The “secret sauce” of performance management in agile organizations

October 16, 2019

Here is an excerpt from an article written by Lucia Darino, Marcus Sieberer, Arthur Vos, and Owain Williams for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.

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Performance management is tough enough in traditional organizations; in agile organizations, three changes are essential to success.
The evidence is clear: a small number of priority practices make the difference between an effective and fair performance-management approach and one that falls short. Organizations that link employee goals to business priorities, invest in managers’ capabilities, 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. Furthermore, these practices are mutually reinforcing: implementing one practice well can have a positive effect on the performance of others, which leads to positive impact on employee and organizational performance, which, in turn, drives organizations to outperform peers.

“Traditional” organizations, designed primarily for stability, involve a static, siloed, structural hierarchy. Goals and decision rights flow downward, with the most powerful governance bodies at the top. These organizations operate through linear planning and control to capture value for shareholders. Although such a structure can be strong, it is often rigid and slow moving.

In contrast, agile organizations are designed for both stability and dynamism. They are made up of a network of teams within a people-centered culture that features rapid learning and fast decision cycles enabled by technology and guided by a powerful common purpose to cocreate value for all stakeholders. Such agile operating models allow for quick and efficient reconfigurations of strategy, structure, processes, people, and technology toward value-creating and -protecting opportunities. Agile organizations thus add velocity and adaptability to stability, creating a critical source of competitive advantage in volatile, uncertain, complex, and ambiguous (VUCA) conditions.

Five trademarks distinguish these organizations:

  • a North Star embodied across the organization
  • a network of empowered teams
  • rapid decision and learning cycles
  • a dynamic people model that ignites passion
  • next-generation-enabling technology

For more, see “The five trademarks of agile organizations,” January 2018.

But how do these priority practices work in the context of agile organizations, which feature networks of empowered teams and rely on a dynamic people model? Colleagues rightfully ask a number of related questions:

  • Why do I need individual goals when the locus of organizational performance is my squad, chapter, and tribe?
  • Who will coach and evaluate me when I have no boss? How can my evaluator understand my performance when he or she doesn’t see my work day to day?
  • How can we maintain a team spirit while still fairly differentiating the highest- and lowest-performing colleagues?

The good news is that there are answers to these questions—and, going further, agility can be a springboard to improve performance-management practices that traditional organizations struggle with (See Exhibit 1). Nearly all organizations, for example, feel the need for more frequent feedback. Working in agile sprints of a few weeks each creates a cadence into which collective and individual feedback naturally fits. Similarly, a culture of more autonomy and risk taking opens opportunities for employees to stretch, take on more responsibility, and find out quickly how they can improve.

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Here is a direct link to the complete article.

Lucia Darino is a senior expert in McKinsey’s New York office, Marcus Sieberer is a senior partner in the Zurich office, Arthur Vos is an associate partner in the Amsterdam office, and Owain Williams is an associate partner in the London office.

The authors wish to thank Bryan Hancock, Kyla Kelly, and Andrew St. George for their contributions to this article.

 

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