Target setting for Key Performance Indicators

Setting targets for Key Performance Indicators is on top of priority list of most of the companies. This is due to the fact that it has become one of the most important steps towards improving organizational performance. However, it is a challenging and complex process to set the right KPI targets in the first place and then to achieve those targets completely or even partially. Adrian Brudan, Research Director of KPI Institute discusses how business owners around the globe can set realistic KPI targets and ultimately achieve them by formulating effective and result oriented strategies.

Benefits of Setting KPI Targets:
There are many benefits of setting targets for KPI, most important for which are given below.
  • Show the desired result levels for Key Performance Indicators.
  • Represent the starting point in measuring and evaluation process (compared to actual/desired level).
  • Impact the behaviour of the organization and employees’ style of working.
  • It increases emphasizes on new business generation and customer retention.

The Goals Setting Theory:
Although, there are many theories informing target setting such as Expectancy-value theory and Achievement-motivation theory yet the most important of them is The Goal Setting Theory.  This theory was introduced by Locke and Latham and it states that “specific, high (hard) goals lead to a higher level of task performance then do easy or vague, abstract goals such as the exhortation to do one’s best.”

  • Principles of Goals Setting Theory:
    Following are some principles of Goal Setting Theory.
  • Goals should be challenging but attainable.
  • Rather than vague, goals should be clear and specific.
  • Managers should involve employees in the process of goals setting.
  • Goals should be measurable in terms of being clearly understood by the employees such as time, cost, quantity and quality.
  • Mechanism of Goal Setting Theory:
    The mechanism of Goal Setting Theory is explained in the following lines.
  • Directive Functions:
    They direct attention and efforts away from goal irrelevant activities towards goal relevant activities.
  • Energizing Function:
    High goals lead to greater effort as compared to low goals.
  • Impact on Persistence:
    When participants are allowed to control the time they spend on the tasks, hard goals prolong efforts.
  • Affect Action Indirectly:
    Business leaders need to affect attention of employees indirectly through discovery, arousal and use of task related strategies and knowledge.

The Target Setting Process:
The prerequisites of a target setting process are.

  • First of all, you have to review and analyze expectations of stakeholders.
  • The second step is to formulate corporate strategies and set objectives.
  • Finally, you will establish key performance indicators.

Target Setting Reference Sources:
There are many sources you can take help of to set realistic and attainable targets. Some of these sources are:

  • Market trends (External Analyses)
  • Internal Benchmarking
  • External Benchmarking
  • Historical Records
  • Drilled Down Targets
  • Start Targets

Important Target Setting Techniques:
Important target setting techniques using sources like Start Targets and Drilled Down Targets are as under.

  • Start Targets:
    When a company does not have any prior information or data to be used as basis for target setting, it can use the Start Target technique. Due to sheer lack of data, Start Target for KPI is simply based on assumptions or business forecasts. However, the testing period will provide data for adjusting targets.
  • Drill Down Targets:
    Drill Down approach, as the name suggests is actually a top-down approach, starting from the top level to the departments and individual level. It divides a bigger target into many smaller targets that a company has to attain.

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Challenges in KPI Target Setting:
It is rather very challenging to set realistic and relevant KPI targets and subsequently achieve them. Following are some of the reasons that make it very difficult for the business leaders and managers to accomplish this all important task necessary for improved performance and in turn, the survival of the organization.

  • First and the foremost reason is the nonexistence or unavailability of trends data for new indicators.
  • Another important problem is the scalability issues such as how to set short term targets for achieving long term goals.
  • Lack of consensus among top executives.
  • Some of the executives and even employees facilitate and promote negative behaviors within the organization.
  • Biases among stakeholders can negatively affect the process of setting targets for Key Performance Indicators.

Incentives and KPI Targets:
The incentive policy is one of the most important policies various organizations adopt in a hope to set best possible targets for KPIs. Some of the important aspects of the incentive policy are:

  • Eligibility criteria for awarding incentives.
  • What should be the size of incentive?
  • What should be the payout frequency?
  • How to determine relationship between performance and payout?
  • What should be the focus of the incentives?

The Performance Measures:
The fourth aspect of incentive policy for KPIs can be interpreted in terms of performance measures. Basically, performance is measured in terms of;

  • Controllability
  • Informativeness
  • Alignment
  • Objectivity
  • Quantity

Pay for Performance:
Nowadays, some companies are adopting a totally different approach of paying employees for the work they do. The approach known as Pay for Performance is all about paying employees according to their level of performance. Different companies use different techniques in this regard, such as financial rewards, Non-Financial rewards and Gamification in order to improve the motivation level.

Negative Behaviors and Performance Based Pay:
However, it is strongly recommended not to link targets immediately to financial incentives as this is the biggest reason of enhancing negative behaviors. You need to use targets as prescription drugs with caution. Following lines explain some of the negative behaviors associated with performance based pay.

  • Sandbagging:
    It results in establishing lower and easy targets than least possible estimated targets.
  • Tunnel Behavior:
    Employees try to achieve own targets without any consideration for other and general wellbeing of the organization.
  • Unethical Behavior:
    Employees disregard the safety and environment considerations in the process of achieving targets.
  • Gaming:
    They use illegal and unapproved methods to influence the results in order to achieve targets.

Concluding, it can be said that you need to adopt unique but effective and fair policies to set realistic and attainable targets for KPIs. It is important to conduct thorough research to set the targets, test and adjust those targets from time to time and establish such initiatives that help your team to achieve those targets with utmost ease. Finally, continuously reviewing and updating targets will always help you to keep your firm on right track.

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