Did you ever hear the phrase “you are your numbers”?
In most companies, business leaders live and die by their numbers regardless of the circumstances in which they hit or miss them. External conditions could be favorable, and you could hit them with little effort. Being faced with a lot of headwind and missing your targets but faring better than your competitors might still make you an underperformer. Corporate life could be easier with more holistic performance assessments.
FP&A is typically in the eye of the storm when it comes to reporting on and assessing company and business leader performance, so it must also be FP&A that spearheads this change.
If you’re not your numbers, what are you then?
Many more factors must be considered when assessing performance. How is the external environment developing, how much risk was taken, and so on. Here are some additional factors to take into consideration, courtesy of the book Strategy Beyond the Hockey Stick:
- Encourage failures and risk-taking at the individual level (as decisions get made on a portfolio level, where the total risk is balanced—discussed in last week’s article, “Sandbagging and Accounting Sleeves Only Get You into Trouble”) and evaluate the quality of the effort rather than only the outcome
- Reflect the probability of success for each initiative and factor it into compensation schemes
- Use team-based or companywide incentive schemes over longer time horizons to encourage more openness at the individual level and risk-taking
The short story here is that we need to stop staring ourselves blind at a single number in isolation and become much more qualitative about the delivered performance. Mind you, this is not an excuse to remove accountability. Making this change could just as easily go against someone seemingly performing well as it could helping someone in trouble.
In the end, value must still be created at the company level; however, if everyone is playing it safe and not making any big bets, then at best the company will be caught in mediocrity.
How can FP&A take charge?
As with “open risk portfolios,” it has a lot to do with providing transparency around the numbers and the environment in which they were achieved. If all plans and initiatives are probability weighted, that’ll enable a much more enlightened follow-up on performance. FP&A must provide this to senior management.
Each business leader should be assessed—not just on what was delivered, but also on how it was delivered and under what circumstances. Simply putting each category on the agenda in every performance discussion will help facilitate this. Of course, it’s impossible to do assessments that take everything into account and are 100% fair to everyone. However, just consider the current situation where performance assessments are considered not fair at all and many companies are abandoning them for individuals altogether. A new paradigm is needed and FP&A can drive this with support from HR. We need to start assessing performance holistically. Period. The question is: Is FP&A ready to do this?
I think we are, so what’s stopping you from getting started?