Your company might have a brilliant strategic plan in terms of growth and competition. But does it take your manager incentives into consideration?
Denise’s company, for example, implemented an incentive plan for top management that was tied to improving the company’s per-share earnings on an after-tax basis. The company had an opportunity to grow by acquiring another business in a synergistic field. But by structuring it through a stock swap, the acquisition would dilute the per-share earnings of Denise’s company. Is it any surprise that management found ways to foil the acquisition? How can you expect managers to make a whole-hearted effort to follow a strategic plan when it will cost them money out of their wallets? Russ’ company’s strategic plan called for 10% growth in annual revenue each year over five years. After the plan had been in place six months he realized that projected growth wasn’t occurring, even though profits were improving significantly. Why? In formulating the plan, Russ made rewards contingent solely on improved profit. It didn’t take management long to realize that the way to get greater compensation was to reduce expenses, even if those expenses could have led to future growth and profit. As a result, research and development were slashed, as was investing in hiring additional salespeople.
The message of both examples is that performance measurements must be based on a business’s strategic plan.
Measurements for incentivizing performance must support the broader objectives and goals of the company. At the same time, performance criteria should lead managers to focus on the company’s objectives as well as their own.
Identical performance measurements cannot be used for every aspect of the company. As measurements affect different people and departments, different goals must be set. But each goal should lead in the same ultimate direction. Each element of the company must be united in achieving the strategic plan. A good strategic plan takes into account the managers’ best interests as well as the company’s goals. Furthermore, managers’ performance measurements and compensation need to align with the company’s strategic plan and goals.