Sights set on target setting?

pharmafile | February 16, 2010 | Feature | Sales and Marketing forecasts, sales 

Research funded by the Chartered Institue of Management Accountants (CIMA) has helped Cranfield School of Management unveil a new framework designed to support organisations with target setting processes.

The ‘Cranfield target setting wheel’ can help firms of all sizes transform their existing performance management and incentive systems, to reflect the sales environment that staff operate in and establish targets that will generate the expected behaviours.

The research, published in a report and conducted by the Centre for Business Performance at Cranfield, demonstrates that most sales performance measurement and incentive systems still focus on the need to meet short-term sales targets, and assume sales people operate independently. This is despite reality being very different, with many sales people working in teams where customer information must be produced and shared. The study highlights that this new selling environment requires innovative ways of measuring performance, setting targets and designing incentive plans.

Commenting on the research findings, Professor Mike Bourne from Cranfield School of Management said: “Setting high but attainable targets is one of the first rules in driving business performance. However, so often companies fail because they miss vital links in the target setting process.  Our research identifies the factors that influence how sales people respond to targets.  Often management’s view of role and performance clarity differed from the sales force due to failures in communication, capacity and performance planning.”

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The research finds that management often wrongly believe that the sales force has participated to some extent in the target setting process, while the sales people simply believe that they have been handed their targets with little explanation.  According to the report sales teams do not want full autonomy when it comes to setting their own targets, chiefly because they are not solely responsible for achieving them, and that better communication between the sales team and management is required.

Communication factor

Co-author of the report, Dr Monica Franco-Santos from the Centre for Business Performance said:  “Organisations need a holistic view of how performance targets, measures and incentive schemes link together. Our research enabled us to develop a framework for doing just that.”

Naomi Smith, CIMA research manager, explains further:  “Communication is an extremely important factor in the whole target setting process and can help overcome many of the difficulties that can arise when things don’t turn out the way they were expected to. Sales people need to know what the target is, how it has been calculated, who is responsible for achieving them and how well they are doing against it. Each member of the team must accept and agree with their performance targets in order to be committed to delivering them. The target setting phase is a key area for management accountants to get involved in, as their strategic oversight and general skill-set are perfectly suited to such a role.”

The wheel’s ten steps

1. Review stakeholder expectations – what do they expect from this organisation?”

2. Strategic objectives clarification/selection – a few clear statements of what the organisation aims to achieve addressing those key stakeholders’ requirements.

3. Define the organisation’s success map – the cause and effect relationship that describes how the organisation creates value to their stakeholders.

4. Prioritise objectives.

5. Operationalisation – defining the KPIs to be used to measure each strategic objective.

6. Data collection – defining the data source, who measures and how often. 

7. Data analysis – including both forecasting and capability analysis.

8. Set targets – deciding on specific performance targets for the organisation’s KPIs. 

9. Action plan design – organisations need to spend time deciding on the actions that will help them achieve their targets. 

10. Action plan discussion and agreement – targets must be communicated together with the action plan for delivering the targets. The action plan MUST be discussed and agreed with those accountable for reaching the targets. 

Need for performance targets

Performance targets are one of the most used managerial tools in the corporate world. Performance targets can be defined as the objects or aims of managerial actions, or as borderlines that differentiate success from failure. Performance targets are, for example, to attain a 10 percent increase in sales or to improve customer satisfaction. Targets are mainly used for motivating specific behaviours, establishing expectations, evaluating and rewarding performance.

At present, the use of performance targets seems to be ubiquitous: however, the report claims a high proportion of organisations have reported to be dissatisfied with their targets, arguing that this management tool is not generating the expected results. 

In research terms, several management fields have focused their attention on the nature and effects of performance targets.

Organisational behaviour researchers, for example, have looked at the impact of assigned targets (i.e. targets set by superiors, also known as assigned goals) on performance for over 30 years. One of their main findings has been that people perform better when they are assigned specific and difficult targets than they do when they are assigned easy targets or ‘do your best’ type of targets. This prediction has been proved to be so strong within the organisational behaviour literature that the use of performance targets is now regarded as an important aspect of motivation theory and management education.

Nevertheless, this area of research is far from being conclusive as there are numerous gaps that remain to be addressed. Furthermore, not all the management literature is in favour of the use of performance targets for managing employees’ performance. For instance, quality management research is very critical with the use of targets for motivation and performance management purposes.

Transformational objectives

Taking into account suggestions for progressing the research on performance targets and for providing new insights to management professionals, the Cranfield report aims to address three specific objectives. One objective is to investigate the behavioural effects of sales performance targets in relationship with sales forces’ incentive pay plans and sales performance measures. The sales function was chosen as it is known that in this environment performance targets are widely used. A second objective is to examine the issues associated with target setting processes and to define an improved procedure in which the knowledge of the different areas of target setting research will be integrated. The third objective is to further understand the factors that affect how difficult a performance target is perceived to be, as this perception seems to be the most critical driver of behaviour and performance.

Behavioural theories

Several organisational theories have looked at the effects of performance targets on behaviour and performance. When performance is below target level, then problemistic search and risk-taking behaviours increase, which in turn generate greater organisational changes. The opposite will occur when performance is above target level.

Problemistic search refers to the type of search that decision makers attempt based on their knowledge of how well they are performing. In general, organisational changes will be less likely to occur when performance is above target, since problemistic search will be at low levels. In turn, time dedicated to problem solving will be less necessary and managers will be more risk averse. So if an individual’s performance is below target, this will positively affect his/her risk-taking behaviours. The opposite will occur if the individual’s performance is above target.

Key factors affecting behaviour

Linking in with the below figure, performance targets can be used alone but in sales environments they are typically linked to incentive plans, they key terms of which are listed here:

Eligibility – who is entitled and how much influence each person has on sales performance.

Incentive size – refers to the amount of money the firm has established as

incentive pay for their sales people.

Payout frequency – how often incentives are paid. The frequency of payout should be in line with the sales processes and strategic planning.

Performance-payout relationship – this refers to the payout curve that reflects how incentive payments are calculated and how they vary with measured performance.

Focus – the focus of incentives needs to be in line with the way in which sales people work and the way in which sales tasks are interrelated.

Incentives review – how often the sales incentive plan is reviewed.

Fairness – refers to the extent to which the sales people’s incentive plan is perceived to be fair by sales people. Perceptions of fairness or equity remains in the eyes of the beholder so management needs to make sure sales people perceive their incentive system to be fair.

Clarity – do sales people understand their incentive plan? And finally there is

Communication – sales people need to know how their incentive system works. The more transparency there is with incentive information the more satisfied salepeople will be, which will have a direct effect on their behaviour.

Moving targets

In today’s sales environments sales people need to work in teams and with high support from above and below in order to meet their targets. Effective sales people are no longer ‘lone wolves’ working autonomously in their territories, but rather well related individuals that are able to work in close collaboration with others.

For further information visit the Cranfield School of Management: www.knowledgeintoaction.net or email Emily Reed to contact the co-authors of the report: emily.reed@cranfield.ac.uk.

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