Here is a brief excerpt from another outstanding article from The McKinsey Quarterly, published by McKinsey & Company, in which co-authors Toby Gibbs, Suzanne Heywood, and Matthew Pettigrew explain how and why employees and managers should be measured as much on their contribution to an organization’s long-term health as to its performance. To read the complete article, check out other resources, register to receive free email alerts, and obtain information about this extraordinary firm, please click here.

Source: Organization Practice

*     *     *

Measuring the performance of people, especially managers and senior executives, presents a perennial conundrum. 

Without quantifiable goals, it’s difficult to measure progress objectively. At the same time, companies that rely too much on financial or other “hard” performance targets risk putting short-term success ahead of long-term health—for example, by tolerating flawed “stars” who drive top performance but intimidate others, ignore staff development, or fail to collaborate with colleagues. The fact is that when people don’t have real targets and incentives to focus on the long term, they don’t; over time, performance declines because not enough people have the attention, or the capabilities, to sustain and renew it.

Yet measuring, let alone strengthening, the capabilities that help companies thrive over the long haul is difficult. These “soft” measures of organizational health—for example, leadership, innovation, quality of execution, employee motivation, or a company’s degree of external orientation—are tricky to convert into annual performance metrics. [Note:  For more, see Scott Keller and Colin Price, “Organizational health: The ultimate competitive advantage,” mckinseyquarterly.com, June 2011.] Moreover, an organization’s health may not change much in a single year, and an employee’s contribution often comes down to judgments and trade-offs. What risks to take and avoid? Which people to develop, and how? Getting a handle on the employee’s personal contribution typically requires in-depth conversations and a more thorough 360-degree style of evaluation than most employees (including senior managers) generally receive. Because of all this, few companies manage people in ways that effectively assess their contributions to corporate health or reward them for improving it.

When companies do try, they often end up using metrics that are discretionary, weighted less heavily than traditional measures of performance, or applied inconsistently. One mistake is to become confused about issues that appear related to organizational health but in practice lie at the heart of an individual’s operational, day-to-day job (and are therefore more appropriately assessed in the context of immediate performance). It’s fine, for example, to judge a senior product manager’s contribution to a company’s external orientation by tracking the number and quality of the new external contacts he or she develops over a year. But it makes little sense to apply the same health test to a media relations specialist for whom meeting new people is an essential part of the role. Similarly, it wouldn’t be helpful to measure an HR manager’s contribution to leadership, capabilities, and innovation (other key features of organizational health) by tracking the time he or she devotes to building the skills of employees and training them—very much features of that person’s day-to-day performance.

Managers and others quickly recognize flaws such as these and respond accordingly. At a global consumer goods company, for example, the head of HR admitted that managers view the organization’s health-related targets as a lever to “top up” their incentive packages. That was hardly the effect the company intended, and a perception that’s proving difficult to change.

*     *     *

The article’s co-authors recommend and discuss three “specific measures.” To read the complete article, please click here.

Toby Gibbs and Suzanne Heywood are principals in McKinsey’s London office, where Matthew Pettigrew is an associate principal.

The co-authors wish to thank John Fisher and Robin Riedel for their contributions to the development of this article.