How to set KPI-s for managers of different levels?

Let’s define goals for the CEO, financial director and sales manager.

Many companies use the KPI (key performance indicators) system only as a motivation tool. It records the desired result of work and bonus level, transmitting the following message to the employees: “if you do more — you will earn more.”

This approach is acceptable, but the main value of performance indicators is not in this. First of all, they are necessary for the analysis of the company’s activities. KPIs help you understand how current results are consistent with the global business goals, what are the pressure points and how best to eliminate them. An incorrectly organized KPI system will only interfere with the company’s work. And vice versa.

There are no universal KPI templates. They are individual for each employee. Furthermore, the KPIs of a sales manager of a trading company will differ from those of a manager, for instance, from the IT sector. Because the specifics of the industry are the deciding factors.

We spoke with Artem Kovbel, a senior partner at Vigilant forensic boutique and a partner at Crowe — an international audit firm. We figured out what to take into consideration when compiling the KPIs of the general director, financial director and sales manager.

KPIs of the general director

Artem: “The purposes of a general director or CEO directly depend on the purposes of the company. If you are aspiring to enter a new market, KPIs may include such tasks as increasing sales, increasing customers, and/or increasing production.

Performance indicators for CEOs are calculated based on long-term goals for a period of six months, a year-this is the only way to fully assess their effectiveness. If everything is done correctly, the KPI system will turn into a kind of scoreboard with the ratio of completed/effective and unfulfilled/ineffective tasks.”

General rules for the formulation of the general director’s KPIs:

#1. Keep it simple. Many people believe that the KPIs of the general director should include all possible indicators, because he, as the chief executive, is responsible for everything. But according to this logic, you will have to add the goals of half of the company’s employees to his KPIs — as a result, you will get a complex and confusing scheme. It is better to limit yourself to 5–7 indicators — this is the most comfortable number of tasks for employees, regardless of their position.

#2. Use the statistics of previous years to calculate the KPIs. The previous results of the CEO or his predecessor are usually used as a basis, adding 15–20% to them (this is the standard percentage of the development, but it can be more or less depending on the situation).

#3. Be specific. Do not write down abstract tasks. Inaccurate wording gives top managers the opportunity to rig the results and receive undeservedly high bonuses. For example, it is better to write in the KPIs:” by the end of the year, increase the company’s share in such a market by 10%”, and not just “increase the share”.

The number of individual performance indicators (results that depend on personal efforts) should be 10–20%. The remaining 80–90% should be the collective KPIs (the results of the work of all departments of the company). But much depends on the business and the sphere: in some cases, top managers may not have individual KPIs at all. And vice versa.

Artem: “My global goal, as the CEO and concurrently the owner, is to increase the company’s profit by 60% this year, and by 100% next year.

Accordingly, for this year, my KPIs include the following tasks:

• ensure the revenue growth of 5% per month
• • make sure that the differential factor between revenue and costs does not fall below 50%
• • make sure that the profitability in the context of products does not fall below 30%
• I have identified these goals as the most important ones. There are other tasks, but they are less important and may change from time to time.”
• KPIs of the financial director
• As with the CEO, tasks of the financial director are directly connected with the company’s goals and its sphere.
• To determine the KPI for the financial director of your particular business, try answering the following questions:
• • What does the company’s profit depend on?
• • How can it be increased?
• • How to reduce costs?
• After getting the necessary answers, we select the results that can actually be improved due to the work of the financial director — and they can be used as a basis for the performance indicators.
• Artem: “In the sphere of audit, in which I work, the financial director is often assigned quite specific KPIs. Get an ACCA certificate, for instance (Association of Chartered Certified Accountants). This is a prestigious document, which proves that its owner is a specialist of the highest category. Only experts with a certain track record are admitted to an examination for obtaining a certificate, and the exam itself is very difficult, and not everyone can pass it the first time.
• Also in the audit company, the KPIs of the financial director requires:
• • avoid cash gaps
• • attract external financing
• • reduce transaction costs when servicing in banks.”
• Depending on the goals set by the owner, KPIs of the financial director may include both financial and non-financial tasks.
• For example:
• • increase in return on sales
• • increasing the speed of customer service (in particular if the company provides financial services)
• • ensuring a certain level in the ratio between accounts receivable and payable
• • increase in the value of the company’s assets (this goal is often set for the financial director if the owner plans to sell the business)
• KPIs of the sales manager
• First, the CEO must formulate for himself , what results he wants to achieve, and then-to convey them to his managers.
• For example, if the goal is to increase profits, then the goal of the sales is to increase the number of sales per month. When it is necessary to ensure a stable flow of income (this is possible if the company has reached the peak of its development in a particular market), sales managers need to increase the quality of the deals, not the quantity of the deals. That is, to find more paying customers and thereby increase the volume of products sold.
• Artem: “In my company, KPIs of the sales managers include:
• • number of cold calls made
• • number of meetings held
• • number of prepared commercial offers
• • plans for the cash proceeds to the current account (approximate date when the client will pay for the service)
• I believe that it is unacceptable to fine sales managers — it strongly demotivates them. At the same time, motivational policy needs to be built in such a way, that sales, in the words of Steve Jobs, “ always stays hungry and chases the prey.”
• This can be achieved by the formula “ a minimum salary and a large variable % as a commission”. It doesn’t work any other way. The biggest mistake of a manager is to give a sales manager a high wage rate and a low commission. I call this formula a motivation killer.
• In order to determine the effective number of deals/calls/meetings for sales, take the sales record that your employees have ever achieved and make it the norm. This is the simplest formula, but its effectiveness is time-tested.