KPIs is determined by how you deal with them:

• Increase your insight in the side-effects and dilemmas that your KPIs are causing, for instance by assessing contradictory KPIs and entering dialogue with your employees

• Don’t solely focus on extrinsic motivators. Instead, make sure to formulate KPIs that help increase and maintain intrinsic motivation in employees

• Prevent fixation on easily quantifiable KPIs and pay additional attention to more intangible KPIs, such as core values. Initiate dialogue with employees to see to which extent they experience these two types of KPIs as equally important in daily practice

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