The Best Performance Goals Are D.U.M.B.
Anyone who has taken a class or performed a Google-search on performance goals has learned about the concept of “SMART” goals. The most common breakdown seems to be: S - Specific, M - Measurable, A - Attainable, R - Relevant, and T - Time-bound. We all seem to know this and yet many still seem to have problems creating successful pay for performance programs. I would like to propose a new D.U.M.B. approach that celebrates the spirit of insanity. Insanity is being defined as the repetition of doing the same thing, again and again, with the expectation of different results. If SMART goals aren't working for you, why not try DUMB goals?
D.U.M.B Goals are:
D – Demonstrable: The metrics and goals you use for P4P must show their impact. You must be able to demonstrate how they work and why they work. You must show how the intent, execution and effort of the individual, group or entire company being assigned these goals, can and will make a difference.
U – Understandable: EBITDA is awesome, but how many people truly understand Earnings Before Interest, Taxes, Depreciation and Amortization? Heck, how many people understand even two of these elements? Even if someone knows what they mean, can they comprehend how their decisions, actions and behaviors materially impact any of these things? Think about some of the other goals, or complex plan design features you have seen. Have you spent the time, money and expended sufficient effort to ensure that they are REALLY understood?
M – Modeled: Your goals must be modeled and applied to realistic growth and pay packages. Stop showing how your mythical stock price of $10 (or some other easy round number) will increase by 50% (or some other easy round number.) Stop showing a continuous, consistent year over year growth rate for multiple years (or quarters.) Don’t model only the best possible scenario. Model multiple realistic possibilities and explain why they might occur and what can be done to earn something better. I realize that figuring out exactly how P4P plans will payout at different levels of performance and for different levels of participants can be hard. But, imagine how much harder it is if you are NOT a compensation professional.
B - Business Critical: There are a whole lot of things that managers want their employees to do well. It really is important that each of these things get done and done well. But, this does not mean that every one of these things should be a metric or goal in your P4P program. A goal that accounts for 10% of the 25% of the year’s LTI vesting, that only pays in the event that there is an improvement of 15% over the prior year, when that 15% represents only 3% of the total value delivered to the company by that individual or group is just silly. But, these types of goals end up in plans because someone is unwilling to fight that fight, or cannot explain how making or losing a potential of $845 on a base pay of $100,000 probably isn’t going to change anything.
So there you have it. Lets hear how DUMB your goals are. Can you successfully apply these principles to all of your current performance plans?
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.