In our recent articles, we have been revisiting Key Performance Indicators, or KPIs, and considering their correct usage in organisations to drive a successful business strategy.
One of the biggest challenges when creating KPIs is setting reasonable targets. KPIs measure the extent to which an objective is being achieved and evidence of its success. But herein lies the challenge. Yes, it can be tempting to set a wildly challenging target in the hope that everyone strives to achieve it, but the reality is that unrealistic targets are a huge demotivator to the very people they are meant to engage.
Your employees need targets that offer the right degree of stretch, but that they know they can attain with hard work and perseverance.
It’s a difficult balance. Set your targets too low and your business simply won’t grow. In fact, it may completely flounder as your competitors move ahead. But if you set them too high you risk disengaging your workforce entirely. Even worse, you may see a talent exodus as your best employees decide to go and work for companies which set bonuses – with the expectation of paying them.
So what can we do to get this process right?
KPI Targets – 5 key points
1. Ask: Do you know what the target is?
Sometimes a KPI is so new to the business and its strategy that there is no data in place for benchmarking. In this instance, how can you set a target without knowing what might be reasonable, achievable with stretch or just downright impossible? In this instance, we actually recommend leaving the target out of the KPI, at least initially, but measuring the data. Over time, as your KPI gathers around 7-10 data points, you’ll be in a much better position to determine a sensible and realistic target.
Some businesses formalise this approach with tools such as an XRM chart.
2. Focus on what is immediately relevant
KPI targets need to be relevant, tangible and immediate. If you target something that isn’t currently in place, then your team will simply switch off. Even an achievable target is pointless if the business doesn’t have the processes, infrastructure (such as technology) and training in place to deliver it. For example, if your recruitment business doesn’t yet have its new Applicant Tracking System in place, don’t plan to measure outputs that rely on it. If you thought stretch targets were demotivating, wait until you accidentally set your employees targets that they can’t physically deliver! (This might sound like an academic scenario but it’s actually all-too-common in fast-paced businesses, particularly those which are reliant on functional technology implementations to deliver their strategy.)
3. Set SMART targets
The SMART model is useful here. Aim to create targets that are Specific, Measurable, Achievable, Realistic and Time-Bound. If you apply this rule to each KPI target that you’re considering, you have a far better chance of creating one that works, for you and for your employees. For example:
Specific: Define those targets as specifically as you can. Play around with wording. Test your proposals with different people in the business to check for a common understanding.
Measurable: Have clear, objective and data-driven measurements for each target. These may refine over time as you learn more and manage the strategy, but begin with a working set and get a clear process in place for accurately gathering that data.
Achievable: As we mentioned above, your targets absolutely must be achievable, with stretch effort and high performance. Shoot for the stars by all means, but make sure discretionary effort and high performance will result in clear rewards.
Realistic: Discuss your proposed targets with functional heads and trusted experts within the business. Success is only achievable when it occurs collectively, so check that your director’s thoughts are compatible with what employees on the front line can see and experience in their daily work. There can be a disconnect.
Time-bound: You may have one primary long-term target to achieve a KPI but make sure it is supported by smaller incremental targets that allow you to check progress along the way. This prevents any nasty surprises at the long-term measurement point!
4. Consider how you will manage your KPI targets
Many businesses use established business strategy management systems such as the Balanced Scorecard and Spider Impact. Whatever system you choose, embed it with rigour and energy. The system is your key to overall strategy success and will drive everything that you deliver – including those KPIs and targets. Consider investing in an automated KPI software system too so that your data tracking and KPI measurement can be done easily, quickly and without error – creating rich reports and presentations in real-time to help your managers make better decisions.
5. Link performance and KPI targets
Good communication is often the difference between a successful business strategy and one that falls short of expectations. Firstly, make sure your targets are clearly built into your employee reward systems, such as performance-related pay, commission structures, and reward and recognition schemes. Clarify thresholds, expectations and processes – and define rewards clearly. This enables you to talk about rewards in a meaningful way, and one that your employees will see is real and tangible.
Once you have that structure in place, you can get your employees excited and enthused about delivering the strategy, by performing and offering that vital discretionary effort that gains them measurable rewards (including plenty of recognition alongside tangible benefits) – and which allows the business to achieve its strategy and thrive.
