If you employ a team of people you will, at some point, want to look at ways to reward those that meet and surpass targets. The principle behind a KPI scheme is to do just that. In particular, it is aimed at incentivising those who add value to your bottom line and acts as a steer to keep employees on track and productive. So what exactly is a KPI scheme and does it work?
What is a KPI scheme?
KPIs (key performance indicators) are metrics used to measure the success of a project or business. They are based on specific data points that provide insight into how well your business is performing.
KPI schemes are broken down into three main areas:
- Input
Input KPIs measure resources used in a process, such as materials and labour.
- Process
Processes measure how work is done.
- Output KPIs
Output KPIs assess quality of products or services.
The system would need to establish a goal structure tailored to business needs and each team role. The structure would need to set out how each goal should be met and what constitutes acceptable performance levels. There would need to be a reporting system and a monitoring process. There would also need to be a system of recognition and reward built in.
The pros and cons of KPI systems
The Pros
- KPIs can provide motivation for employees to perform better by offering recognition of good performance and rewards.
- Setting individual measurable targets to strive for can encourage taking more initiative and create an environment of competition to perform better between teammates.
- A KPI System will offer insights in to how to improve team performance that might lead to better business outcomes.
- Where poor performance is identified, training and resources can be introduced to encourage improved performance across the board.
The cons
- KPIs may also impede creativity. Reaching performance targets may discourage employees from working outside of those specific targets.
- While there are rewards for reaching KPIs, missing them might demotivate employees and cause stress.
- Not all added value an employee brings can be measured easily by KPIs. Soft indicators such as customer service may have a huge impact on business success but not be easily measured and rewarded by a KPI scheme. This could lead to feelings of dissatisfaction and resentment with some team members feeling unappreciated.
- Setting too many or unreasonable objectives may depress and demotivate employees. This could build resentment and lead to mental health issues and eventually resignations.
- There is a risk that a KPI system breaks down cooperative team spirit as each individual focuses on achieving their goals.
How do you set up a KPI scheme?
Setting targets
Decide on the types of target goals that need to be met and set appropriate indicators for each goal. Indicators will contain criteria for assessing performance, such as customer satisfaction, product excellence and service delivery times.
Communicate
Once your KPIs have been defined and agreed upon, it’s important to communicate these goals. This could be done through individual and group meetings, emails, training or whatever method suits the size and structure of your business.
Monitor
Regular monitoring sessions are essential once targets have been set so you can track progress against goals within specific time frames. This would enable you to intervene early if a team member isn’t achieving their designated target indicator.
Review
A regular review of the entire system is crucial if a KPI scheme is going to be useful in the long term. By looking at data from the entire team or workforce you should be able to understand generic as well as individual issues. This would allow you to improve the KPI scheme and tweak your business processes for better business outcomes.
And finally…
If you have staff, their productivity can make or break your business. A KPI scheme is worth considering as a tool to optimise productivity, but it has its drawbacks and it won’t suit all types of businesses or employee roles.
Before deciding on the best tool for your business consider the nature of the work and whether outcomes are tangible enough to be appreciated by the scheme. KPI schemes are a form of micromanagement that can stifle creativity. Consider if this would work for your business.
If, however, you feel the structured nature of KPIs present an opportunity for your business the effort to implement such a scheme may deliver the results your company needs to succeed.