Outcome Based Goals in Performance Management

Originally posted,

Over the last decade, as I have been responsible for establishing or improving employee performance management frameworks, I have spent time thinking about the proper criteria and methods. In 2017, when I joined Amazon, I was impressed with the diligence that Sunny Jain (manager and VP for NA Consumables) and the entire business team spent on understanding and proving the causal links between a business input and the resulting output. In a 1:1 with Sunny, he explained that at Amazon, the business was focused on setting goals on business inputs (controllable and measurable). I heard the same message during my MBA, where the professor discussed the evolution of modern business management to focus on inputs. I took these learnings forward into my goal-setting considerations in performance management. Let’s bring this down to concrete examples (that have been sanitized and are symbolic of cases I have seen or discussed in the industry):

Example A Engineer A makes a change that yields an incremental revenue increase of $100,000 or 1% of existing revenue. Engineer B makes a change that yields an incremental revenue increase of $10,000 or 0.1% of existing revenue.

In an outcome-based framework, Engineer A outperforms Engineer B. Engineer A would see a fast promotion and amplify their career progress. However, let’s add some more context. In both cases, we will assume that the measurements are, as stated, incremental. Organic growth and the impact of other improvements (as well as environmental changes) have been removed. In the first case, even after that has all been considered, the entitlement (i.e. the maximum amount of revenue the product could achieve) is $1B incremental revenue. A vibrant economy and the general availability of spending dollars by the general public contribute to the large entitlement. In the second case, the entitlement is $10M. The smaller entitlement is due to a change in the economy and a shift to a saving mentality. These entitlement numbers can be predicted but are rarely known when doing planning or performance reviews. In the first case, Engineer A worked to acquire 0.01% of the entitlement. Engineer B has reached 0.1% of the entitlement. Engineer B has an order of magnitude more impact than Engineer A. How can we have known this when doing performance reviews? That is where the work to find the causal links between inputs and outputs is critical to fair reviews. Incremental revenue is an outcome and should not be used. Instead, we should consider creating a goal around the inputs the engineers were meant to impact (change). The outcome is used to direct strategy. Specifically, in this case, whether to invest further during the operating period to achieve desired revenue growth. In terms of behaviours, people will be incentivized to move to teams where the environment facilitates ease of promotion. Engineers promoted during more challenging times will compare the effort to achieve their promotions and the relative skill-sets gap, resulting in animosity and a division between these pools of employees. It will also enhance Peter’s Principle, as people promoted during easier times will bubble up to higher positions above those who may be better skilled but in a more challenging climate.

Example B Team A sees a 20% growth in the share of their market segment. Team B sees a 1% reduction in the share of their market segment.

Similar to Example A, a surface reading of the statements makes it clear that Team A is outperforming Team B. Again, adding context to both cases will place things in a different light. Team A is launching a competing product into a relatively new market space (blue ocean). Since they fast follow the original product in the market, they can focus on the features that customers have already demonstrated are the right fit. Further, since they are part of a large company, they have many resources to use for their product team. These resources help them quickly create a competitive product and price it under their competitors. Team B, their product has been in the market for over a decade and is the dominant product in their market. They have over 90% of the market segment. New products are introduced for niche areas of the overall market, but there have been few real competitors for years. Market segment share retention is the more challenging problem as there is no other product to fast-follow. The skills that a product team needs to retain market share in an established space, or when they have a large majority of the market, is a different skill set than a growth team. The issue of specialization (niche products taking share) and a significant competitor could develop. For entertainment products, there is also the risk of the product becoming stale or losing its entertainment value. Measuring this team on market segment share growth is not representative of the team’s effort or the total value to the company of the product. Companies often create incentive models based on growth. It is easier to measure and has more value to the company regarding reporting to the stock market than measuring the effort of retaining market share. You can develop groups of people that will join a team during the growth phase to earn easy rewards. They are not incentivized and do not help the team grow their backbench of talent. When the product acquires the needed market share and the team needs to move towards a retention strategy, these people leave the team. The result is a talent vacuum that leaves the group struggling internally due to a lack of strong leaders and ICs and because there needed to be preparation or plan for the required pivot. Due to this chaos, the product can significantly drop its market segment share. If it falls far enough, these people who left earlier can return and “save” the group. Overall, the net result for the company is very detrimental. The performance management framework in this example should be focused on how leaders build their teams, succession planning, and contingencies for changes in the market. Connecting individual performance goals to a growth output ignores that role’s short- and long-term inputs. A manager is building and supporting a team (input). This focus would be true for zero-to-one and retention scenarios.