Through performance management, we are intending to increase the motivation of our employees. We are looking for methods and tools to increase their intrinsic motivation. Moreover, while we know that performance management is already tough enough in traditional organizations, we realize that it becomes even more complicated in agile structures. Lucia Darino, Marcus Sieberer, Arthur Vos, and Owain Williams stated recently in a McKinsey report that organizations that link employees’ goals to business priorities and differentiate rewards for the extremes of performance are 84 percent more likely to have performance management approaches that their employees perceive and recognize as being fair – and we know how important it is that an HR system is seen as being fair from an employee’s perspective. So what do we need to take into consideration when creating effective and fair performance?
In traditional organizations, we have a clear hierarchical order. At the top, we have managers with clear and powerful governance. They define the business goals which are the baseline for the planning and controlling processes. It is therefore obvious that we will link the individual goals of the employees to these goals. Goals are assessed on a yearly basis and so is the performance management system. All in all, it is easy to understand and easy to manage even if it is a bit rigid and slow since business goals are constantly changing throughout the year.
But today’s organizations are much more dynamic. Their business goals are constantly changing and more and more organizations these days see an agile approach as being much more suitable. However, agile organizations are made up of network teams with a people-centered culture (far away from a powerful top-down governance approach). The agile teams are designed to make rapid decisions based on a regular learning process. An inflexible performance process will hinder the teams in their development process. Above all, the role of the hierarchy has changed significantly. Flat organizational structures with a limited hierarchy and no or only a small middle management approach is turning into a coaching role (far away from a controlling function). Empowered and autonomous teams with clear end-to-end accountability and purpose are taking over the responsibility of the business delivery process.
Last year, I was part of a cross-functional team which was commissioned to develop a new incentive system as part of a performance system within an agile organization. The organization itself had started an agile transformation process and realized that there was a need to also change its HR management tools. The purpose was to support this new business set-up with a new system that supports the agile culture which empowers the agile way of working. We understood agility as being a mind-set that is based on the agile values. The system should therefore foster especially a better collaboration among all employees. Following the principle of empowerment, we designed a system whereby employees can present their team achievements (projects). All employees can rate these projects. For this purpose, they are earning a number of points every week which they can spend on dedicated project proposals. With these points, the team receiving the rewards can finally sponsor a team event which promotes team spirit. Additionally, they can also write down their feedback. Of course, everything is transparent and everybody has the same rights (independent from their hierarchical functions). This makes this system fair and it’s up to every employee to become an active part of the performance measurement system.
As the organizations are just in the middle of the transformation process, individual targets still exist. With the new system, we have just introduced a team objective approach as well. The new system is flexible because project proposals can be submitted at any time. They see that the first feedback is very positive. Obviously, the employees are more likely to view their performance management approach as being fair if outcomes are differentiated. Indeed, in agile organizations, we have to be more creative when it comes to designing efficient management systems. But organizations embarking on agile transformations cannot afford to ignore performance management. It’s time to start working on it!
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