Performance Planning

Definition: Performance planning is the first step of performance management. Performance

planning is the process of determining what and how a job is to be done in such a manner that
both the employee and his superior understand what is expected from the employee and how
success is defined and measured. Performance planning for an employee flows from
organizational or unit objectives and is undertaken jointly by the employee and his superior.

Performance planning is a systematic and structured approach to successfully achieve the desired
goals of an individual or team throughout the assessment year. A plan is chalked out for the team
or an individual(s) keeping in mind the broader objectives of the organization.

Description: Performance planning is a crucial part of an employee's growth in the organization.

An effective performance planning system will be easy to understand, as well as to implement. It
would also be accurate enough to provide the performance of an employee throughout the year.

There are four basic objectives of performance planning.

The first one is to communicate basic responsibilities that the individual has to perform on a
daily basis. It could be reporting, data management, etc.

The second objective is to remove any vagueness in the goals and objectives that the individual
has to achieve in the year or time period specified by the team leader.

The third is to identify and build on the competencies of an individual for doing the job. This
helps in making employees more productive.

The fourth is to create an adequate career development plan for the individual which would keep
him/her motivated. If an employee is well aware of his/her career as well as growth plan, he/she
will be self-motivated.

The performance planning tool should be effective in monitoring as well as measuring the
results. It should identify key performance levels which can easily be quantifiable. Performance
metrics which are easy to identify are helpful in making comparisons.

The performance plan laid out would also be helpful in enlisting various training programs which
employees can take to increase knowledge and productivity.

Normally, there is no specific format in making a performance plan, but it should have these four
parameters. The first is to list the goals, the second is that it should contain various performance
measures. The third one is that the performance planning should enlist various measures or
action required to achieve desired goals, and the last one is that it should have a given time
period for all goals.

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Features and benefits of performance planning
Matching Organization and Employee Objectives

This means the program should attempt to match the employee’s career goals and aspirations
with those of the company or organization. Some may wonder how that’s possible, but put
another way, employees will be most productive if they see their present performance leading to
increased responsibilities with possible advancement and higher pay.

So if present responsibilities and tasks are enjoyable and advancement is an objective, then
assigning and completing additional tasks that are part of the company’s objectives will
contribute to the achievement of both employee and company goals and objectives. All of this
can be achieved through regular surveying and discussion of employee job satisfaction and
career aspirations, then using that information in developing the next Workplan. When
developing an employee’s Workplan for a new fiscal year, there should be provision for training
and development for that employee. We recommend that such training or development be
included on the actual Workplan so the employee not only has the authority to take the training,
but also has a responsibility to implement what was learned to improve productivity and the
overall performance of the organization. That process leads to improved employee job
satisfaction and satisfied employees are more productive employees.

Identifying company expectations.

As Owners and Managers, we often assume that all the employee needs to know is what tasks
and responsibilities are to be carried out at any given time. Dr. Ken Blanchard, author of The
One Minute Manager, has said we should always be trying to “catch people doing something
right”. He’s talking about the benefits of positive reinforcement. However, as Managers we first
have to make sure the employee is doing the right thing, before we can catch him / her doing it
right. We believe a lot of supervisory time can be saved by defining the tasks and responsibilities
of a given position – so the employee is doing the right thing. Then we need a simple, regular
evaluation process to illustrate that those same tasks and responsibilities are being done right.
That’s the long term formal approach. Of course Dr. Blanchard encourages us to be informally
providing that positive reinforcement all the time. Employees will be more productive if the
company’s expectations are clearly defined on Job Descriptions, and Appraisals are used
regularly to evaluate how those expectations are being met. We also want systems that we can
readily adapt to changes in the market, changes in the priorities of the organization and changes
in policies and procedures Relative Importance of Responsibilities

An employee in any position in a company or organization will have a list of objectives to be met
and /or duties for which he or she is responsible. Those objectives should be formally identified
in a Job Description and some programs will list the objectives or responsibilities in order of
priority. However, that doesn’t provide the employee with information regarding how much
more important one objective or responsibility is than another. A worthwhile evaluation of an

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employee’s performance can only be made if it is weighted according to the importance of the
various objectives and responsibilities.

How well an employee meets his or her objectives will influence how well the business achieves
its objectives. We must remember that the collective objectives and responsibilities of all
employees are essentially the same as the overall objectives of the business or oganization.
However, we also know that, for a variety of reasons, not all employees meet objectives to the
same degree. But how is that evaluated? We have found that the most effective way to
incorporate a weighting of that importance is done by assigning points for each objective or
responsibility according to its importance and to the amount of time spent on it. Those points are
best used on a combination Workplan and Appraisal form.
Similar responsibilities can have similar weighting, helping to ensure fairness and consistency in
appraisals. Good employees like to know when they’re doing a good job. And a business needs
to know how well it’s meeting its objectives. A Performance Planning program can do both by
identifying the relative importance of various objectives and responsibilities and evaluating
employees accordingly.

Identifying responsibilities for specific time periods

A key element in any Performance Planning program is a regular, consistent series of appraisals.
It seems easy for us as owners and managers to neglect employee communication. Job
satisfaction can usually be enhanced by keeping employees informed about the business and
their contributions to its success. It is extremely beneficial to communicate with employees,
formally on a regular basis and informally as situations dictate. While informal communications
can take place any time, formal communications should be scheduled in two formats. First,
regular staff meetings should be held to discuss issues of general interest. Second, one-on-one
sessions with employees should be scheduled two to four times per year, depending on the
organization and the employee’s duties and responsibilities. Those sessions should include
performance reviews or progress reviews to monitor the status of progress toward objectives. All
too often, communication takes place only when there are problems or issues that need to be
addressed. While short meetings may be routine, a more formal discussion, scheduled regularly,
allows both the employee and supervisor to prepare in advance and have more productive, two-
way discussions.

Management employees who may have objectives relating to budget or business plan numbers
will have the formal appraisal at year end, but progress reviews through the year help to identify
issues that should be addressed immediately, rather than held off until year-end. Non-
management should have their reviews every three to six months. Setting up a review schedule
will help employees in reaching objectives and ultimately improve job satisfaction as well. A
Performance Planning program should provide fixed time frames over which their formal
evaluations or appraisals will take place.

Identifying consequences of performance and behaviour.

Owners and Managers want management tools that help them easily and conveniently monitor
and document behavior and performance. It’s unfortunate, but all too often an employee finds

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himself / herself out of a job and didn’t see the dismissal coming. That situation usually arises
from poor performance or bad behavior, both of which could be prevented with two items: 1) A
basic Personnel Policy, to outline behavior expectations, and 2) Performance Appraisals to
monitor objectives and responsibilities. The Personnel Policy should identify the company’s
expectations of the employee and also explain what the employee can expect from the company.
We recommend that new employees be required to read and sign off on the company Personnel
Policy the first day on the job. They should also be advised of the consequences of both good
and bad behavior. Just as important is the need to discuss specific examples of behavior at the
time they happen. As Dr. Ken Blanchard says, we want to “catch people doing something right”
– an excellent way to improve employee morale.

Performance Appraisals outline the objectives and responsibilities of the position, along with
appropriate timelines. Regular reviews of progress on those objectives and responsibilities give
both the employee and the supervisor insight into overall performance. While many objectives
may be longer term, possibly through a complete fiscal year, progress should be reviewed more
often. We suggest that should be done formally two to four times per year, but more frequent,
informal monitoring is often beneficial. Day to day responsibilities may require continuous
monitoring, as well as at the formal reviews. Employees need to know in advance what the
consequences of good and bad performance and behavior are, not at the end of their
employment. Identifying consequences of performance and behavior also significantly reduces
the incidence of “wrongful dismissals”.

Providing a basic communication line between employee and supervisor.

Scheduling performance reviews helps achieve employee and company objectives as discussed
above. We need to discuss issues as they arise, but unless we schedule sessions like staff
meetings, and especially the regular performance reviews, we often don’t have true
“communication”. By its very definition, communication needs to be two-way and that is best
accomplished by scheduling performance or progress reviews on a regular basis. “Catching
people doing something right” has to become a habit on the part of supervisors. It means short
discussions on positive matters, not just when something needs to be corrected. Having regular,
formal appraisal interviews forces everyone to participate in overall communication. We find
that some employees, more than others, feel more comfortable in initiating communication with
superiors; but those who are less inclined may have issues or suggestions that are every bit as
important to the organization. Scheduled meetings and interviews help ensure that we keep
communication lines open with all employees and should be an integral part of your Performance
Planning program. Part of this process is something we call an Employee Career Plan – a
document completed each year by each employee. It provides an opportunity to indicate career
objectives and to provide valuable input and feedback to superiors. It also acts as a basis for
discussions during formal appraisal interviews.

Provides consistency in performance and behaviour evaluation.

Weighting of objectives and responsibilities also assists in making appraisals consistent among
all employees. Employees are very aware when supervisors appear to use different standards,
depending on who is being evaluated. That results in morale problems and less teamwork.
Implementing a good Performance Planning program forces us to use the same standards for

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employees having the same, or at least similar, objectives and responsibilities. We prefer a
system that is formal, consistent, and particularly for numerical objectives, leaves no room for
subjectivity and the possibility of the appearance of unfair evaluations. This also makes it easier
for employees to monitor their own skill development. Without consistent evaluation, employees
may feel they aren’t progressing and that may lead to reduced job satisfaction and even a higher
staff turnover rate.

Reducing the need for day-to-day supervision.

Owners and managers want to take the least amount of time assigning various duties and
responsibilities. Much of that time can be avoided if Job Descriptions clearly identify key
objectives and responsibilities. In addition, we find that by using Workplans that allocate points
to objectives and responsibilities based on their importance, employees know automatically
which duties need to take priority. Over time, employees become proficient at completing
various tasks and meeting objectives in order of priority with less coaching and supervision.
Employees benefit from having defined duties and responsibilities since it enhances their skill
development and allows them to demonstrate their ability to perform well without so much direct
supervision. That allows supervisory staff to elevate their levels of responsibility because they
spend less time on the details of direct supervision. The productivity of supervisory staff drops
very quickly if they are frequently interrupted by subordinates looking for immediate direction.

It Reduces “Crisis Management” Situations

Virtually every organization occasionally encounters situations that may be viewed as a “crisis”,
by other employees, by customers or clients and / or by owners and shareholders. These are
situations where decisions or actions must be made immediately, with little time for discussion
or study. Common causes of such situations are: 1) Employees involved don’t have the answer to
a question or problem; 2) Employees don’t know who to turn to for help or advice; 3) There are
no clear lines of authority for decision-making; 4) Fear of the consequences of making a wrong
decision and a further crisis results from no decision being made.

We recommend that where there is an Owner or Manager, Supervisory staff and junior staff, a
simple Organizational Chart should be developed to define lines of authority. However, each
position must have Job Description which identifies key responsibilities and also the more senior
position to which that position reports. Wording of the key responsibilities should help in
delegating responsibilities as well. A position “Co-ordinating” a certain function will have more
authority than a position “Assisting” with that same function. There should also be information
provided in the Personnel Policy regarding certain activities which require input or approval
from a Manager or Supervisor.

Provides a continuous record of employee’s skill development.

As mentioned previously, formal performance appraisals should be completed 2 to 4 times each

year; informal progress discussions should be held more often. A review of past appraisals will
assist a supervisor in monitoring the skill development of individual employees. This leads to
improved productivity and employee job satisfaction by:

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  Allowing the supervisor to provide coaching where required
 Determining which employees are capable of handling increased responsibility and / or
promotion
 Provides documentation of skill development so employee capabilities can be measured
consistently throughout the organization
 Assists in determining overall and individual training requirements
 Assists with succession planning
 Becomes the vehicle for matching employee career aspirations with company goals and
objectives as closely as possible

Employees appreciate having documentation of their skill development. Formal appraisals allow
the employee and the supervisor to concentrate on responsibilities that capitalize on basic
strengths and, wherever possible, use coaching and training to develop lesser skills.

Helping facilitate delegation.

When Owners and Managers who start out with only one or two employees, they are quite
capable of defining and monitoring performance and behavior. However, as the organization
grows in the number of employees, it becomes increasingly difficult to do so. They then want a
management tool that will help with delegation while assisting with development of employee
supervisory skills. Job Descriptions should list key objectives and responsibilities using specific
action words. Examples include “Co-ordinate, Develop, Implement, Complete, etc. If those
words are used in the Job Description of a senior person, then a subordinate may have similar
duties with wording such as “Assist with the co-ordination of ……” This also provides the
opportunity to develop that senior person’s supervisory skills by having them help in evaluating
the performance of the subordinate. At the end of each fiscal year, or sooner if a “re-
organization” is required, the Job Descriptions and Workplans need to be reviewed and revised
to meet the needs of the organization. Virtually every organization will have some change in
priorities from one year to the next. Owners and managers want to be able to communicate those
changes quickly and easily while continuing to assign accountability for those changes in
priority. Owners and Managers want task and responsibility delegation to be a win-win-win
situation – wins for the supervisor, the subordinate and the organization.

Provides a vehicle for employees to document their career goals and monitor progress.
We strongly suggest that any performance planning program include a document that employees
would complete each year to document their career goals and the training they feel would be
required to meet those goals. Supervisors can then compare those goals with those of the
organization and, where appropriate, authorize the necessary training. Employees will often
request more training opportunities than are affordable in time or finances, but will still be
enthused about their training if they can see that such training is contributing to their long term
career goals. The added step that is sometimes missed involves having the employee become
responsible for taking the training and being accountable for implementing what was learned to
help improve productivity. Employees will feel more positive about their work if they can see
how their enhanced skills and productivity are contributing to the success of the organization.
When these steps are implemented and documented, both productivity and employee job
satisfaction improve. Organizations benefit from some form of succession planning and

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employees like to see that promotion within the organization is possible. When employee skill
development is documented, matches long term career objectives and can be seen as providing
promotion opportunities, the entire process becomes a win-win situation for both employee and
employer.

Developing Performance Standards

While performance elements tell employees what they have to do, the standards tell them how
well they have to do it. The first article in this series defined and reviewed the characteristics of
critical, non-critical, and additional performance elements. This article reviews the principles of
writing good standards that can be used effectively to appraise employee performance of those
elements.

Definition

A performance standard is a management-approved expression of the performance threshold(s),

requirement(s), or expectation(s) that must be met to be appraised at a particular level of
performance. A Fully Successful (or equivalent) standard must be established for each critical
element and included in the employee performance plan. If other levels of performance are used
by the appraisal program, writing standards for those levels and including tem in the
performance plan is not required by is encouraged so that employees will know what they have
to do to meet standards higher than Fully Successful.

General Measures

Performance standards should be objective, measurable, realistic, and stated clearly in writing (or
otherwise recorded). The standards should be written in terms of specific measurers that will be
used to appraise performance. In order to develop specific measurers, you first must determine
the general measure(s) that are important for each element. General measurers used to measure
employee performance include the following:

 Quality address how well the work is performed and/or how accurate or how effective the final
product is. Quality refers to accuracy, appearance, usefulness, or effectiveness.
 Quantity addresses how much work is produced. A quantity measure can be expressed as an
error rate, such as number ore percentage of errors allowable per unit of work, or as a general
result to be achieved. When a quality or quantity standard is set, the Fully Successful standard
should be high enough to be challenging but not so high that it is not really achievable.
 Timeliness addresses how quickly, when or by what date the work is produced. The most
common error made in setting timeliness standards is to allow no margin for error. As with
other standards, timeliness standards should be set realistically in view of other performance
requirements and needs of the organization.
 Cost-Effectiveness addresses dollar savings to the Government or working within a budget.
Standards that address cost-effectiveness should be based on specific resource levels (money,
personnel, or time) that generally can be documented and measured in agencies' annual fiscal
year budgets. Cost-effectiveness standards may include such aspects of performance as

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 maintaining or reducing unit costs, reducing the time it takes to produce a product or service, or
reducing waste.

For each element, decide which of these general measurers are important to the performance of
the element by asking the following questions:

 Is quality important? Does the stakeholder or customer care how well the work is done?
 Is quantity important? Does the stakeholder or customer care how many are produced?
 Is it important that the element be accomplished by a certain time or date?
 Is it important that the element be done within certain cost limits?

Specific Measures

Once you've decided which general measures are important, you can develop specific measurers.
It is these specific measures that will be included in the standard. To develop specific measure(s)
for each element, you must determine how you would measure the quantity, quality, timeliness,
and/or cost-effectiveness of the element. If it can be measured with numbers, clearly define those
numbers. If performance only can be described (i.e., observed and verified), clarify who would
be the best judge to appraise the work and what factors they would look for. (The first-line
supervisor is often the best person to judge performance, but there may be situations, depending
on what is being measured, when a peer or the customer receiving the product or service would
be the best judge.)

The following questions may help you determine specific measures. For each general measure,
ask:

 How could [quality, quantity, timeliness, and/or cost effectiveness] be measured?

 Is there some number or percent that could be tracked?

If there is no number, and the element can only be judged, ask:

 Who could judge that the element was done well? What factors would they look for?

Writing Standards

Once you've established the specific measures that apply to the elements, you can begin to write
the standards. Before writing the Fully Successful standard, you must know the number of levels
that your appraisal program uses to appraise elements. For example, if you are under an appraisal
program that uses two levels to appraise elements, the Fully Successful standard would describe
a single point of performance, above which is Fully Successful, and below which is
Unacceptable. If, however, your appraisal program uses five levels to appraise elements, you
would describe the Fully Successful standard as a range, above which is higher than Fully
Successful, and below which would be Minimally Successful (or equivalent). How you write the
Fully Successful standard depends on the number of levels your program uses to appraise
elements.

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If a specific measure for an element is numeric, for example, you would list the units to be
tracked and determine the range of numbers (or the single number in a program that appraises
elements at two levels) that represents Fully Successful performance. If the specific measure is
descriptive, you would identify the judge, list the factors that the judge would look for, and
determine what he or she would see or report that verifies that Fully Successful performance for
that element had been met.

Examples

Included below are examples of elements and standards. The specific measures are in italics; the
performance (or range of performance) that actually establishes the level of the standard are in
boldface type.

Element: Guidance and Technical Assistance

Fully Successful Standard in an appraisal program that appraises elements at five levels (to meet
this standard, all of the bullets listed must be present or occur):

 No more than 3-8% errors per quarter, as determined by the supervisor.

 At least 60-80% of customers agree that the employee is willing to assist and that the
information they receive is helpful.
 Employee initially responds to customer requests for assistance within at least 1-8 working
hours from receipt of request.

(If this standard had been written for an appraisal program that appraised elements at only two
levels, the standard would have been "no more than 8% errors per quarter, "at least 60% of
customers agree," and "up to 8 working hours from receipt of request.")

Element: Team Participation

Fully Successful Standard in an appraisal program that appraises elements at five levels (to meet
this standard, all of the bullets listed must be present or occur):

The supervisor and team members are satisfied that the incumbent:

 Usually assumes an appropriate amount of work/responsibility for group projects;

 Typically demonstrates a willingness to assume other responsibilities as needed; and
 Generally shares knowledge of office procedures/equipment with other members of the team.

Element: Analytical Results and Specifications

Fully Successful Standard in an appraisal program that appraises elements at five levels (to meet
this standard, all of the bullets listed must be present or occur):

The Research Manager is routinely satisfied that:

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  The method measures that appropriate variable.
 The results are relevant.
 The method is scientifically sound.
 There is a well-written protocol.
 The method is accurate, precise, reproducible, fast, and cost-effective.

Performance Planning Steps

Step One: Obtain and Review the Appropriate Materials

 Performance Management Resource Guide

 Entity and Department Balanced Scorecards
 Staff Member's Job Description
 Expected Job Results Template
 Performance Planning and Review form

Step Two: Prepare for Performance Planning

 Review entity and department balanced scorecards and strategies:

o Obtain documents.
o Review and clarify with Next Level Supervisor and others as appropriate.
 Inform Staff Member of upcoming Performance Planning Session:
o Describe and discuss the overall performance management process.
o Review performance forms with Staff Member.
o Describe objectives of performance planning session.
o Provide background information and related materials as available and
appropriate.
 Schedule Performance Planning Session:
o Encourage Staff Member to "rough draft" a few important Expected Job Results
and Behaviors or list job responsibilities.
o Allow Staff Member at least one week to prepare and plan.
 Prepare preliminary drafts of Staff Member Expected Job Results and Behaviors and
review job description.

Step Three: Conduct Performance Planning Session

 Confirm Staff Member's understanding of the performance management process.

 Review balanced scorecards and strategies:
o Seek consensus on departmental goals and strategies.
 Discuss Staff Member role and job responsibilities:
 Review job description and confirm job purposes.
 Discuss relationship between job and department goals and strategies.
o Review job description for clarity and agreement
o Establish Expected Job Results and Behaviors by sharing preliminary draft and
discussing areas of disagreement or need for clarification.

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 o Record defined Expected Job Results and Behaviors.
o Determine resources and skills required to complete the Professional
Development Plan.
 Distribute copies of the Performance Planning and Review form:
o Copy to Staff Member.
o Supervisor retains original.

Goal-setting theory
Goal-setting theory refers to the effects of setting goals on subsequent performance. Researcher
Edwin Locke found that individuals who set specific, difficult goals performed better than those
who set general, easy goals. Locke proposed five basic principles of goal-setting: clarity,
challenge, commitment, feedback, and task complexity.

One of the most effective ways to stay motivated is to set goals for yourself. However, the type
and quality of goals you set affects how well they will work.

Imagine you are 30 pounds overweight and want to drop some extra weight. When setting your
goal, you have several options. You could say, “I want to lose weight within the next year. I will
go on a diet to lose the weight.” This goal is pretty vague and poorly defined; you haven’t
specified how much weight you want to lose or what concrete steps you will take to lose it.

Alternatively, you could say, “I want to lose two pounds a week for the next four months. I will
exercise for at least 30 minutes, five days per week. I will also change my diet to include three
servings of fruits and vegetables as well as whole-grain products. I will also limit myself to
eating out just one day per week.” This goal is much more specific and includes actionable steps.

The simple act of setting an effective goal gives you a better chance of realizing that goal. In
fact, listed below are several principles crucial to setting effective goals.

Effective goal-setting principles:

1. Clarity. A clear, measurable goal is more achievable than one that is poorly defined. In
other words, be specific! The most effective goals have a specific timeline for
completion.
2. Challenge. The goal must have a decent level of difficulty in order to motivate you to
strive toward the goal.
3. Commitment. Put deliberate effort into meeting this goal. Share your goal with someone
else in order to increase your accountability to meet that goal.
4. Feedback. Set up a method to receive information on your progress toward a goal. If
losing 30 pounds in four months turns out to be too hard, it is better to adjust the
difficulty of your goal mid-way through the timeline than to give up entirely.

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 5. Task complexity. If a goal is especially complex, make sure you give yourself enough
time to overcome the learning curve involved in completing the task. In other words, if a
goal is really tough, make sure you give yourself some padding to give you the best
chance at succeeding.

How do I use this in my life?

Setting a goal is a great way to encourage achievement and stay motivated. However, many of us
set goals that are ineffective at pushing us to do our best. When you are helping your youthling
with a project or trying to improve an aspect of your daily life, think carefully about the goals
you set. Ensure that each goal accounts for some or all of the principles above: clarity, challenge,
commitment, and feedback.

Work with your youthling to set goals that are appropriate and achievable given her abilities.
Begin by letting her set her own goal. Perhaps she wants to get 100% on her next math test. This
goal meets the criteria of being clear, challenging, and is something she has committed to. Talk
together about whether that is an attainable goal. If she routinely gets C’s on math assignments,
achieving a perfect score might be a poor goal. Next, set a clear action plan for achieving the
goal. Consider the complexity of the task and how much time will be needed to be successful.

In the end, her goal might read something like this: “I want to get 100% on my next math test. I
will perform 5 algebra problems every night for the next two weeks. My mom will give me
feedback on whether I am getting the problems correct and how to fix my mistakes.” This clear,
achievable goal provides motivation and a specific plan for receiving feedback. Even if she does
not reach 100% on her test, goal-setting theory states that she will perform much better than had
she made a non-specific, easy goal.

Performance criteria
Performance criteria describe the measurable standards set by company management to which an
activity or system element is to perform. (Some companies may refer to performance criteria as
‘goals’ or ‘targets’.)

A written description of the standards or characteristics to be assessed for a given task or activity
used by a line manager or assessor to ascertain if an individual, group or organization can
perform a specified task or activity to the defined standard or characteristics. Performance
criteria are used in business, companies, organizations, educational settings for a variety of
purposes.

Performance Criteria means the one or more criteria that the Board shall select for purposes of
establishing the Performance Goals for a Performance Period. The Performance Criteria that
shall be used to establish such Performance Goals may be based on any one of, or combination
of, the following as determined by the Board: (i) earnings (including earnings per share and net
earnings); (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest,

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taxes, depreciation and amortization; (iv) total stockholder return; (v) return on equity or average
stockholder’s equity; (vi) return on assets, investment, or capital employed; (vii) stock price;
(viii) margin (including gross margin); (ix) income (before or after taxes); (x) operating income;
(xi) operating income after taxes; (xii) pre-tax profit; (xiii) operating cash flow; (xiv) sales or
revenue targets; (xv) increases in revenue or product revenue; (xvi) expenses and cost reduction
goals; (xvii) improvement in or attainment of working capital levels; (xiii) economic value added
(or an equivalent metric); (xix) market share; (xx) cash flow; (xxi) cash flow per share; (xxii)
share price performance; (xxiii) debt reduction; (xxiv) implementation or completion of projects
or processes; (xxv) customer satisfaction; (xxvi) stockholders’ equity; (xxvii) capital
expenditures; (xxiii) debt levels; (xxix) operating profit or net operating profit; (xxx) workforce
diversity; (xxxi) growth of net income or operating income; (xxxii) billings; and (xxxiii) to the
extent that an Award is not intended to comply with Section 162(m) of the Code, other measures
of performance selected by the Board.

Key Performance Indicator (KPI)

A Key Performance Indicator is a measurable value that demonstrates how effectively a
company is achieving key business objectives. Organizations use KPIs at multiple levels to
evaluate their success at reaching targets. High-level KPIs may focus on the overall performance
of the business, while low-level KPIs may focus on processes in departments such as sales,
marketing, HR, support and others.

So what is the definition of KPI? What does KPI mean? What does KPI stand for? Here are a
couple other definitions:

 Oxford's Dictionary definition of KPI: A quantifiable measure used to evaluate the

success of an organization, employee, etc. in meeting objectives for performance.
 Investopedia's definition of KPI: A set of quantifiable measures that a company uses to
gauge its performance over time.
 Macmillan's Dictionary definition of KPI: A way of measuring the effectiveness of an
organization and its progress towards achieving its goals.

What makes a KPI effective?

Now that we know KPI stands for key performance indicator it is only as valuable as the
action it inspires. Too often, organizations blindly adopt industry-recognized KPIs and then
wonder why that KPI doesn't reflect their own business and fails to affect any positive change.
One of the most important, but often overlooked, aspects of KPIs is that they are a form of
communication. As such, they abide by the same rules and best-practices as any other form of
communication. Succinct, clear and relevant information is much more likely to be absorbed and
acted upon.

In terms of developing a strategy for formulating KPIs, your team should start with the basics
and understand what your organizational objectives are, how you plan on achieving them, and
who can act on this information. This should be an iterative process that involves feedback from
analysts, department heads and managers. As this fact finding mission unfolds, you will gain a

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better understanding of which business processes need to be measured with a KPI dashboard and
with whom that information should be shared.

How to define a KPI

Defining key performance indicators can be tricky business. The operative word in KPI is “key”
because every KPI should related to a specific business outcome with a performance measure.
KPIs are often confused with business metrics. Although often used in the same spirit, KPIs need
to be defined according to critical or core business objectives. Follow these steps when defining
a KPI:

 What is your desired outcome?

 Why does this outcome matter?
 How are you going to measure progress?
 How can you influence the outcome?
 Who is responsible for the business outcome?
 How will you know you’ve achieved your outcome?
 How often will you review progress towards the outcome?

As an example, let’s say your objective is to increase sales revenue this year. You’re going to
call this your Sales Growth KPI. Here’s how you might define the KPI:

 To increase sales revenue by 20% this year

 Achieving this target will allow the business to become profitable
 Progress will be measured as an increase in revenue measured in dollars spent
 By hiring additional sales staff, by promoting existing customers to buy more product
 The Chief Sales Officer is responsible for this metric
 Revenue will have increased by 20% this year
 Will be reviewed on a monthly basis

What is a SMART KPI?

One way to evaluate the relevance of a performance indicator is to use the SMART criteria. The
letters are typically taken to stand for Specific, Measurable, Attainable, Relevant, Time-
bound. In other words:

 Is your objective Specific?

 Can you Measure progress towards that goal?
 Is the goal realistically Attainable?
 How Relevant is the goal to your organization?
 What is the Time-frame for achieving this goal?

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Being even SMARTER about your KPIs

The SMART criteria can also be expanded to be SMARTER with the addition of evaluate and
reevaluate. These two steps are extremely important, as they ensure you continually assess your
KPIs and their relevance to your business. For example, if you've exceeded your revenue target
for the current year, you should determine if that's because you set your goal too low or if that's
attributable to some other factor.

How to write and develop KPIs

When writing or developing a KPI, you need to consider how that KPI relates to a specific
business outcome or objective. KPIs need to be customized to your business situation and should
be developed to help you achieve your goals. Follow these steps when writing a KPI:

1. Write a clear objective for your KPI

Writing a clear objective for your KPI is one of the most important – if not THE most important
– part of developing KPIs.

A KPI needs to be intimately connected with a key business objective. Not just a business
objective, or something that someone in your organization might happen to think is important. It
needs to be integral to the organization’s success.

Otherwise you are aiming for a target that fails to address a business outcome. That means that,
at best, you’re working towards a goal that has no impact for your organization. At worst, it will
result in your business wasting time, money and other resources that would have best been
directed elsewhere.

The key takeaway is this: KPIs need to be more than just arbitrary numbers. They need to
express something strategic about what your organization is trying to do. You can (or should be
able to) learn a lot about a company’s business model just by looking at their KPIs.

Without writing out a clear objective, all of this will be lost.

2. Share your KPI with stakeholders

Your KPI is useless if it doesn’t get communicated properly. How are your employees – the
people tasked with carrying out your vision for the organization – supposed to follow through on

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your goals if they don’t know what they are? Or perhaps worse: Not sharing your KPI risks
alienating and frustrating your employees and other stakeholders who are unable to see the
direction in which your organization is heading.

But sharing your KPIs with your stakeholders is one thing (though even this is something that
too many organizations fail to do). More than that, though, they need to be communicated in the
right away.

KPIs need context to be effective. This can only be accomplished if you explain not just what
you’re measuring, but why you’re measuring it. Otherwise they are just numbers on a screen that
have no meaning to you or your employees.

Explain to your employees why you’re measuring what you’re measuring. Answer questions
about why you’ve decided on one KPI over another. And most important of all? Listen. KPIs
aren’t infallible. Nor will they necessarily be obvious to all involved. Listening to your
employees will help you identify where your organization’s underlying goals aren’t being
communicated properly

Say you’re getting lots of questions about why profit isn’t a KPI for your company. It’s a
reasonable belief for your employees to have. Making money is, after all, an essential part of
what any business does. But maybe revenue isn’t the be all and end all for your organization at a
given time. Maybe you’re looking to make major investments into research and development or
are on a major acquisition spree. Getting lots of questions like this is a sign you need to do a
better job of communicating your KPIs and the strategic goals behind them.

And who knows: Your employees might even give you some ideas on how to improve your
KPIs.

3. Review the KPI on a weekly or monthly basis

Checking in on your KPIs regularly is essential to their maintenance and development.

Obviously tracking your progress against the KPI is important (what else would be the point of
setting it in the first place?) But equally essential is tracking your progress so you can assess how
successful you were in developing the KPI in the first place.

Not all KPIs are successful. Some have objectives that are unachievable (more on that below).
Some fail to track the underlying business goal they were supposed to achieve. Only by checking
in regularly can you decide if it’s time to change your KPIs.

4. Make sure the KPI is actionable

Making your KPIs actionable is a five-step process:

1. Review business objectives

2. Analyze your current performance
3. Set short and long term KPI targets

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 4. Review targets with your team
5. Review progress and readjust

Most of this we’ve already gone over, but it’s worth focusing on the need to develop targets for
both the short- and long-term. Once you’ve set a goal with a timeline that’s farther into the future
(say the next few quarters, or your fiscal year) you can then work backwards and identify the
milestones you’ll need to hit on the way there.

Let’s say, for example, you want to sign up 1,500 newsletter subscribers in the first quarter of the
year. You’ll want to set monthly, bi-weekly or even weekly targets to get there. That way you’ll
be able to continually reassess and change course as needed on your way to achieving the longer-
term goal.

You could divide the targets up equally according to each month. In this case that would be 500
subscriptions in January, 500 in February and 500 in March. However you may want to get more
specific. There are more days in January and March than February, so maybe you want to set a
target of 600 for those months. Or maybe you typically get more website traffic in February
(perhaps your business has a presence at a major trade show) so you decide to set a target of 800
in that month.

Whatever it is, make sure you break up your KPI targets to set short-term goals.

5. Evolve your KPI to fit the changing needs of the business

KPIs that never get updated can quickly become obsolete.

Let’s say, for example, that your organization recently started a new product line or expanded
overseas. If you don’t update your KPIs, your team will continue to chase targets that don’t
necessarily capture the change in tactical or strategic direction.

You may think, based on your results, that you are continuing to perform at a high level. In
reality, though, you may be tracking KPIs that fail to capture the impact your efforts are having
on underlying strategic goals.

Reviewing your KPIs on a monthly (or, ideally, weekly) basis will give you a chance to fine tune
– or change course entirely.

You might even find new and possibly more efficient ways of getting to the same destination.

6. Check to see that the KPI is attainable

Setting achievable targets for your team is essential. A target that’s too high risks your team
giving up even before they start. Set a target too low and you’ll quickly find yourself wondering
what to do with yourself once you’ve achieved your annual goals two months into the calendar
year.

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An analysis of your current performance is essential. Without this you’re left to search blindly
for numbers that have no root in reality. Your current performance is also a good starting place
for deciding on areas upon which you need to improve.

Start rooting around in the data you’ve already collected to set a baseline for what you’ve
accomplished in the past. Tools like Google Analytics are great for this, but so are more
traditional accounting tools that track revenue and gross margin.

7. Update your KPI objectives as needed

KPIs aren’t static. They always need to evolve, update and change as needed. If you’re setting
and forgetting your KPIs, you risk chasing objectives that are no longer relevant to your
business.

Make a habit of regularly checking in not just to see how you are performing against your KPIs,
but on which KPIs need to be changed or scrapped completely.

To someone who’s never developed a KPI before, all of this might sound exhausting.

But here’s the good news: Once you’ve gone through this process a few times, it’ll be that much
easier to use it again in the future.

8. Bringing it all together

KPIs generally are an essential tool for measuring the success of your business and making the
adjustments required to make it successful.

The usefulness of individual KPIs, though, have their limits.

The most important part of any KPI is its utility. Once its outlived its usefulness, you shouldn’t
hesitate to toss it and get started on new ones that better align with your underlying business
objectives.

Using KPIs as part of your performance management

frameworks
The most common elements between most performance management frameworks are setting
objectives, measuring performance, and managing all related activities.

According to classic old adage, Goodhart's Law, "any observed statistical regularity will tend to
collapse once pressure is placed upon it for control purposes."

Charles Goodhart was an economist in 1975 whose research was used in helping criticize
government decision making processes, specifically with regards to monetary policy. This

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concept was then made mainstream by Marilyn Strathern, “when a measure becomes a target, it
ceases to be a good measure.”

A performance indicator or key performance indicator is just one type of performance

measurement. There are many performance management frameworks that are both similar yet
different. Each of these frameworks brings forward elements that can be pulled together to help
drive success backed by data. Let's dig in.

Step 1: Aligning Business Strategy

A popular theme in startups these days is the One Metric That Matters (OMTM). The key
takeaway from this simple, yet extremely powerful tool is that you have to have a thorough
understanding of your business model in order to hone in on that metrics and get the entire
organization aligned.

Many will argue that sales is the most important metric when it comes to measuring the success
of a business. The challenge with this metric is the measured outcome.

Ask yourself: What is the one metric that would help drive more sales?

One answer to this question could be tracking the number of customers who have integrated your
product with 3 other applications. This measure would be indicative of level of engagement, and
their probability of churning would likely be reduced.

The reason being that once customers are locked in, they churn less which then creates the right
unit economics for the company to grow. So in this case instead of looking at sales numbers, we
would only count a customer if, and only if, they connected with 3 apps.

This is merely an example, and doesn’t mean that there is only one metric you should care about!
This framework helps with keeping everyone focused on the one thing they should care about
most.

Step 2: Cover all of your bases

With business comes trade offs.

You have probably heard the saying, "You can have cheap, good, or fast. But you can only pick
2".

Let's start with a classic framework that helps to navigate these trade offs. The Balanced
Scorecard (BSC) helps you break down the key areas of your business (perspectives) where
activities need to be monitored.

The four perspectives that need to be in balance are:

1. Financial Perspective
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 2. Customer Perspective
3. Internal Business Process Perspective
4. Learning and Growth Perspective

These four key areas of your business are intertwined and all must be aligned. When one is
impacted, there is impact on another, in other words, there will be a trade off.

Step 3: Putting your BSC strategy framework into action with OKRs

The Balanced Scorecard (BSC) strategy suggests that for each perspective you develop
objectives, measures (KPIs), set targets (goals), and initiatives (actions). A more recent
framework that is getting popularized is the OKR Framework. Popularized by its use at Google,
the OKR (objectives and key results) framework is used to define and track objectives and their
outcomes. Many would argue that this framework sits in between a KPI strategy and the
Balanced Scorecard approach.

OKRs are used as a performance tool that sets, communicates, and monitors goals in an
organization so that all employees are focused in the same direction. The system encourages
employee success through clear work objectives and desired key results. The beauty of the
system is that it provides a simple, practical, and straightforward framework for defining,
tracking, and measuring goals, both as something to aspire to and as something that can be
measured.

Step 4: Monitoring with a KPI Dashboard

A KPI dashboard provides you with an at-a-glance view of your business performance in real-
time so you can get a better picture on how the entire organization is doing.

Common terms found in these frameworks that are worth understanding include:

Key risk indicator (KRI): a measure used in management to indicate how risky an activity is.
Key risk indicators are metrics monitored by organizations to provide an early warning of
increasing risk exposures in various areas of the business.

Critical success factor (CSF): is a management term for an element that is necessary for an
organization to achieve its mission. Critical success factors should not be confused with success
criteria. Success criteria is most commonly used in project management to determine if the
project was a success or not. Success criteria are defined with the objectives and can be
quantified by using KPIs.

Performance metrics: measure an organization's behavior, activities, and performance at the

individual level and not organizational level. For example, an individual who works in a call
centre may have performance metrics such as Number of Calls Answered, Average Wait Time,
Number of Successful Calls Processed, and Average Length of Call.

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KPI as a tool of employee engagement

Employee engagement is something with which many organizations are struggling. Just 33 per
cent of workers in the United States (and a measly 15 per cent worldwide) define themselves as
being “involved in, enthusiastic about and committed to their job and workplace” at work,
according to Gallup.

This is profoundly impacting many businesses’ bottom lines. To cite just one statistic:
Organizations with a highly-engaged workforce see an average 20 per cent increase in sales,
Gallup says.

Connecting employees to your organization’s purpose

Ask any employee why they don’t feel engaged at work and you’ll probably get some variation
on the same theme.

 They feel disconnected from the organization’s larger purpose.

 They fail to see any impact their daily efforts – the activities which occupy most of their
time – have on larger organizational goals.
 They don’t understand the strategic direction of the organization.

These are in some ways distinct problems. But in other ways they all stem from the same issue:
Poor communication, about strategy, between management and lower-level employees.

KPIs help solve this problem.

KPIs are, by their very nature, strategic. Because they differ from metrics, they help companies
to really focus in on what’s important. Not everything can be a KPI. KPIs force you to focus in
on those metrics that really underscore the end goals of your organization.

KPIs force an organization not just to measure how their strategy is performing, but to decide
what their strategy is in the first place. They show employees a lot about what actually matters to
management in the first place.

For example: Profit for a charity would be unlikely to qualify as a KPI. Why? Because a charity
is a charity – it exists to achieve some sort of larger impact beyond simply turning a quick buck.
An organization like that would be far more concerned with the amount they’re investing in
scientific research, maybe, or perhaps the number of laws they were able to change.

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Wouldn’t it be nice if your employees could see the end goals towards which they are working?

They help connect employees’ work to organization-wide goals

KPIs are a great way to communicate strategy to your employees. They help wade through the
at-times messy, cryptic and ambiguous world of tactics and connect them to the end goals of
your organization.

Many of us have experienced this. We get so caught up in our own little work bubbles, trying as
hard as possible to ensure we stay on top of our own specific set of tasks, that we frequently fail
to see why we’re doing it in the first place.

Is it any wonder that frustration and, eventually, disengagement sets in?

KPIs help cut through this muddle. They take a step back from the chaotic world of tactics to
identify the end goals towards which everyone is working.

More effectively reach key goals

Micromanagement creates a lot of problems for employee morale. But one of the worst is the
brake it puts on employees’ creativity.

Say you’re a manager who’s in charge of the launch of a major new product. That you want to
make the product launch a success should be self-evident. But there’s a big difference between
telling your team about the sales numbers you’d like to achieve and diving right into the nitty
gritty of what you want the website to look like, which marketing channels you’d like to use and
even when to send out social media posts.

Some managers might think they are just doing their job or even being helpful with employees
by offering their “suggestions”. In reality what they’re doing is choking off their workforce’s
creativity and likely frustrating them to no end.

No one expects managers to stay completely hands off with what their employees are doing. But
the line between setting an end goal and telling your employees how to get there is a fine one.

The advantage with setting KPIs is that they allow you to set an expectation for what you want
accomplished, while leaving the specifics up to the creativity and ingenuity of your team.

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