What are the stages of excellence in KPIs and incentives?

KPIs and incentives develop through five stages. At the bottom, every target is last year plus a percentage, and the bonus pays for the behaviour the business complains about. At the top, targets rest on evidence a manager can challenge, and the bonus pays only for work the business would want anyway.

The stages are assessed across five dimensions: the objectives, the measures, the targets, the review rhythm and the incentives.

The five stages, in KPI and incentive terms

• Lagging. Five managers give five answers on what the business is trying to achieve. Every target is last year's number plus a percentage. Sales are pulled forward at the end of every period.
• Basic. The list of objectives runs to a page and was written for the board. Targets exist for every financial line and almost nothing else. Review actions are agreed and nobody checks them.
• Competent. Three to five written objectives each have a measure and an owner. Each target rests on written evidence. Each review ends with actions that the next review checks.
• Advanced. Something worthwhile was left off the objectives on purpose. Targets differ by unit because starting points differ. What the bonus pays for was checked against what the business wants, and changed.
• Leading. An objective is dropped in a meeting, with the reason written down. Someone has been thanked for refusing to pull a sale forward. The bonus pays only for behaviour the business wants.

The five dimensions a KPI and incentive assessment covers

1. The objectives: how many there are, whether they cascade, whether the front line understands them, shared outcomes, and change kept apart from the day job.
2. The measures: defined once, a named owner for each, leading as well as lagging, and side effects watched.
3. The targets: how they are set and negotiated, stretch against the record, what happens when the world moves, and gaming near the line.
4. The rhythm: how often the objectives are reviewed, whether a review changes anything, performance conversations, and who can see the results.
5. The incentives: what the bonus pays for, line of sight, how the bonus hangs on the budget, recognition beyond money, and the principles behind pay.

How are KPIs and incentives measured?

KPI and incentive maturity is measured one practice at a time. A Stages of Excellence assessment asks about 21 practices across the five dimensions. Three more, on how the plan is built, appear where a written bonus, commission or share plan covers at least the managers. For each practice, the respondent picks the one of five sentences that describes the business today.

The patterns that recur

Score patterns cluster into five types:

• The Budget Bonus: the bonus hangs on hitting the budget, so the budget is negotiated rather than built.
• Goals on a Poster: good objectives, few and understood, that nothing measures.
• Numbers Without Decisions: a monthly meeting that reads out numbers and changes nothing.
• Paying for the Wrong Thing: a plan that pays on one number, which rewards something else.
• The Annual Wash-Up: everything happens once a year and after the fact.

Sentences from the check

Each of these is the lowest of five sentences on its question:

• "Ask five managers what the business is trying to achieve this year and you get five answers, none of them written down."
• "Every target is last year's number plus a percentage, the same percentage for everyone, decided by the owner in an afternoon."
• "The review is a reporting session: numbers are read out, a red number is explained, and everyone leaves to do what they were doing."

See where your business stands: the KPIs and incentives check takes about ten minutes.