6 ways to encourage innovation through performance management

Tying individuals’ work to strategic goals can provide incentive for developing effective new approaches.

What can organisations do to ensure that employees are motivated to innovate and adapt in a fast-changing global marketplace? Effective performance management can make the most of employee talents and tie individuals' work more directly to strategic goals, according to Reimagining Performance Management, a new research report from AICPA & CIMA and the World Business Council for Sustainable Development. Among other things, performance management can drive greater adaptability to disruptions and encourage employees to try new approaches, two critical goals for organisations in the current environment. Here are some expert tips on how to open the door to innovation.

Link organisational strategies to individual goals. A good starting point is understanding how employees' output contributes to the achievement of corporate strategic goals. At one organisation, Funmi Adesida, FCMA, CGMA, principal consultant at ADF Business Solutions in Lagos, worked with a human resources consultant who created a strategy map that helped the company translate its strategies into individual goals that could be measured.

The one-page chart encompassed what the organisation wanted to achieve with each strategy, information that could be used to build KPIs. The next step was to set goals company-wide, then for departments, and finally for individual roles. "It was so simple," Adesida said. By tying company aims to individual and shared goals, "everyone could understand the implications of their own tasks", she said. That engagement can give them the information and the inspiration they need to innovate or adapt to change. Communicating about this process and its intent to staff and managers is also critical. "To get what you want, you must explain why you're doing something," she said.

Use measures that employees can control. In building KPIs, "employers should focus on factors that mean something to employees and that they have some power over", said Donny Shimamoto, CPA/CITP, CGMA, managing director of Intraprise TechKnowlogies LLC in Honolulu. Workers will be less likely to come up with innovative solutions or improvements if their goals have no immediate meaning to them, he said. One of his clients, a large convenience store chain, recognised that the people who manage its stores have no impact on gross margin or numerous other data points. As a result, their profit and loss statement for each store now includes only items within the store manager's purview, such as overtime, cash variation, inventory shrinkage, and fresh food write-offs. Items overseen at the corporate level, such as rent or utilities, are categorised under "other expenses".

In addition, to enable good decision-making, information must be accessible to employees in the field, perhaps through the cloud or mobile applications, Shimamoto said, and should be as close to "real time" as possible so that it is relevant. Workers should also have greater say on decisions that are within their realm of control and influence and that could lead to a worthwhile innovation. Empowering an employee means in part that he or she has room to try things that may not work out. "If they are too scared to fail, they won't take any action," he said.

Decide how to balance risk and new approaches. Unfortunately, at some organisations, leadership may encourage innovation but fail to recognise the roadblocks that prevent it from actually happening, said Adrian van der Merwe, ACMA, CGMA, the CEO at Sonum International Africa and North Wind Digital in Johannesburg. Corporations are generally structured to reduce threats, especially the larger they grow, but "innovation is the polar opposite of minimising risk", he said. "Innovation implies you're prepared to take a risk and fundamentally challenge the premise of the business. It can be difficult for those two goals to work together."

Developing a separate innovation group with its own performance measures is one solution. One of van der Merwe's clients retained its traditional KPIs and other standard performance measures in its primary business. At the same time, it chose a team to try new approaches and ideas and gave them the freedom to fail. Among other things, the group experimented with new technologies to see if they should be incorporated into the overall organisation. "Having different KPIs allowed them to take risks without worrying about being punished for them," he said. In this case, one KPI was how many success stories there were in the group's technology experimentation.

To include other employees not directly involved in innovation efforts, van der Merwe recommended offering bonuses or other rewards to people who, for example, come up with a great idea to improve how their department works. This approach makes it easier for all employees to contribute to the effort in their own ways.

Consider your culture. Organisations should be alert to the ways that culture can stifle innovation, van der Merwe said. For example, companies may offer rewards for innovative ideas, but employees may be reluctant to vie for recognition if they believe that their manager will resent having them step into the limelight or that public recognition for an individual might not be in sync with the culture of the local community or country. Steps to solve the problem might include recognising managers or others as part of the process, he said. According to Adesida, the organisation may also task the HR department with identifying and working with managers who hinder or fail to encourage innovation.

The corporate culture must also allow people to reveal what they don't know or to suggest something that may sound ridiculous. "If you ask a stupid question, you are corrected and you go away with knowledge," Adesida said. "It's better to look stupid than to be stupid."

Ward off potential disasters. Innovation works best if organisations set up guardrails to ensure that any potential failure will not be catastrophic. One of Shimamoto's clients asks employees to come to him with their solutions for problems and their explanations of why they might work. "That allows the manager to see the employee's thinking," he said. "It's possible to coach the employee through the process and along the way teach them about how to make good decisions."

In his own firm, Shimamoto emphasises the value of good values-based decision-making and educates staff on ways to translate the firm's values into decisions that will have a positive impact on corporate strategy and results. Employees are told that as long as they make decisions that reflect the firm's values, they won't necessarily be punished for a decision that goes wrong.

Calibrate performance to uncertain times. "When performance management systems and controls are designed positively, they provide a safe environment for people to take on responsibility and provide limits of risk for those who are innovative," the Reimagining Performance Management report states. By being creative and flexible, organisations can benefit from the kind of innovative and adaptable culture that will be better able to thrive in uncertain times.

Anita Dennis is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, FM magazine's editorial director, at