Common problems with performance indicators - complexity and control

A little while since I posted. Life has just been too busy!

During the week I had cause to look at some performance indicators. Several pages of them in table form. My heart sank because they really breached two key rules.

The first rule is simplicity. The more things you try to measure, the more complicated the indicators become, the less effective they are likely to be.

The second rule is control. If people are to be assessed using indicators, then there needs to be a link between the indicators and those elements of performance that people can control on an individual basis. With these indicators, no individual or even individual teams could guarantee results.

Sigh. I wonder how we can get the message across in an effective way. Certainly I am not very effective.

Professional Services Management - a note on problems with continuous improvement

This post is really a note to myself.

I have always been a supporter of continuous improvement as a management approach. Recently I have begun to have doubts about its application in practice.

Take a reliable part time professional who is yielding a good profit to the firm. He/she may be balancing work and family responsibilities. Now increase the pressure to try to improve results. This will often result in an immediate increase in billings. However, this may in fact be just a short term result.

If the person is already in a personal balance position, just balancing work with other commitments, immediate tension is created. This may lead to subsequent declines in performance and even the loss of a profitable professional. 

In theory, continuous improvement starts be recognising the constraints faced by individual workers. In practice, these issues are often ignored.

Common Management Problems - responsibility without authority

This post continues my common management problem series with a look at a very common problem, responsibility without authority.

This one can be simply stated. You ask someone to do something, make them responsible for delivery, but then do not give them the authority to carry out the task properly.

This all sounds so simple to fix, yet the reality appears to be that this is one of the most common of common management problems.

In many cases, it is simply a matter of personality or approach - we want to micro-manage. Equally often, organisational structures simply do not allow proper delegation.

If the problem is the first, then it's up to us. If the problem is the second and the structures cannot be changed, then the only solution is to reduce the scope of formal responsibility so that it fits with actual authority.

Previous posts

Those interested can find a full list of the posts in this series here.

Designing a simple performance appraisal system - implementation issues

This, my last post in this short series, briefly discusses the practical issues that can arise in implementing the system I have described.

From experience, three main problems are likely to arise.

First, people have to be given the skills to make them comfortable with the new approach. This is best done by means of an initial workshop in which the system is explained, with staff given the opportunity to experiment through role pays.

As new staff are appointed, they too need to be given access to information about the system. In the case of people who will be required to do appraisals, one way to help them is to get them to sit in on one or two appraisal systems.

Secondly, any new system requires time before it is properly internalised. Too often, management focus shifts to other issues, resulting in lagging effort.

Third, the approach must be kept both focused and as simple as possible. Too many firms start adding things in, complicating the overall process.

Remember, the whole point of this system is performance improvement, but in a way that should aid both manager and staff.

Introductory post.

Ndarala Group Series on the Economics of Professional Services

Over on the Ndarala Group blog we have begun a series on the economics of professional services. The material is drawn from internal Group material that I prepared. We are publishing it in this form to make it more broadly accessible.

So far we have put up seven posts, with a lot more to go. In some ways the blog form is not really suited to something like this, but it does at least get it out into the public domain. Later will consolidate it and post it to our web site.

If you are interested in the series, you will find the introductory post here.

Designing a simple performance appraisal system - sample policy statement

This post in the series sets out a sample boiler plate policy statement designed for immediate use in a professional services environment.

PERFORMANCE APPRAISAL SYSTEM

This paper sets out the approach to performance appraisal.

EMPLOYMENT PHILOSOPHY

Service to the client is central to our work. To this end, the firm undertakes to provide a supportive working environment and to assist the individual staff member to enhance his/her skills. In return, the firm expects individual staff members to be prepared to learn and to seek to improve performance

OBJECTIVES OF PERFORMANCE APPRAISAL

Consistent with the firm’s employment philosophy, the objectives of performance appraisal are to improve individual performance and job satisfaction. To this end, performance appraisal needs to be a structured process during which the individual and firm jointly:

• assess performance during the previous period against the objectives set for the job, identifying achievements together with any significant shortcomings
• identify any problems that might be hindering the individual in achieving improved job performance or satisfaction
• review future objectives
• agree any actions required to improve performance or job satisfaction.

Under this approach, each performance review provides a base for subsequent performance reviews.

KEY APPRAISAL PRINCIPLES

Effective performance appraisal is based on a number of key principles:

• improvement focused: performance improvement is central to the process
• non-disciplinary: performance appraisal is not concerned with discipline or disciplinary approaches
• fairness: the approach must be seen to be fair by all those involved
• transparency: the approach needs to be open and well understood. There should be no hidden agendas
• joint: the appraisal is a cooperative review not just of the individual, but also of the firm and its systems as they affect work
• needs based: the review has to take into account the needs of both individual and firm
• realism: the review needs to be based on realistic expectations on both sides
• non-threatening: a structured review process can be a frightening experience for both the staff member and his/her supervisor. It has been known to make staff physically sick in the period immediately prior to the review. To minimise this, it needs to be carried out in a cooperative non-threatening fashion
• delivery: both firm and individual must be prepared to deliver on any commitments made during the performance review.

RELATIONSHIP WITH PAY REVIEWS

While there is a relationship, the performance appraisal process should not be confused with pay reviews.

Performance appraisal seeks to improve performance and involves very different issues from those relating to pay. In the majority of cases pay issues should not be dealt with during the performance review. Inclusion of pay reviews within performance reviews nearly always twists the focus away from performance improvement.

FREQUENCY OF APPRAISAL

The first appraisal should be carried out three months after appointment. Thereafter appraisals can be carried out at three or six monthly intervals.

WHO SHOULD DO THE APPRAISAL

Note: this section will need modification depending upon firm structure. Partner reviews involve different issues and are not fully covered here. With senior staff or partners, there are sometimes advantages in using an external facilitator.

The appraisal team depends upon reporting lines.

The partners should carry out appraisal of the CEO/Practice Manager/Office Manager.

A team of two consisting of the direct supervisor plus another nominee (Office Manager, partner, HR person etc) should carry out other staff appraisal.

STRUCTURE OF APPRAISALS

Appraisals at all levels should follow a common format.

Prior to the appraisal, the team should meet to discuss the issues involved and to review previous appraisal.

The review should start with a review of the position itself. Firm operations change continuously. There is not a position in the firm that is exactly the same as it was six months ago. Experience has also demonstrated that even the most experienced manager does not in fact know all the features and nuances of the positions reporting to him/her.

It is therefore very important to establish the changing parameters of the job. What are the key features of the position, where are the main work pressures, how has the job changed, what changes might be expected in the future?

The person being appraised should then be asked to discuss his/her own performance. What do they like/not like about the job? What have they done well, what might be improved? What problems do they face in improving performance? What might be done to improve job satisfaction? Where do they see themselves going next?

Discussion can then turn to a discussion of any performance issues identified by the team that have not already been covered. In this context, while self-awareness varies, most people have some idea of their own performance strengths and weaknesses. It is much easier to deal with performance issues that people have identified themselves. A free flowing discussion will generally allow issues to be identified and dealt with in a non-threatening way.

The last part of the discussion should focus on things that might be done to improve performance. Outcomes here can be quite wide-ranging and might include new training, job redesign, improved supervision and priority changes.

The results of the appraisal should be written up by the chair, cleared with the person being appraised and then signed by all parties. Where the person being appraised disagrees with any aspect of the appraisal, then this should be formally recorded.

The results of the appraisal then provide a benchmark for subsequent appraisals.

A suggested form for recording appraisal results is attached.

PERFORMANCE REVIEW

Name:
Date of Appraisal:
Appraisal Team:
Date of Previous Appraisal:
Summary:

Agreed Actions:

Insert full meeting details here

Endorsed as an accurate record of discussions:


Appraiser Name Appraiser Name
Position Position

___________________ _________________

Appraisee Name
Position

___________________

Previous post. Next post.

Designing a simple performance appraisal system - introduction

Almost twelve months ago, I set out the principles that I thought were important in the design of a good performance appraisal system.

While I have seen very few really good performance appraisal systems, to my mind the development of a simple, effective, performance appraisal system that increases in value with time is not hard.

In this context, I thought that it might be helpful to at least some readers if I provided a working example of a system that I know can work. I trialled it originally in an organisation while I was CEO and since then have used it in client work.

The key points about it are that it is simple, focuses on performance improvement and is designed to help staff and managers do their ordinary jobs.

To keep things really simple, I am breaking this series into four posts including my original post:

1. My first post, Designing a Good Performance Appraisal System, sets out basic principles.
2. This post introduces the series.
3. The third post, Designing a simple performance appraisal system - sample policy statement, sets out a simple policy statement describing the system and is intended for direct use.
4. The final post, Designing a simple performance appraisal system - implementation issues, looks at some of the practical problems that can arise in implementing the system.

I would be happy to answer any questions that you might have.

It takes more than money to make the world go round

In an earlier post on performance pay I spoke of the distortions that could arise with performance pay systems. I suggested that money itself was not a good motivator, that a focus on money could introduce sometimes unexpected behavioural distortions.

Interesting article by Ross Gittins in the Sydney Morning Herald (10 September 2007) making the same point in a different way.

Ross spoke of the pre-school that had a problem with parents arriving late to pick up their kids, forcing staff to pay late. The school introduced a charge for late parents.

The school thought of it as a fine, a way of encouraging parents to be on time. In fact, the problem got worse because parents thought of it as a fee in return for being late.

As Ross said, introducing a monetary payment changed what had been a moral issue – doing the right thing by day care workers – into a commercial transaction. People no longer felt guilty about arriving late because they were paying for the privilege.

His core conclusion was that where intrinsic motivation is important, introducing monetary rewards can crowd out that intrinsic motivation, making things worse rather than better.

This is a precise statement of one the problems that can arise with performance based pay. Exactly the same problem can arise with performance agreements.

The Problem with Performance Agreements - Limiting staff contribution

In my last post in this series, I talked about ways in which performance agreements limited manager freedom - and responsibility. This post looks briefly at the way in which performance agreements can actually act to limit staff contribution.

The problem can be simply stated. You get what you measure. The more precisely you prescribe, the more you limit activities to those things you prescribe.

Two examples to illustrate my point.

Many professional firms use simple performance metrics focused on yield per hour. They then wonder why their staff are not prepared to become involved in, interested in, other activities such as marketing. Why should they? There is no return from such involvement.

In other types of organisations further removed from direct time based charging, performance agreements often focus on specific activities or projects. You will do x by y. That's fine, but do not expect your staff to do z or k, no matter how important z or k may be.

Talking to staff in this type of organisation, I find it interesting that many actually see performance agreements as a protection. If I do what is in my performance agreement as required, then I cannot be criticised. So negotiation of performance agreements becomes a process of working out the minimum that will satisfy given the particular views at the time of manager and management.

This type of limiting or satisficing behaviour can make it very difficult to really improve performance or to do new things.

This need not happen, but avoiding the problem requires a very particular approach to the development and management of performance agreements, an approach that can be difficult to achieve in most organisations.

In my next post in this series I will look at what is involved in this particular approach.

Introductory post. Previous post. Next post.

The Problem with Performance Agreements - Limiting manager freedom

In my first post in this series, I talked about some of the problems associated with performance agreements. I now want to extend the argument, focusing on one issue, the way in which performance agreements inevitably limit the freedom of the manager.

The need for good management has never been greater. Yet I sometimes feel that management as such is becoming a lost art, submerged on one side in the current obsession with leadership, on the other in a plethora of limitations.

Management does involve leadership, but leadership is only one element of the manager's core role, getting the best results from the people and other resources at his or her command. It may sound trite, but the real role of the manager is just that, management.

I feel strongly on this one because over the last two decades I have watched a real decline in management roles and skills across a number of different organisation types in both public and private sectors. This may sound extreme, but in some organisations management in the old sense of the word has actually vanished, replaced by a reliance on systems.

The systems based command and control organisation works in the sense that the organisation still operates, but this comes at a cost in both human and business terms.

By its very nature, management is a bit messy. Needs change, priorities shift, crises arise. Further, any manager worth his or her salt generates new ideas while working. Sometimes, often, these are a little outside current ways of working simply because they are new. A good manager tries to test and introduce new things, in so doing working around and through existing systems.

Performance agreements can be used to stop all this type of nonsense by limiting the manager to the specified and the known. Further, in a world of cascading agreements where the manager's staff are also on agreements, those staff agreements have the useful effect of further limiting the manager's capacity to do new things by also limiting staff activity to the agreed and the known.

The command and control approach can sometimes be remarkably efficient in getting specific defined things done. It is much less effective when it comes to doing things or solving problems that fall outside neat pigeon holes, often hopeless when it comes to something new.

A key difficulty from my perspective with the application of performance agreements in a systems based command and control environment is the way it de-skills managers. Management now centres on the management of performance agreements and the performance agreement process. "Managers" who have grown up in this type of environment often lack the basic skills necessary to manage in a broader environment. Worse, they may not even recognise this lack.

Performance agreements need not be like this. It's just that the standard performance agreement process seems to drive them in this way.

Introductory post. Next

The Problem with Performance Agreements - Introduction

I have just been looking at a set of performance agreements. All very modern, but they reminded me of the problems that I have with so many performance agreements.

The agreements are meant to cover the 2008-2008 financial year. That's fine, but there is no way of actually forecasting just what will happen over that year, nor of the extent to which priorities will change.

The agreements must be related to the formal duties of the positions. That's fine, but most advances actually come from people doing more than their position demands.

In fact, the greatest advances come, as in the skunk works concept (here one and here two), where people actually work around the limitations of formal positions. But you cannot really put this in a performance agreement. The effect is that performance agreements can get certain things done, but can actually stop real development. Unless, of course, those further up in the chain of command already know the best outcome.

The agreement must have defined outcomes, along with agreement as to how those outcomes should be measured. But again outcomes have to be related to immediate roles.

In most organisational environments, results come from combined actions by a number of people. This means that the value of the contribution made by any individual depends in part upon actions by others. This is not a problem where the individual is in control of the team, but does create issues where the individual has little or no control over other critical actions.

Setting an individual performance target that is dependent upon actions by others over which an individual has no control has very obvious dangers. For that reason, many performance agreements are in fact activity rather than results based, I will do x by y, with results measured simply by the achievement of x by y. This may aid command and control, but actually does very little to drive improvement.

Now none of this means that you should not have performance agreements. However, those agreements need to be carefully thought through if they are to deliver the results that you hope for.

Next post

Professional Services - Values, Culture and Depression 6: Wrap Up

This post wraps up my arguments about the problem of depression within professional services.

The initial building blocks for the series were two posts (one, two) in my common management problems series discussing the best way of dealing with poor performers. I have treated these as building block posts because my experience suggests that at firm level depression is often dealt with as a performance problem and then mismanaged at that level.

In those posts I suggested, among other things, that it was best to deal with performance problems early before they had time to build. I also emphasised the need to clearly identify the real problem needing to be addressed. The two case studies included in the depression series show breaches of both principles.

I began the depression series on 25 April with a post reporting on the results of an Australian survey suggesting that depression was worst among professionals and students. That is, these groups had higher incidences of depressions than other groups in Australian societies.

I also noted that depression problems appeared to be worst among patent attorneys and lawyers. I suggested that depression was a problem for both individuals and firms.

In the following post I compared law and IT.

In this post I began using the subtitle "Values, Culture and Depression." I did so because firm values and culture affect the treatment of depression in a management environment and in so doing affect the depressed individual.

The reason I chose to compare law and IT is that the individual performance environment in law as compared to the more collectivist managed environment in IT does, in my view, contribute to the higher incidence of depression in law. Somewhat similar arguments can be applied across the professions.

In my next post I took Free at Last as a depression case study. I find that examples help me understand issues. I hope that this is true for you too.

Free at Last's story is in part a story of management failures. But it is also a story with a positive personal ending.

I then diverted slightly with a brief note on the story of John Brogden, a leading NSW politician. Politics is another profession marked by depression problems. As with Free at Last, John's story shows that there is hope at the end of the depression tunnel.

In the next post I extended John's story. Here I spoke of my own brush with depression. I also tried to lay down a few simple management guidelines for dealing with the problem.

I then turned in Jan's case to another case study. Here we can see again how poor management practice contributed to individual problems to the ultimate cost of the firm itself.

In this series I have tried to write from both an individual and personal viewpoint as well as from a management perspective. I hope that readers gain some value.

Posts in this Series

Precursor posts:

• 18 March Common Management Problems - dealing with poor performers
• 6 April Common Management Problems - dealing with poor performers 2

The Depression series:

• 25 April Managing Depression - a problem for individuals and firms
• 28 April Professional Services - Values, Culture and Depression 1: IT vs law
• 1 May Professional Services - Values, Culture and Depression 2: case study - Free at Last
• 4 May Professional Services - Values, Culture and Depression 3: John Brogden
• 7 May Professional Services - Values, Culture and Depression 4: Guidelines
• 16 May Professional Services - Values, Culture and Depression 5: Jan's Case
• 16 May Professional Services - Values, Culture and Depression 6: Wrap Up

Professional Services - Value, Culture and Depression 4: Guidelines

In my last brief post in his series I referred to the case of John Brogden, the former opposition leader in the NSW State Parliament. It was a very brief and somewhat cryptic post because I was on my way to Queensland. I said that I would amplify it later.

At least in Australia, politics like law appears to be a depression prone profession.

In the Brogden case, John said something stupid, the media came down on him like hounds in a feeding frenzy, he resigned as leader then attempted to kill himself. I commented in passing at the time in a post on my personal blog, Why are we so hard on our politicians - and ourselves. My focus then was on what the whole thing was doing to our political process. However, there are some broader issues.

In this post I have repeated the painting I carried in the first Brogden post. I drew this from Neil's blog, but do not know the painter. I have repeated it because it so accurately captures a point that I want to make. Before going on, those who would like to find out more about John's views on depression can find the interview transcript here.

As we saw in the case study on Free at Last, people's first reaction to someone suffering from depression is to tell them to pull their socks up, to buck up, to do better. Now look at the painting.

The subject sits alone. The tones are sepia, sombre, washed of colour. He sits next to what appear to be disembodied ears - people do not listen.

To suffer from depression is to be alone, lost in a sombre world. John Bunyan's novel Pilgrim's Progress speaks of the Slough of Despond. Bunyan meant it a little differently, but slough of despond has come to capture the position of those suffering from the black dog.

We know that people can come through depression.

The former Victorian Premier Geoff Kennett went through depression to become leader of Beyond Blue, Australia's leading anti-depression initiative. He spends much of his time helping people, something that would have seemed inconceivable to those opposed to his very rough and tumble style of politics.

Now John Brogden, too, seems to be coming through with the announcement that he has become patron of the telephone counselling service Lifeline NSW.

Lifeline was founded in 1963 by the late Reverend Dr Sir Alan Walker after he received a call from a distressed man who three days later took his own life. Determined not to let loneliness, isolation or anxiety be the cause of other deaths, Sir Alan launched a crisis line, which operated out of the Methodist Central Mission in Sydney.

Today, somewhere in Australia, there is a new call to Lifeline every minute and an average of over 450,000 calls are answered each year.

While we know that there can be an end to the slough of despond, this can seem inconceivable to the person suffering from depression.

Last year my own wheels came off.

At the worst point, I found it impossible to handle other than the most routine things. Making anything other than the most minor decisions was impossible. I felt completely alone, liable to break into tears. I was the person sitting on the shore.

Much of this I was able to conceal in a day to day sense. My experience has been that people suffering from depression often do not want to talk about it, are unable even to handle the conversation.

This makes them hard to help. It also means that things can get so bad that dire consequences can result, consequences that can come as a surprise to others because the problem has been concealed.

In my own case, and perhaps oddly, blogging itself proved to be the way out because at the time of greatest self doubt it showed me that I could still measure up in professional terms, made me feel that I could still contribute, gave me a sense of progress at a time when so many other things seemed to have gone wrong. Writing became its own catharsis.

I do not pretend that things are yet perfect. I am again fully functional in a professional sense, but still find it very hard to act, to make decisions, on strictly personal matters. But I can again think of a future.

If we link all this back to ways to handle depression in a work context, the core focus of this series, there are I think a couple of guidelines that can help guide management responses.

Guideline one is to reduce the pressure on the person, recognising that one symptom of depression is a reduced ability to cope.

Guideline two is to find ways of building self-esteem, something that is much harder to do.

Depression strikes at the heart of self-worth. That is why it is so destructive.

If we look at suicide among young rural males in Australia, a group with above average suicide rates, we can see a complex brought about by stress, drought, reduced opportunities, even the absence of potential mates because of the limited number of young women in some country areas. All this translates into lower self-esteem.

I do not have an answer as to the best way of increasing self-esteem. This has to be judged in the context of the individual case. However, my experience has been that even the act of caring in a sensitive way can help because it shows the person that they are valued.

Guideline three is to recognise that depression is a health problem, one that may require specialist help. You cannot address the performance problems that may be created by depression without addressing the underlying cause.

All this is not easy, I know. No firm can be expected to carry a sick worker indefinitely. However, this brings me to my final guideline.

Whatever action you take as a manager needs to be done in a fair, equitable, open and caring way.

Posts in this Series

Precursor posts:

• 18 March Common Management Problems - dealing with poor performers
• 6 April Common Management Problems - dealing with poor performers 2

The Depression series:

• 25 April Managing Depression - a problem for individuals and firms
• 28 April Professional Services - Values, Culture and Depression 1: IT vs law
• 1 May Professional Services - Values, Culture and Depression 2: case study - Free at Last
• 4 May Professional Services - Values, Culture and Depression 3: John Brogden
• 7 May Professional Services - Values, Culture and Depression 4: Guidelines
• 16 May Professional Services - Values, Culture and Depression 5: Jan's Case
• 16 May Professional Services - Values, Culture and Depression 6: Wrap Up

Professional Services - Values, Culture and Depression 2: case study - Free at Last

In Professional Services - Values, Culture and Depression 1 I compared IT and law to draw out some of the reasons why the incidence of depression in law is the highest among professional groups. This post extends the argument using as a case study one of several examples on the Junior Lawyers Union blog.

And, I don't regret it (leaving) one bit. When I made the decision to leave the firm, I was taking 100mg of Zoloft a day and spent much of my office time wondering whether my desk chair was heavy enough to smash the window of my 18th floor office. Free at Last

Free at Last has obviously had a depression problem for some time. Free at Last goes on:

Prior to my departure, I disclosed my depression to the firm, thinking that since things had spiralled so far, perhaps, somewhere, there might be someone with a glimmer of humanity lurking around the firm who could help me out.

Instead, the firm demanded a medical certificate to confirm my depression. Once that was produced, two of the partners sat me down and advised me that I was being formally 'performance managed'. They told me that they expected me to get in earlier and leave later, be more 'enthusiastic' about the work I was being given and to increase my output. They then demanded that I say the words 'I want to be a commercial lawyer'.

What can I say?

I suppose the first point is that I find it very hard to believe that Free at Last's problems were not visible to others. Indeed, the response from the two partners indicates that they were aware of performance problems.

Now here the firm is already in beach of one of the key principles I laid down in my two posts on Common Management Problems - dealing with poor performers (post one here, post two here), the need to catch problems early before they grow into major issues. Nothing was done until Free at Last raised the issue.

The second principle I laid down was the need to define the problem, to get the facts. This needed to be done in advance of any corrective action. Then, I suggested, you should take a deep breath, take time to think the problem through. Too often, people go into see problem, fix problem mode. I noted that this could be disastrous.

In this case the firm demanded a medical certificate, an action that may have been necessary, but one that also clearly indicates that Free at Last's problems had in some way been put in the malingerer class. From this point, things go badly awry.

In supplying the certificate, Free at Last established a prima facie case that she (I think that Free at Last is a she) had a medical problem, an illness. So the problem to be addressed changed from poor performance to an illness resulting in poor performance. A very different set of issues.

There is no evidence that the firm gathered any information on depression to guide thinking about responses, nor do they appear to have made any attempt to find out from Free at Last what she had done to seek help. Instead of treating the problem as a medical one that was affecting work, the partners attempted to address the work related results of the problem independent of the cause.

This was bound to fail. Anybody who has suffered from depression or who has seen people suffering from depression will know that a reduced ability to cope is one of the key features of the illness.

Needless to say, a couple of days I tendered my resignation. The sad thing is that one of them seemed genuinely surprised by my decision.

This outcome may in fact have been the best result for Free at Last. In her words: When I finally walked out the door of the top tier firm that I worked for, I had no job to go. It was a leap into the great unknown - terrifying but ultimately liberating.

The outcome may even have been the best result for the firm in that it removed the need to deal with the problem. However, it is likely that the way in the matter was handled had at least some adverse effects within the firm on the attitudes of other staff to the firm.

But to the degree that it was the best result for either party, it was so by accident. The outcome could have been very different.

I am not surprised at the suggestion that one partner seemed genuinely surprised at the resignation decision.

My experience has been that many partners are actually concerned about their people, but lack the time, sensitivity and management skills required to handle people management issues properly. Sadly, some seem doomed to repeat the same mistakes with the same surprise each time that things did not work out.

Posts in this Series

Precursor posts:

• 18 March Common Management Problems - dealing with poor performers
• 6 April Common Management Problems - dealing with poor performers 2

The Depression series:

• 25 April Managing Depression - a problem for individuals and firms
• 28 April Professional Services - Values, Culture and Depression 1: IT vs law
• 1 May Professional Services - Values, Culture and Depression 2: case study - Free at Last
• 4 May Professional Services - Values, Culture and Depression 3: John Brogden
• 7 May Professional Services - Values, Culture and Depression 4: Guidelines
• 16 May Professional Services - Values, Culture and Depression 5: Jan's Case
• 16 May Professional Services - Values, Culture and Depression 6: Wrap Up

Professional Services - Values, Culture and Depression 1: IT vs law

In my last post, Managing Depression - a problem for individuals and firms, I talked about the problems created by the growing incidence of depression. A community wide problem, Australian survey data suggests that the incidence within the professions is most acute among lawyers and patent attorneys.

Why lawyers and patent attorneys? Part of the reason is, I think, that these professions combine individual work with a high pressure billable hours culture.

To provide a comparative base, consider the case of the IT professional.

A significant proportion of IT professionals work in teams in a project environment. Pressures can be high, but they are dictated by shared project milestones. This makes for cooperative working.

Firm economics come back to yield on time, but the relationship between each individual's performance and firm profitability is less direct than in the billable hours environment. Once a price has been set, the challenge is to manage resources to bring the job in on or below budget. Performance measurement techniques focus on the project.

Compare this to law. Work is individual. Firm profitability depends upon the yield on individual time. Each month the firm's performance measurement system spits out reports that focus on individual performance. So performance pressures are individual and direct.

In IT projects there is a manager, the project manager, whose task is to manage the project. This includes managing the people in the project at least so far as that project is concerned.

There is no real equivalent in most law firms. In many, people management is in fact seen as a diversion, something that diverts scarce billable hours into firm time. People are meant to manage themselves to achieve their individual billings targets.

All this creates a culture in which depression can flower.

Posts in this Series

Precursor posts:

• 18 March Common Management Problems - dealing with poor performers
• 6 April Common Management Problems - dealing with poor performers 2

The Depression series:

• 25 April Managing Depression - a problem for individuals and firms
• 28 April Professional Services - Values, Culture and Depression 1: IT vs law
• 1 May Professional Services - Values, Culture and Depression 2: case study - Free at Last
• 4 May Professional Services - Values, Culture and Depression 3: John Brogden
• 7 May Professional Services - Values, Culture and Depression 4: Guidelines
• 16 May Professional Services - Values, Culture and Depression 5: Jan's Case
• 16 May Professional Services - Values, Culture and Depression 6: Wrap Up

Professional Services Management and the Dangers of Elitism

In my last review on blog posts of interest I mentioned a quote provided on Dennis Howlett's AccMan blog, finishing As Dennis said, "Hmm…not so sure about that."

The quote itself seems unexceptionable enough on the surface. Dennis notes that John Bailey, KPMG’s UK director of Coaching, was reported as saying that the onus is on a particular individual to develop talented people:

“This helps people to experience feeling well-managed, in terms of being treated in a way that helps them to maximise their performance and fulfil their career aspirations”

I do not have the full context, so should not comment on the specifics. However, the concern that the comment triggered in my mind was simply the dangers of elitism.

I often hear firms say that we try to recruit the best. I also see firms emphasising the weight that they place on the development of their best people. I see firms struggling in the marketplace to attract the cream of talent.

Leave aside the problems associated with making a reasonable margin on the work of such highly paid and mobile professionals. Bruce MacEwen has dealt with this in his writing on the salaries paid to associates in US law firms (here for example). The fact is that for nearly all firms in all segments of professional services this type of elitist approach is neither possible nor sensible. In fact, it can be downright dangerous.

In saying this I am not saying that firms should be satisfied with mediocrity. I feel just the opposite. Nor am I saying that there is not a place for special recruitment and training programs. These have their place. What I am saying is that the approach to people management and performance improvement needs to focus on all people in the firm, not just the selected few.

I do not remember of the top of my head - indeed I have a mental blank - who first used the phrase ordinary people doing extraordinary things. However, a simple web search shows that the phrase has become extraordinarily widely spread across a variety of areas.

The point of the phrase is that extraordinary results come from extraordinary performance of all people in the firm, not just the few. A firm that can energize its total staff will nearly always do better than that relying on on a selected elite.

Performance Measurement - Profit Per Equity Partner (PEP)

People love pecking order measures. I suppose that this is only normal.

I was reminded of this by a recent post Bruce MacEwen’s blog about the vexed question of the use of Profit per Equity Partner (PEP) as a measure. There Bruce discusses an article by Guy Beringer, a senior partner at Allen & Overy, criticizing the use of PEP as a measure. Bruce then suggests a number of alternative measures.

My problem with the way that PEP is used is that PEP, at least as I understand it, is grossly misleading because it combines and confuses two very different things, the return from work and the return on capital. This confusion is deeply embedded in traditional partnership structures and ways of thinking.

In earlier posts (here and here) I argued strongly that we needed to establish a clear demarcation between returns on work and capital. This links to my main problem with PEP, I don’t actually know what the measure means.

To begin with, it seems to imply that all partners have equal shares. This may but need not be true.

Then problems can arise where firms derive revenue from services other than legal services. These may include back office services as well as revenue from training and publishing operations, to name just three. These can work to increase PEP in ways that have nothing to do with supply of legal services.

Moving on, there can be problems with accounting processes. I know of firms that express the profit pool in terms of cash available to partners after meeting all cash out costs including development and capital costs because that is the real measure to them. Some firms on growth trajectories are prepared to take lower “profits’ now in expectation of higher returns later. The profit pool measures on which PEP depends are not necessarily consistent between firms.

PEP is also affected by the markets in which a firm operates.

Senior legal salaries are far higher in some markets than others. So to the degree that a firm operates in a higher salary sector you would expect PEP to be higher because the salary equivalent component within PEP is higher. This says nothing about the firm’s real profitability, the return on equity.

Just to amplify this a little.

In practice, we all know that some partners contribute more than they get, others get more than they contribute. That is one of the reasons I support more transparent systems. However, assume for the sake of simplicity that all partners are equally competent, work equally hard and make similar contributions.

In these circumstances each partner can leave the firm and get a salary or salary equivalent some where else. This is the return for labour and will vary between markets. If PEP is not high enough to cover this, then the firm is in fact operating at a real loss. So the varying salary equivalent component in PEP of itself says little about real performance.

Performance Pay and Teachers

On 25 February I wrote on problems with performance pay with a special focus on the current Australian debate on performance pay for teachers. I was pleased to see that the story was picked up quite widely.

Ninglun (Neil Whitfield) picked it up the same day with a story entitled Read Jim Belshaw on "Problems with Performance Pay". In turn, this led Arthur Vandelay to cross-reference the story in his own post on the issue. The post was also picked up by The Agonist.

Site traffic reflected these stories, with a steady flow of hits.

Later - 17 March

I was interested to see today from Ninglun's blog that his post on my post is still featuring on his blog list of most popular stories.

Problems with Performance Pay

Graphic: This diagram shows Maslow's hierarchy of needs, represented as a pyramid with the more primitive needs at the bottom.

Julie Bishop, the Minister for Education in Australia's Howard Government, has announced that the Commonwealth Government intends to force the introduction of performance based pay for teachers in Australia's public schools.

Background

For the benefit of my international readers, education is a state responsibility under Australia's Federal Constitution.

Each state maintains a centrally managed public school system intended to make universal education available to all, but also sets curriculum, standards and final examinations for the whole education system, including the growing non-Government sector.

While the Commonwealth Government does not have constitutional responsibility for education, Commonwealth Governments of all political persuasions have become increasingly active in the education area in recent years through provision of funds. Now Minister Bishop want to use this leverage to force new teacher pay arrangements on the states.

Performance based pay arrangements exist to some degree in the non-Government sector. The proposal to extend the concept has met with strong opposition from State Governments and teachers' unions.

I have written a fair bit about education issues on my personal blog. In this context, I promised to write a piece looking at performance pay from a management perspective. Ninglun, one of my blogging colleagues, has just reminded me of that promise.

I am putting the post on this blog because schools are in fact professional services organisations, while the post also provides me with an opportunity to discuss performance pay issues in a broader context.

I should make my personal position clear. Twenty years ago I supported performance based pay. I no longer do so except in narrowly defined circumstances. My own experience with the practical application of performance based pay has been negative. One of the problems with performance based pay is that it all seems so intuitively sensible. After all, shouldn't we reward people for relative contribution, thus motivating them them to do better?

Thus in the Australian case Julie Bishop argues the need to reward the better teachers, in so doing increasing the maximum amount that teachers can get, attracting more people to the profession. Now I have no necessary brief for the way that teachers in public schools are currently paid, but I do think the the Minister's proposals are likely to have perverse results.

Money as Motivator

Does money motivate? Does higher pay, or the chance of higher pay, lead to improved performance? I have seen little evidence to suggest that it does, although I have to be careful how I phrase this.

Clearly, all firms operate in the marketplace for talent. They need to set pay structures that will attract and retain the people they want. One of the reasons why Australia has had a problem attracting teachers is that pay scales for teachers have been too low relative to other opportunities.

Individual firms also adopt specific recruitment and pay policies targeting the type of person they want (can afford). This includes specific areas like sales or corporate finance where performance pat including commissions are common. This may but need not lead to commercial success.

All this said, there is little hard data that I am aware of to say that higher pay or performance pay will improve performance at sector level beyond the market pay required to attract and hold people in the first place.

In fact, in his study of the transition of firms from good to great, Jim Collins found that there was no link between remuneration and performance. The only discernible difference between the good to great and the rest was that the good to great companies in fact paid their senior executives slightly less!

Pay and the Hygiene Factor

To understand some of the reasons why performance pay may not work and even be counter productive we need to look at the work of Herzberg.

Frederick Herzberg (1923 - 2000) was a noted psychologist who became one of the most influential names in business management. He is possibly most famous for his work in job enrichment and Motivator-Hygiene theory. According to Wikipedia (link above) his 1975 publication "One More Time, How Do You Motivate Workers?" is still the most requested article from the Harvard Business Review.

In 1959, Herzberg proposed the two factor theory of human motivation in the workplace. According to his theory people are influenced by two factors:

• Satisfaction and psychological growth are a result of motivation factors. These include achievement, recognition, work identity, responsibility, promotion, growth.
• Dissatisfaction is a result of a lack of hygiene factors. These include pay, fringe benefits, relationship with co-workers, physical environment, supervisor-employee relations.

So Herzberg puts pay in the hygiene class, something that can demotivate if its wrong, but not a motivator in its own right.

Now link this to the work of Abraham Maslow (1908-1970).

In 1943 Maslow proposed his hierarchy of needs. This is often depicted as a pyramid (see graphic) consisting of five levels: the four lower levels are grouped together as deficiency needs associated with physiological needs, while the top level is termed growth needs associated with psychological needs.

While deficiency needs must be met, growth needs are continually shaping behaviour. The basic concept is that the higher needs in this hierarchy only come into focus once all the needs that are lower down in the pyramid are mainly or entirely satisfied. Growth forces create upward movement in the hierarchy, whereas regressive forces push prepotent needs further down the hierarchy.

I have never been a supporter of all the detail in Maslow, but his work does explain why I think that Herzberg was correct to classify money as a hygiene factor. It all comes back to the impact of pay and changes in pay on Herzberg's motivational factors and the higher levels in the Maslow pyramid including especially esteem.

This is best illustrated by example.

Practical Examples of the Hygiene Factor at work.

Take a worker in the firm and give him/her a one-off bonus for good performance. This increases the employee's self esteem, and is likely to motivate.

Now move to a pay system combining a base salary with a performance bonus. In this, the first year, staff get varying levels of bonus. This has a number of effects.

In doing their family financial planning, staff have to make estimates in advance of likely income. Those who get more than expected are pleased, their esteem increases. Conversely, those who get less than expected are disappointed, their esteem is reduced. If the shortfall is significant, then problems may arise with lower levels on the Maslow hierarchy if, for example, the family is suddenly short of cash and has to cut back.

Humans are social animals and like to know their place in the pecking order. No matter how much people are told to keep bonus details confidential, the office will soon work it out. This introduces a new dynamic as people are happy or disappointed with their relative position.

I have previously suggested that one of the most common mistakes made in designing a performance appraisal system, one of the most common reasons why they fail to contribute to performance improvement, is the linking of performance appraisal and pay.

You can see why just on the simple example given above. Scarce staff and management time is effectively diverted from business not just into running the process, but in handling all the consequent complaints. This is why so many index based pay linked appraisal systems end up with average scoring just above the average, why there are so few highs and lows. It's just easiest.

You get what you measure

One of the common problems with performance measurement systems in general, performance based pay in particular, is that you get what you measure.

This need not matter if there is a clear, direct and discernible link between what you want from staff and pay policy.

One of my friends is a futures trader for a bank. He gets a small pool of money to play with, a relatively small base salary plus a bonus of a percentage of the money he makes. He is very happy with that.

In similar vein, Australia's Macquarie Bank, one of the world's most successful investment banks, has bonus arrangements directly related to fees generated over time. Macquarie attracts a particular type of person interested in the possibility of earning well above average incomes, of becoming a millionaire.

These are reasonably clear cut cases, although even here problems can arise.

To begin with, you build in an incentive to undertake those things that maximise pay. This can and has lead to risky decisions and even fraud. Then you get a second problem if the institution's market position slips or if conditions change, leading to declines in firm fee income and hence performance bonuses. Those key rainmakers that you really wanted to keep may be the first to jump ship.

Cloudy Relationships

Problems become more complex where the relationship between those things being measured and the success of the organisation are more complex or even contradictory.

Take time based charging, a common practice in many parts of the professional sector. If, as is usually the case, performance measurement focuses on billings, this creates an incentive to maximise billings at the expense of the client. Problems here have been well explored on Chris Marston's Inside the Firm of the Future blog as well as on blogs such as Adam Smith Esq or David Maister's. David's latest post actually provides a specific example of assessment problems.

Problems arise too where you actually want your people to perform across a range of dimensions.

Assume that you want staff to take a degree of personal responsibility for marketing, but measure only billings and focus on that in remuneration. You can be sure marketing will be ignored.

Assume that you need your staff to work in teams, but focus instead on individual performance. You can be sure that team work will suffer.

Particular problems can also arise where elements of performance depend on factors outside individual control or are not directly measurable.

Julie Bishop's Position

I now want to tease all this out a little by taking Minister Bishops' arguments as reported in the Australian press.

To improve national standards, Minister Bishop, wants teachers to be assessed on the improvement of their students over the year. The aim is for the best teachers to benefit most, especially at disadvantaged schools.

In coming to her views, Minister Bishop appears to have been influenced by some US studies including a University of Arkansas study showed maths results rising by about 4 percentage points at schools with a generous performance pay system. She also believes that there are disincentive affects built into the current pay system where pay peaks after nine years, reducing incentive for further teacher improvement.

Her preferred model is for performance bonuses based on two things: improvements in student exam scores compared with statewide results; subjective assessments by principals, parents, students and other teachers.

She also argues that this would benefit teachers in disadvantaged schools most, attracting teachers to disadvantaged schools is a problem, because their students have the greatest room for improvement.

The Arguments

I note at the outset that I agree with Minister Bishop about the need to increase the pay range for teachers. I have also long felt that there needs to be more flexibility in pay structures. However, this will not be provided by the uniform pay performance structures that she is proposing that simply substitutes one rigid uniform system for another.

Turning to the evidence, I have not read the overseas studies but would be cautious about them. Here I am grateful to Bruce MacEwen in his recent review of The Halo Effect, by Phil Rosenzweig, a professor of strategy and management at the International Institute for Management Development in Lausanne for making a core point, the difference between correlation and causation.

This is a major problem in education studies where many different variables come into play. The fact that there is an apparently statistically significant relationship, if only at 4 per cent, between maths results in Arkansas schools and schools with performance pay does not of itself say anything about a causal linkage. We don't know about student demographics, we don't know about school resourcing, we don't know about broader school management.

So without actually having read the studies I remain cautious.

The next thing is Minister Bishop's objectives. Here I think that we can put the arguments about the need to increase the pay range aside because this is really a separate objective that can be dealt with in several different ways independent of Minister Bishop's proposal.

Minister Bishop wants to raise the standard of Australia's public schooling. However, what does she mean by this? What are or should be the objectives of schooling? How does this link to public education? This is an area where I have written a fair bit recently simply because I am worried that with our obsession with quantifiable measures we are loosing site of broader educational objectives including especially developing the capacity to think.

Turning now to her score card measures.

The first thing to note is that performance is to be measured in individual terms. It is true that good teachers get better outcomes even in bad schools. But educational performance at student level depends upon a wide range of factors including increasingly popular team teaching, facilities and school management.

If we link this to my earlier discussion we can see three things. The first is that the individual focus may work against team performance, especially for team contributions not directly reflected in individual results. The second is that payment or non payment of the bonus may, in some cases, depend upon factors totally outside the teacher's control.

The second thing to note is that the first leg is totally focused on exam performance. I have daughters who have just gone through/are going through the NSW year 12 Higher School Certificate. In this case assessment results are made up 50:50 of continuous assessment and the final exam.

Again this worries me because I have formed the view at a personal parental level that the results obsession is creating undue pressure and damaging the standard of education. The last thing I want is to teachers give a direct incentive to increase the pressure on student to perform in the HSC or, alternatively, to drop out.

Two examples to illustrate what I mean.

Take a reasonably bright student who is doing okay and simply does not need to get maximum exam results to do what he or she wants to do. That student may prefer to take the opportunity to enjoy other aspects of school life including clubs and sport. But this means that he/she is not going to show maximum improvement in results, thus putting teacher pay under some pressure.

Take a not so bright student who is unlikely to do well but who is enjoying the school experience. There may now be an incentive to force that student to drop out.

I am sure that the second leg in the pay assessment process - subjective assessments by principals, parents, students and other teachers - is intended to offset the exam bias. However, this variant of the now popular 36o degree assessment process has its own problems.

I have only had limited direct experience with 360 degree assessment processes in a small number of larger clients. Introduced by HR people keen to try the latest, they simply did not work. A key problem was lack of clarity in just what was to be achieved.

I think that this presently holds true for Minister Bishop's proposal. Again speaking as a parent, I simply do not want to be involved in an assessment process that will directly affect the pay of individual teachers.

In all, the Minister has some distance to go to convince me that her current proposals make much sense.

Performance Measurement - a follow up note

In my last post I spoke of the seven deadly sins of performance measurement. While I mentioned Chris Marston, I had not seen the latest post on his blog' Get Your Calculators and Spreadsheets Out. Ready . . . Set . . . Hurry Up and STOP!!!!'

This post reinforces many of the messages I was trying to get across and is well worth a read.