It’s the prerogative of every employer to set high standards for their workforce. However, a recent case demonstrated that employers must be able to justify their performance targets. How can you ensure KPIs stand up to scrutiny?
If an employee is falling behind on their performance targets, policies and procedures tend to dictate familiar steps: craft a performance improvement plan, offer coaching and, if the situation doesn’t improve, issue warnings of potential termination.
But what if the issue isn’t with the employee’s capability, but instead with the performance targets themselves?
The implications of unreasonable performance targets
A recent legal case that HRM reported on underscored the importance of considering this question in dealing with lagging performers.
In this case, heard recently by the Fair Work Commission (FWC), an employee at a Sydney beauty clinic successfully contested her termination for failing to meet key performance indicators (KPIs).
The employee in this case, who was a part-time worker, argued that her manager had imposed the same performance targets on her that were given to her full-time colleagues. Furthermore, she claimed that none of her fellow sales consultants, regardless of their working hours, had ever achieved the sales target of $150,000 per month.
Her employer did not produce any evidence to the contrary, and the FWC found that the targets were therefore unreasonable. Also taking into account the manager’s inadequate warning and dismissal process, the FWC ultimately found in the employee’s favour and ordered the employer to compensate her.
Read HRM’s full article on the case and its implications here.
“[This case] is a lesson for employers to, firstly, ensure that their performance criteria are well-founded and will stand up to scrutiny,” says David Catanese, Partner at Hall & Wilcox. “That will ensure employers avoid issues when they’re applying performance criteria or taking action for underperformance or failures.”
Another key takeaway from the FWC’s decision is that employers need to take into account part-time and flexible work arrangements when setting performance criteria, he says.
“That’s especially the case if part-time work, flexible work arrangements or additional leave arise because of parental or carer responsibilities, a person’s disability or absences because of illness or injury. Without taking such factors into account, there is an increased risk of unlawful discrimination, particularly indirect discrimination.”
“If you’re asking too much of staff, they’re going to want something in return, or they may leave.” – David Catanese, Partner at Hall & Wilcox.
3 tips to set clear and compliant KPIs
A common challenge that employers face is how to stretch and push employees without pushing them too far. As a risk mitigation step, it’s important to remind leaders that they should be setting realistic and achievable KPIs based on employees’ skill level, experience and available resources/support.
It’s also worth considering the following points:
1. Plan for potential legal challenges
In the FWC case mentioned above, the employer’s inability to provide any evidence to justify their KPIs would have been one of their most significant failings in the eyes of the FWC, says Catanese.
What employers can take from this is that they should not wait until they are in an unfair dismissal hearing to consider the justification they might need in a situation like this.
“The best way to justify [specific KPIs] is to consider whether the criteria would stand up to reasonable scrutiny,” he says.
“For example, if you’re setting a monthly sales target of $150,000, how have you arrived at that figure? [It might be], for example, ‘Our overheads are $140,000. And we need $150,000 to make a profit.’ You don’t need to gather the evidence at that stage, but knowing how you would answer the question is very important.”
2. Consult and involve your employees when setting targets
In determining whether KPIs are reasonable, it’s important not to overlook input from the employees who are striving to meet those targets.
“Lots of businesses do involve employees in the setting of KPIs,” says Catanese. “We see that often with feedback in annual performance reviews – it’s a cooperative and joint process between management and staff as to how to set KPIs for the coming years.
“I think that that’s a really positive way to go about setting performance criteria. It makes it clear to employees what the criteria are, and [they’ll be] more likely to buy in that they’re reasonable.
“It might be that employees actually have a really good idea about how to structure work and KPIs such that they can achieve success and meet their criteria.”
On the flipside, co-creating KPIs also offers employees the chance to share information that might help identify potentially unfair KPIs.
For example, perhaps a manager sets a new business acquisition target for a team, but forgets that one of the key team members will be on long-service leave for a portion of the year. That information then helps leaders to adjust the goalposts.
3. Account for non-standard work arrangements
Adjusting performance targets based on employees’ unique working arrangements is a significant challenge for employers, even more so now that flexible work arrangements have become commonplace.
“It can be really difficult… particularly where there aren’t clear measures of output or production,” says Catanese.
“In my experience, the best way to be able to set targets that are fair and achievable is to firstly look at the business model. There will be a bottom line and a point at which the overheads and direct employment costs of a person mean that a certain level of productive output needs to be generated to make it cost-effective.”
This may be easier for employers in a profit-driven environment where targets are more black-and-white, he says.
“If it’s not a profit-making enterprise, [think about] what they are funded for, what the maximum cost is and what sort of output they need for that cost.
“Once that information is there, people can be more creative in thinking about KPIs. And, at that point, you engage the employees and have a meaningful discussion about what they are seeing.”
Ultimately, setting fair KPIs comes down to balancing what’s reasonable for the business as well as its people, he says. As well as the bottom line, this means considering the impact of difficult KPIs on employee morale.
“Businesses should remember that they do retain managerial prerogative – they can set performance standards, and they can set very high standards, but they need to weigh that against their ability to attract and retain staff,” he says.
“Obviously, if you’re asking too much of staff, they’re going to want something in return, or they may leave. And it’s difficult in some sectors to secure the best [talent]. So being reasonable, and having a high level of engagement about KPI setting is a good way to make sure that employees remain engaged.”
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