At the beginning of our communication, for a more “lively conversation”, let’s divide the questions from management practice in terms of KPI and motivation into 2 conditional groups:
- 1 group of questions are questions of “values and meanings” or “humanitarian” (why is “this” necessary?), when decisions are made based on the value attitudes of the top officials of the organization, on intuition, and to a lesser extent on the basis of rational reasoning;
- The 2nd group of questions are “design” or “engineering” questions (what to do? how to do “it”? when? etc.), when it is necessary to “design” some “social system/technology” in business practice to solve applied problems and calculate/measure the results — a project management system (including project indicators), a budgeting system or a motivation system based on KPI. The formation of such management systems (subsystems) is accompanied by “trials and errors” on the path to applying best practices, testing options and choosing the best option from those possible for your company, with its own culture of relationships, management style, etc.
An additional objective of the article is not only to disclose individual issues from the area of personnel motivation in conjunction with KPI management, but also to identify the organizational phenomenon of solving management issues of the second group using methods inherent in the first group of issues. The article discusses an example from the area of personnel motivation. The topic of motivation is a complex and “nervous” topic, and in this regard, all possible coincidences of views, opinions, KPIs and figures in this article are asked to be considered accidental.
The above phenomenon manifests itself when it is necessary to move from general and shared principles (answers to questions of the first group) to specific action plans. It is hypothesized that most of the questions of the second group can be tested empirically, competently implementing “pilot” projects of trial implementation of new ideas and rules, which will save “a lot” of time on ineffective deliberative exchange of opinions. Instead of such an exchange of opinions – “what seems better to whom” – it is proposed to formulate the main options for solving the issue in a simplified and enlarged manner, to outline the options for how the issue can be resolved in principle, to analyze them for “costs/effects”, “pros/cons”, and thereby increase awareness of the consequences of one’s decisions. An idea that is simple and understandable, but rarely finds systemic support in practice. Often, instead of accepting several options and testing them empirically, real actions that form experience are replaced by consultative corporate “squabbles” and other types of corporate “consultative-theatrical” arts, which sometimes end with decisions “from the position” and not “from common sense”…
“Humanitarian” questions of the first group in the area of motivation will look like this:
- What do we want to achieve with our motivation system? Why do we need it in the first place?
- Will there be fundamental differences between motivation systems for different categories of personnel? What are they?
- How can we know that our motivation system is actually influencing employee behavior in the way it was originally intended?
It is very difficult to select options for these and similar questions and test them; here, rather, the client markets and the labor market will test the viability and sustainability of the social structure of the company’s business.
The “engineering” questions of the second group in the area of motivation are expressed as follows:
- How many indicators (KPI) should be in an employee’s motivation card: 5, maximum 7, minimum 2?
- How many and what kind of KPIs should there be? If you are interested in the question of where to get and look at examples of KPIs, the source of examples is here ;
- What should be the bonus limits? 70%-130% of the target 100% value of the indicator? 80%-120% or only 100% achievement of any indicator matters? How to determine the optimal range? And what determines its optimality – the manager’s assessment of the intensity of target values, statistics of previous achievements, the owner’s desire, or the intensity of the glow of fire in the eyes of employees? Should these limits be uniform for all indicators or should each indicator have its own?
- Does it make sense to assign weights to those KPIs that are not used in employee motivation cards, but act as indicators of the state of individual areas of the business?
- Where do we get the minimum value of the indicator (minimum plan) and its maximum target value (maximum plan)? Should the minimum and maximum be equidistant from the planned KPI value (balance of the desire to insure risk and ambitions)?
- Do the KPI value limits acceptable for the business coincide with the bonus limits?
- According to what logic should bonuses be paid in the range of premium and bonus payments? (Individual variants of “graphical logics” of bonus payments are presented in the figure, Figure 1. In the article we will focus on the simplest and most understandable linear dependence of the bonus on the actual % of achievement of the planned values of the indicator).
- How do the boundaries of the desired values of the indicators relate to each other within the framework of one employee motivation map? Between employees? (question about the balance of target values of the indicators)
Figure 1. Options for bonus dependencies on % KPI fulfillment.
These engineering questions can be answered by analyzing the best practices of other companies, from one’s own value systems (the company’s management’s answers to its “humanitarian” questions). Then create working test models to test the options for one’s own solutions, which is what this article proposes to do, and an example of how this might look is shown in Fig., Figure 7. But we will approach this question gradually, taking several steps.
In this article we will consider an example of “tuning” a motivation system based on the motivation card of one employee. In “engineering” terms, the adjustment of the motivation system regulators occurs simultaneously with the adjustment of the planning system regulators, see Fig., Figure 7.
Initial conditions
Based on the decomposition of the company’s goals and indicators, a motivation card has been defined for employee N, which contains 3 indicators with weights, target values of indicators (KPI) and acceptable business boundaries for their values, see Fig., Figure 2:
Figure 2. Initial conditions.
In the process of goal setting, we set up “regulators”: KPI weight, planned values and KPI value limits. The lower limit of the indicator values (minimum plan) defines the acceptable indicator value for the business when the situation is not yet critical, and nothing will “collapse” in the company’s business processes. The upper limit of the indicator values (maximum plan) is a hard-to-reach bar of the ideal result, which should not be exceeded, because either the reward will “go off the charts”, or there may simply be negative consequences for the business if related business processes, departments do not support the breakthrough result in one of them.
At the end of the planned annual period, we summarize the achievements, reflect the fact and % of achievement, see fig., Figure 3.
Figure 3. Simplified motivation map.
We calculated the % of achievement of each KPI and derived the final % of achievement using the weighted average method. It is assumed that the company’s management is guided by the value settings to reward worthy results of the staff. It seems that a good result has been achieved, it would be necessary to reward, the question is – how to reward?
Let’s assume that the target annual bonus fund of an employee in the position under consideration is 500,000 rubles with 100% achievement of the planned values of all three KPIs. The figure, Figure 4, clearly shows how the pie of the total target bonus is distributed in proportion to the KPI weights.
Figure 4. Pie of total target bonus for three KPIs.
Setting up a “test task”
Let’s consider 2 options for paying remuneration, and try to answer ourselves which option is better (more convenient, more practical, more understandable):
- Based on % Achievement, “Target Bonus” x “% Achievement”.
- Based on bonus coefficients, when for each “+1%” of achievement above the plan we pay taking into account the increasing coefficient “x2”, and for each “-1%” below the plan we pay taking into account the decreasing coefficient “x1.5”.
The first option is a special case of the second with bonus coefficients equal to “x1”.
Let us introduce some “pilot test” initial conditions of the incentive system.
These initial data are variables, by changing which you can test and understand which bonus options can be paid for which options of final results, and we will also try to answer the question for ourselves – is it possible to define the following conditions as universal for all KPIs :
- Bonus limits: “70%-130%” of the planned KPI value equal to “100%”
- The division value of the % achievement scale : “x2” for each “+1%” of achievement above the plan and “x1.5” for each “-1%” below the plan
The calculation of the reward based on the % of achievement using the profitability indicator as an example can be graphically represented as the blue graph in Fig. 5.
The calculation of the reward based on the bonus coefficient (option 2) can be graphically represented as the red graph in Fig. Figure 5. Graphically, we get the same linear dependence, but with “tuning” – the line will have a kink, the meaning of which is that “we motivate more for more within the specified limits”.
Depending on the goals for which the motivation system is being developed, the goals and values of the management, the first, second or some other option is chosen for motivating personnel.
Figure 5.
Let us consider the option when not universal, but different values of the motivation system regulators are allowed, based on the fact that in order to change the KPI values by 1 unit, different KPIs will require different intensity of efforts, for example, a change in the satisfaction coefficient by 1 point and a change in the sales volume indicator in square meters is a change by 1 square meter.
The settings of the “regulators” of the motivation system for each KPI allow us to more clearly decide what to strive for – universal motivational settings, or to allow different settings depending on the types of indicators (KPI), see Fig., Figure 6.
By varying the settings, you can more clearly define how and for what (in what dynamics and within what KPI value limits) the reward will be paid – the KPI bonus.
Figure 6. Settings of the motivation system “regulators”.
As a result, the “dashboard” for testing the bonus may look like the one in Fig. 7.
Figure 7. Dashboard for testing KPIs and evaluating bonus payment options.
Thus, having defined the “humanitarian” questions, it is proposed to define “engineering” questions on motivation and use the approach considered to test answer options, select the optimal one, and then manage the settings of the motivation system.
In the dialogue between the head of the HR department and functional managers, when it is necessary to agree on incentive schemes for the next planning year, a visual approach will also be useful, facilitating the achievement of mutual understanding by both parties to the negotiations.
Of course, the article considers a simplified situation: it does not consider all possible types of indicators (KPI), in particular, KPI for reducing target values (example: defects, complaints), KPI for stabilizing target values (example: current liquidity); it considers an example with only 3 indicators and a simple linear dependence of the bonus on the % of KPI achievement or bonus coefficient. Of course, if desired, improvements are possible…
Summary of experience and practice…
What risks are important to consider when developing a motivation system?
- Underestimation of planned values by employees. This risk develops “paranoia” in developers of the motivation system and often leads to its unjustified complications. This risk will not be eliminated by any sophisticated formulas and dependencies. It is proposed to correlate the seriousness with which this risk is considered with the declared values of the company – are there any interesting and quite “predictable” discoveries here… ?
- Use of vague and “murky” indicators (KPI), especially when indicators of results or efficiency of activity are replaced by indicators of implementation of events such as “to complete the event on time by 31.12.2011” (i.e. by the end of the planning period), “% of implementation of the action plan”. The “picture” is even more fun if the executor himself calculates the % of the plan implementation, and the content of the plan is clear only to him in detail.
- What also creates confusion is the substitution of indicators with normal units of measurement (natural or value) for indicators such as % deviation. The meaning is emasculated as the number of such indicators increases, and each time, especially during the analysis of the reporting, it is necessary to refer to the sources, and what are the real (absolute) values of this indicator.
- Another example of “muddy” pseudo indicators are indicators of the “yes/no” type. The ability to accumulate statistics on such indicators (10 times “yes”, 1 time “no”) is especially pleasing.
- The calculation of the bonus is perceived by the staff as complex and vague, which creates a persistent impression of the bias of the motivation system and an attempt to disguise the subjectivity of the management with a “fence” of formulas.
- Substitution of indicators with expert assessments. Especially when expert assessments begin to prevail over other types of indicators.
Conditions for creating a working motivation system
An employee motivation system based on key performance indicators (KPI) can be correctly formed and “inexpensively” maintained “in operation” if, from year to year, i.e. on a regular basis, the decomposition of goals and indicators of the upper level, the company level, is correctly performed.
All the “piling up” in the motivation system is a “sand castle” if the KPI is out of “air”, the accounting system is “crooked”, the decomposition of the upper goals and indicators is made from traditional ideas of the functionality, what the employee usually does, and not based on an understanding of what exactly characterizes the required results and efficiency, process and project logic.
For a functioning motivation system based on KPI, correct indicators (KPI) are required, which are correctly taken into account or are clearly calculated, and are within the real influence zone of the employee or employees (if the indicator is integral and depends on the actions of several related departments).
P.S.
Some ideas in the article were developed with the support of Evgeniya Dyachkova , for which we thank her very much! The exchange of ideas makes us more conscious and viable! All interested parties are invited to download and view the model, “test the bonus”: [download id=”4″].
