Setting performance goals to promote growth is tricky.
Although aggressive goals can spark great accomplishments, they also can lead to bad behavior by employees who may be willing to bend or break rules in pursuit of those goals.
At financial services company Wells Fargo and automaker Volkswagen, aggressive goal-setting led to fraud and cost each company customer trust and record fines, said Bonnie Hancock, executive director of N.C. State University’s ERM Initiative.
“When the stakes are high – ie, employees worry, ‘If I don’t meet this goal, I’ll lose my job or I’m going to get a poor performance evaluation’ – then they may game the system,” Hancock said.
Finding middle ground between setting the bar too low and too high is challenging, she said. Thought needs to be put into analyzing potential actions that employees may take to achieve goals, and ways to prevent or detect potentially harmful actions should be developed. Also, companies should identify behavior that’s off limits and install controls to detect it.
“If a company really has to set stretch goals,” Hancock added, “it has to be careful not to be punitive if those stretch goals aren’t met.”
Fast growth, big risks
Wrays, an Australian firm of patent and trademark lawyers established almost 100 years ago, is well aware that rapid expansion goals carry risk. The firm focused on aggressively growing its client base, especially in its Sydney and Melbourne offices, since the Australian government released plans last year to support economic growth through entrepreneurship and innovation.
“While income and profit are very important, without first delivering quality of service, we would not be serving our clients’ needs,” said Wrays CFO Robert Pierce, ACMA, CGMA.
To further its growth goals and accommodate clients frustrated with high hourly charges, Wrays has set fairly modest hourly rates for its services. Bonuses for Wrays’s professional staff start at 5% above targets, Pierce said. To make sure the quality of service doesn’t suffer, Wrays surveys its clients every month. Survey questions include inquiries about whether clients’ emails and calls are answered promptly. Clients are also asked whether they would refer Wrays to peers, and their responses are tallied and tracked monthly at the board level.
“You have to have some measurable goals, but you also have to take into account some qualitative factors and some judgement,” Hancock said. “If you’re just blindly following numerical goals, you might hit the goal but miss the mark in terms of what you’re trying to achieve.”
Setting achievable goals
To ensure performance goals are appropriate and to detect bad behavior as the goals are implemented, Hancock suggested using the following tools:
Balanced scorecard. To tie business activities to the organization’s vision and strategy, a balanced scorecard offers a framework that provides executives and managers a balanced view of organizational performance. Multiple measurements are used to monitor performance against multiple strategic goals.
Wells Fargo, for example, got into trouble relying too much on one performance measurement – eight products per customer – to determine the success of its cross-selling strategy. A more balanced approach would have included consideration of other indicators towards its strategic goal, which, Hancock said, was probably cementing deep customer relationships.
Periodic surveys. Polling customers or employees is a tool to measure interactions and, depending on the questions asked, can also be used to collect qualitative opinions. In Wrays’s case, the customer surveys help determine whether clients are satisfied with the firm’s service.
Employee surveys can be used to gauge how lower-level employees interpret management’s risk appetite, Hancock said. Employees are asked, for example, which trade-offs they are willing to make in pursuing specific goals. The responses help determine whether there’s a gap between what employees do and what management would want them to do.
Pre-mortem analysis. To test whether a goal may trigger unintended and unwanted consequences, a pre-mortem analysis starts with the assumption that the worst possible outcome that could occur has happened. The potential trigger is found by backtracking and analyzing what could have caused the outcome.
Once potential bad behaviors are identified, ways to prevent or detect them can be built in, Hancock said.
Periodic audit. Companies that have done pre-mortem analyses and installed controls to detect bad behavior can then perform periodic audits of a sample of transactions that count towards a certain goal. These risk assessments would have to be done before annual audits to determine incentive compensation.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor. Copyright © 2011-2016 American Institute of CPAs. Copyright © 2011-2016 Chartered Institute of Management Accountants. All rights reserved.