How to build a High Performing Organization through KPI Setting

There are many ways to build a High Performing Team but one of the factor that contribute to this is KPI setting. The reason is obvious as it is related to what everyone is looking forward to which is Bonus.

First of all let’s understand there are few types of organization out there in the market. Each type practice different way of deciding on the Performance Bonus.

Let’s start with the most popular one Multi National Company or better known as MNC. Firstly, every employee will have their own KPI (Key Performance Indicator) which is to measure how is the performance of the employee. This is only part of the performance appraisal and other includes competency and attributes rating. All this will add up to the individual score to see their rating. To make it easy, usually there will be 5 rating (1 being the lowest means low performance and 5 being the highest means high performance). I would say most of the people around 80% get 3 because that’s the average and 10% is at 4 or 5 which means top performer and 10% will be at below 3 which is low performer. This is following the bell curve concept which many organisations are still using which I strongly disagree. Bell curve does not promote rewarding top performer rather believe that in every organization there will be 10% top performer, 10 % low performer and the rest are all average. This is also due to the fact it is tie back to the amount of bonus payout available and the top management always need to do calibration to either calibrate the high rating or force distribution of low rating to the employees in order to meet the percentage ratio.

Personal appraisal is just one part of the performance bonus and annual increment. What is more important as the deciding factor if you will get bonus for that year is how well the company perform. Most companies operate on achievement of Sales Volume, Sales Revenue and Profit. Some do take into consideration of their Market Share command. I will break all this down one by one for you to understand.

Sales volume refer to the quantity of the product being sold. This is important because all companies want to sell more of their products into the market. Just take an example of instant coffee, if the company able to sell more than previous year, that indirectly means they have taking up competitor’s share in the market. Either that or they have able to grow their portfolio of product as an expansion line and this is a strategy in order to take up more market share.

Sales Revenue is referring to the value that the company achieved by selling their products to the market. If last year the company did a $100mil sales revenue and if this year the increase is 10%, that would mean the company want to hit $110mil sales revenue. This is important because by having higher revenue, that will mean the company will be able to achieve more profit provided that they did not sell their product at discounted to achieve the sales revenue. Usually they would have done this during the AOP (Annual Operating Plan) or sometime some companies call it budgeting to factor in all the products, sales price and quantity.

Profit is the most crucial factor and also the deciding factor of performance bonus. Profit is after the company sell their products to the market, the revenue that comes back to the company after deduction of all expenses and cost will get the PBT (Profit Before Tax) and PAT (Profit After Tax). Why do I say this is the most important factor? Let me give you example how the sales revenue and sales volume can be achieved but might not necessary means there is profit.

Eg. 1. Sales Volume 1,000,000 cartons selling at $10.00 per carton = $10million

Eg. 2. Sales Volume 1,100,000 cartons selling at $9.00 per carton = $9.9million

Let say this company needs to achieve 1.1million cartons and $10million sales revenue. They can achieve $10million by increase the product price to $10.00 but their sales volume decreases and not hit the target. If they want to hit the sales volume target, they might need to reduce the price per carton which cause them to miss the sales revenue target.

A simpler understanding for many would be, luxury brand like Hermes or Burberry only need a few clients to shop at their premise and will bring in higher revenue compare to a high-street brand that selling to the masses need more clients to bring in the higher revenue. You can’t expect to hit both at the same time unless that year the company is doing very well with their marketing campaign, product launches and their market activation is world class.

Even if the company achieve sales volume and sales revenue but if the company is not making profit, they can’t give out bonus as well. That is why profit is one of the most important if not the only important factor to decide on the performance bonus.

Another type of companies would be the SME (Small Medium Enterprise) which is mostly are local company set up. I would say most if not all do not have a proper appraisal format or structure of performance bonus and annual increment. Most of the time, they will declare bonus if the company is doing very well in term of sales and having profit. The quantum of the bonus pay out is subject to the company owner and do not have a basis of how it is being calculated. You might be getting 2 month this year and the following year 1 month which you will not know how to get that amount.

In term of annual increment, regardless what type of organization, it is ranging between 4% - 8% for normal increment (4% - 5% for normal, 6% - 8% for high performer). Only if you get promotion you will start hitting the 10% - 15%. It is extremely rare to get beyond 20% increment in an organization hence why there are people moving to other companies because you will get more than 20%. My highest is close to 50%.

After understanding how the performance bonus pay out based on your own KPI and the company KPI, sometime it depends on your role. For example, my previous role was a regional role so I am supporting a larger region. That means there will be a regional multiplier in my performance bonus pay calculation where the performance of the entire South APAC affects my pay out.

That bring me to the end of this subject and that is why when a company is not paying bonus due to they did not achieve their revenue, sales or any other KPI will affect the morale of the people because those are not the key factor. The key crucial factor is the profit. Can you imagine a company that is making profit yet not paying their employee’s bonus yet you are expecting the employees to continue serving and helping the company to achieve their goal?

If you have any questions, feel free to post it here and I will answer it or you can also direct message me if it is too sensitive.

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