Here’s How You Can Evaluate and Reward Employees Effectively
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Here’s How You Can Evaluate and Reward Employees Effectively

Here’s How You Can Evaluate and Reward Employees Effectively

Business & Career | September 7, 2021
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Key Result Areas and Key Performance Indicators are essential for setting an effective performance-based system. Here’s what you need to know.

One of the most common mistakes of business owners is to evaluate and reward their employees based on a non-measurable or subjective assessment of their work performance. For example, in one of the companies I know, the owners are evaluating the performance of their managers based on a subjective ranking of excellent, very good, average, and poor ratings.

In another company, the owners are evaluating managers based on an evaluation form template that asked questions such as (1) Did the manager properly supervise his staff? (2) Did the manager regularly reported on time?, (3) Did the manager submitted reports in a timely manner, (4) Did the manager achieve his or her targets?

And so on and so forth.

Disadvantages of a Subjective Evaluation

The problem with this process is that all the managers are being assessed with the same set of criteria (or questions)—which may not truly capture their actual work performance. For example, if a sales manager was always late or absent but was able to exceed his target by 200%, will he be rated overall as “average” because of his absences or will he be rated as “excellent” because he exceeded his target tremendously? Or how about an accounting manager who was never absent and submits reports on time, but the staff complains a lot about him or her? Will the manager still be rated overall as “excellent”?

In many instances, this kind of evaluation could result in the employees’ envy, distrust, and disappointment with the company’s management. Moreover, favoritism or patronage politics in the workplace will become the norm because of the absence of a measurable way or guide when assessing employee performance.

Key Result Areas and Key Performance Indicators

So how can business owners address such issues? One of the best practices in assessing the performance of employees is to identify specific Key Result Areas (KRAs) and to set measurable Key Performance Indicators (KPIs) for each employee.

While this process takes time, once it’s complete, you can use the information as the basis for a comprehensive performance management system. That way, you can drive up the performance of your employees which, in turn, should significantly boost the company’s performance. Obviously, the KRAs and KPIs of each manager (or employee) will be different from each other because those will depend on the nature of the work being performed.

But take note—most companies who practice this systematic review revise their KRAs and KPIs every two years.

Key Result Areas, Explained

To further explain, Key Result Areas, or KRAs, are specific areas of concern or areas for improvement in a company. This can include operational items such as profits, processes, locations, markets, customers, accounts, structures, and assets. But what are examples of KRAs? If you are in the sales department, sales, repeat orders, and customers are your KRAs. On the other hand, if you are in the production department, KRAs include accidents, production costs, products produced. And if you are in the HR Department, hiring time, employee turnover, and training count as KRAs.

As you can surmise, each employee has different KRAs—depending on the nature of their work.

Key Performance Indicators, Explained

Key Performance Indicators, or KPIs, are business metrics—which can include numerical or quantitative metrics. These are used to measure the achievements of an organization and its employees. KPIs can be in the form of achieving an increase or decrease in certain factors, the percentages of achievements, specific target numbers, or the amount and attainment of specific timetables.

Examples of KPIs include 20% increase, PHP 100 million, zero, 10% decrease, or 1,000 bags of products.

Measuring Your Company’s KRAs and KPIs

Now, in order to measure performance, you need to put your KRAs and KPIs together—and they become your Performance Measures (or “Targets”). So, KRA+ KPI = Performance Measures.

For example, combining the KRAs and KPIs discussed in the preceding paragraphs, you will come up with a 20% increase in sales, zero accidents, a 10% decrease in costs, 1,000 bags produced per week. By combining the relevant KRAs and KPIs, you can come up with specific performance measures for each manager.

(Note: To facilitate the gathering of information, you can explain the process to your employees and require them to submit their own KRAs and KPIs. You can then review, discuss and select the most appropriate KRAs and KPIs for each employee. That way, your employees will feel you have valued their inputs and therefore cannot complain, as most of the information originated from them.)

Summarizing Your Performance-Based Measures

The next big thing that your company should do is to summarize the performance measures or targets assigned to each employee. From there, you can come up with your employees’ individual Performance Scorecards.

A simple rating system should also be designed to measure the achievement of each target. For example, a three-point grading system can be employed: 1—failed to meet the target, 2—achieved the target, and 3—exceeded the target.

For the geeks out there, here is an example—a sales manager has two targets: a PHP 2 million increase in sales and an average of 10 new customers per month. If he only made a PHP 1.9 million increase in sales, his rating for this KRA is 1 (below target). On the other hand, if he achieves an average of 12 new customers, his rating is 3 (exceeded target).  Adding those up, his total ratings will be 4. Divide 4 by 2 KRAs, and his average rating will be 2. And so on and so forth. If your other managers scored a 2.5 or 3 or 1.5, you can now discern correctly who is performing better than the other.

(Note: To avoid going overboard on this one, my suggestion is to limit the performance measures to 10 KRAs or KPIs per employee. But make sure that the KRAs being scored are the most important ones. Also, some companies who employ this system assign a higher percentage or weights for the more important targets, compared to the less important ones.)

Advantages of a Performance Scorecards

The benefits of having performance scorecards are tremendous. Among other things, performance scorecards can:

  1. Provide employees with a clear understanding of what management expects them to accomplish.
  2. Provide management with a powerful tool to monitor the performance of key employees all throughout the year by using monthly performance scorecards.
  3. Ensure fairness in giving rewards or benefits to key employees, since they will be rewarded based on their actual accomplishments.
  4. Motivate employees to do their best, since they are measured based on mutually-agreed upon performance standards.
  5. Ensure that the output or results of management’s evaluation of employee performance can be reviewed or audited easily, thereby removing disputes and favoritism.

Finally, you can tie up the results of your employees’ performance scorecards to your reward system.  For example, you can give the employee with the highest score for the month a simple token or reward—ice cream, a food basket, dinner, and the like—to encourage others to catch up and perform better.

You can also summarize the employees’ annual performance rankings and use the results as the basis for giving bonuses or merit increases. Whatever you do, you can be sure that your employees will be treated fairly and equitably because there is little or no room for subjectivity. At the end of the day, what matters most is that your employees were properly recognized and rewarded based on their actual performance. Keep safe.

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Learning How To Manage Your Employees The Right Way

5 Ways to Make Working From Home Work For You

Recovery Plans To Keep Your Business Afloat Amid The Pandemic And Beyond

Juancho is the Chairman of Golden Falcon Advisory Services, Inc., an investment and financial management firm that provides advisory services to high-net-worth individuals (HNWIs) and business owners. Juancho is also currently the CEO of Chan Robles & Company, the accounting and business consulting arm of the Chan Robles Group.
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