SMART goals and DUMB organizations
It is common practice in most organizations to have Key Result Areas (KRAs) agreed upon between managers and subordinates at the beginning of every year. These KRAs are supposed to reflect the priorities of the organization over the period under consideration and are expected to be in alignment with the organization’s business strategy.
In an effort to promote “accountability” and “objectivity” in performance assessment, HR often mandates that KRAs be translated into what are known as “SMART” (specific, measurable, actionable, relevant/realistic and time-bound) goals for each subordinate. Having individual KRAs is considered to be a prerequisite for building world class organizations where even the most junior person is held accountable for producing “results”. The SMART goals are expected to make it crystal clear to every rank-and-file employee what (s)he needs to personally do in order to execute the organization’s strategy.
At the end of the review period, managers are asked to rate their subordinates’ performance against the pre-decided KRAs/SMART goals on a scale of 1 to 5 (going from “far below expectations” to “far above expectations”) and then the organization is force-fitted into the ruthlessness of the so-called bell curve. All this is supposed to drive a results-oriented and meritocratic culture that will motivate good performers and weed out poor performers.
Except it doesn’t. People come up with all sorts of key performance indicators (KPIs) to justify success in their chosen KRAs and inflate the value of individual contributions in their self-appraisals. SMART KPIs such as “Number of leads generated per dollar value of marketing expense during the financial year” or “Monthly average cost of production of steam at constant/budget rates of power, water and coal” are commonplace for most middle managers. And you wonder, if people were as awesome as they sound in their self-appraisals, why is the company so glaringly mediocre? If organizations are supposed to promote collaboration and teamwork, why the mindless insistence on individual KRAs and KPIs? Can individuals be deemed to perform far above expectations and be given fat bonuses if the company as a whole has fared miserably?
The sports analogy for business makes it self-evident that individual KRAs are ludicrous at best and disastrous at worst. Imagine a football team where scoring goals is the KRA for strikers and defending goals is the KRA for defenders and their bonuses are tightly linked to performance on these metrics. Should a defender let go a chance to score or a striker not prevent an opposition’s goal? After all, business, like football, is a team game and the emphasis should be on team success rather than individual performance.
There are three underlying assumptions that appear to drive the persistence of individual KRAs. First is the free-rider problem — if teams rather than individuals are held responsible for results, there will inevitably be people who don’t contribute their fair share of efforts to achieving the team’s objectives. If such people continue to get rewarded with the team, it’ll eventually drive away the really good performers who will feel that others are unfairly benefiting from their efforts.
The second and more implicit assumption is that it is actually possible to break down the goals of the organization into distinct sub-goals that can then be assigned to individuals at the start of the year (or half-year or quarter) and mutually agreed between manager and subordinate. However, such wishful thinking ignores the fact that organizational results are not additive but multiplicative in nature. Even if one individual were to perform exceptionally well in their area of influence (say, product design), the effort will mean nothing in terms of producing economic results if a colleague in customer service or marketing fails to deliver.
However, the most damaging assumption is the assumption of ceteris paribus, or all other things remaining the same. Take a look at the earlier example of average cost of steam. It sounds perfectly logical as a KPI for someone in charge of utilities at a manufacturing location. Why should the utilities manager be penalized for movements in rates of coal, power or water? But things are never ceteris paribus in reality. If prices of coal move adversely, the efforts of the utility manager in reducing steam costs will not be reflected in the organization’s profitability. On the other hand, if efforts to improve steam efficiency by the production team results in a drop in overall steam requirement, it might drive up the unit cost of steam (apparent poor performance by the utility manager) but the organization will see an improved bottomline.
Performance appraisals with an emphasis on SMART goals and objectivity are often counterproductive. And this is because assessing performance in organizations can never be completely objective. There is no cut-and-dried way to measure output of employees in modern organizations. Often, activities done today result in better or worse output in subsequent years. In addition, output metrics that can be readily quantified need to be assessed to determine whether short-term performance has been achieved at the expense of long-term sustainability.
The manner in which performance reviews are carried out also gives employees a sense of what is valued in the organization. Performance reviews impact performance across the organization for a long time and also shape the culture of the organization. It is futile to expect that subordinates keep their reviews confidential and not discuss them with colleagues. In several companies, the emphasis is only on the final assessment grade, which ultimately determines performance bonuses and promotions. Little attempt is made by managers to write a detailed performance review and discuss it with the subordinate with a view to improve future performance.
In such companies, the entire exercise of performance review is value destructive. Employees feel disconnected from the organizational mission and objectives as the emphasis is on individual performance. A large majority of the organization is unhappy with the outcome of the performance appraisal exercise (even people who are rated to have performed above expectations). Several employees feel manipulated as their managers claim helplessness in the face of bell curve compulsions or reviewer’s (manager’s manager) moderation of performance grades. And ultimately, employees are baffled about how they can improve performance and some unfortunately conclude that the way to better grades in future is by buttering the bosses or indulging in organizational politics. In the end, SMART goals lead to DUMB organizations where efforts are more focused on individual advancement, often at the expense of the organization’s success.
Though many organizations of late have famously abandoned the bell curve, many still persist with some version of SMART goals. Performance Reviews of some sort are indispensable for organizations that intend to progress and prosper. It is imperative to critically think whether SMART goals are actually furthering the organization’s interests. It is time we abandon the obsession with accountability and objectivity. Managers today should conduct authentic performance reviews and should not be afraid to apply their judgment, even though judgment is by definition subjective.
