In most companies, targets are just as an important part of daily business as praying is at church. For a long time, targets were set with the main focus on the budget, i.e. primarily based on financial aspects.
New technologies and methods which brought the definition and implementation of objectives closer to each other in the 1990s resulted in more and more targets being set, even in non-financial business units. Given all the objectives, it is easy to forget what the management’s main duty actually is: to deliver the best possible performance. Objectives can certainly make a contribution to this. The decisive factor is that they are expedient and can be implemented effectively. The following five steps help to set realistic targets and introduce an efficient performance management system:
1. Base target setting on the overall strategy
Corporate objectives should always be based on the company’s main strategy. This means that managers need to break down the overriding strategic objectives into individual components of the entire value chain, i.e. into the respective divisions and departments. The challenge lies in defining the relevant measures and responsibilities in such a way that they are not only expedient on paper but also during day-to-day business operations and in a way that avoids duplications.
2. Make the right choice
Having too many targets results in employees not being able to see the forest for the trees. If too few are set, it is not possible to connect the dots. It is therefore crucial to make the right choice and focus on the important aspects. So on the one hand, the targets should be linked to the relevant value drivers in the company like income, return on sales or investments. On the other hand, a healthy balance must be found between financial targets (e.g. sales growth, earnings yield or free cashflow) and non-financial objectives (e.g. customer satisfaction, production lead times or customer returns). This is only possible if the measures and responsibilities are defined and distributed across divisions and functions.
3. Pull together
The defined business strategy must be communicated to the whole company on a personal level. The decisive success factor is that the Executive Board – and especially the CEO – leads by example by living by the values and objectives. The CFO’s duty is to monitor the implementation of the targets in day-to-day business and ensure that the various measures are harmonized expediently. The most important actors for implementing the objectives are nevertheless the respective departments and employees. It is necessary to pave the way for them through targeted coaching so that they can apply their individual skills in the best possible manner to ensuring that the targets are met.
4. Do not carve objectives in stone
Objectives are relative and are also based on internal and external framework conditions which can quickly change. Implementing targets is therefore a constant experimentation process. It is important in this respect also sometimes to accept performance that is not in line with expectations over a limited period. This is the only way of being able to respond effectively to changing conditions and adjust the objectives accordingly.
5. Optimize performance management
The target setting process should be institutionalized as part of an all-embracing performance management system. To this end, CEOs and CFOs can resort to integrated planning solutions which support the company in the areas of strategy, budgeting, forecasting and financial planning. Such applications help to introduce an effective performance management system in the company by combining the respective areas with each other and enable decision-makers to focus on their main skills.