Performance measures are not simply arbitrary measures set up to allow organisations to report on monthly progress. A performance measure, based on a strategic goal, must defined so that it can be easily interpreted and provide valuable performance information.
Therefore the performance measure must be based on a Target, which is the desired level of performance and Thresholds which will determine the upper and lower limits of performance, both for a specific reporting period. Typically the thresholds will allow coloured indicators to be created displaying Green for good performance, Amber for satisfactory performance and Red for poor performance.
Targets provide a driving force behind employee motivation. They need to be determined with great care. If they are too high they will be abandoned as unachievable. If they are too low then company growth may be inhibited. Shorter term targets are always taken more seriously than long term targets. Shorter term targets, e.g. annual targets, are often used as part of an employee compensation package. Setting reasonable short-term targets and aggressively high long-term targets often has practical uses. As the long-term target is generally not linked to compensation packages, it can be used as an ‘aspirational’ motivational tool. The target can indicate to employees that the company has an aspirational desire to grow in the long-term but a practical view of the short-term current market.
Thresholds provide the means to see at-a-glance how a performance measure is doing relative to what is considered ‘bad’ performance and what is considered ‘good’ performance in any given time period. Great care needs to be taken not over-react to a measure that suddenly falls into the red or for that matter progresses quickly in the green area. Using thresholds usually gives a snap-shot view of performance and rarely provides a story or trend. It is imperative that you look at previous history and trend information before making a judgement based on a snap-shot view. For more information on this look at Using history to set targets or we thoroughly recommend Stacey Barr’s work in this area, specifically the article 3 essential signals to look for in your KPIs.
There are three common methods used in general practice to determine thresholds and targets:
Using a Baseline – This is one of the most common methods. It bases targets and thresholds on existing data where that data has shown a level of consistency over a reasonable period of time. It may be a product line that has shown modestly increasing sales over a period of nine to twelve months. The modest increase, or slightly higher than the modest increase can be extrapolated and used as the target. The key thing to remember is that the data provides a baseline pattern that is reasonably consistent. This method is not reliable if the data is unstable or erratic.
Using External Benchmarks – The benchmarks may not be external to the company, but should be external to the group or department. A benchmark provides a comparative target. It looks at an area of performance in one area, for example the ticket sales process for football stadium and compares it to best practice in another area for example the ticket sales process for a theatre. The belief being that although the industries are different, the process is the same.
Compliance and Regulations – often targets and thresholds have to be based on a set of service-level-agreements or on industry regulatory requirements. In this case, to be in the business simply requires these targets to be set.
The easiest way to keep track of targets and thresholds is to use a business performance system that has been set up to do the work for you. For more information, read our QuickScore overview.