When Chasing the KPI Backfires

What a KPI Is

A Key Performance Indicator (KPI) is a concept that businesses draw on when managing their staff. A KPI is a quantifiable measure used to assess business performance. KPIs can be high-level or low-level: a high-level KPI gauges the performance of the organisation as a whole, while a low-level KPI gauges the performance of an individual department or employee.

In a company or team that runs on KPIs, the indicators are usually set by management for the staff or departments beneath them. KPIs tend to prize results over process, the aim being to give an employee or department a clear target to work towards. At an annual or quarterly review, the company treats whether an employee has met their KPIs as a key benchmark for assessing performance, and an employee who hits target may earn a bonus or a promotion. From setting the indicators to assessing performance, KPIs place a strong emphasis on efficiency and results, so that employees can keep track of their own progress at any moment and understand how their role can deliver the best outcomes for the business.

Examples of KPIs

Different departments, and different positions within a company's structure, will have different KPIs.

A marketing department's KPIs might include: lifting website traffic from 8,000 to 16,000 a day; growing a Facebook following to 300,000; or raising the website's conversion rate — the proportion of site visits that turn into customers — to 2%, and so on.

A customer service department's KPIs, on the other hand, might be: keeping customer satisfaction above 4; keeping call-handling time within 30 seconds; or keeping complaints to no more than 3, and so on.

These examples all have one thing in common: they are quantifiable. Real numbers make a target clear and concrete, providing an objective benchmark against which performance can be assessed.

How to Set KPIs

When setting Key Performance Indicators, managers can turn to the SMART method. SMART names five criteria for setting a sound target: Specific, Measurable, Achievable, Relevant and Time-bound.

"Improve the website's appeal" is not a good KPI, because "appeal" is not specific enough, nor can "appeal" be quantified.

"Raise blog traffic from 18,000 to 20,000 visitors a day within six months" is a good KPI, because it has a clear time limit and it turns "appeal" into a measurable "blog traffic". "From 18,000 to 20,000 visitors" is an achievable target rather than an unrealistic one, and blog traffic correlates closely with online sales revenue, so meeting the target should lift the company's turnover.

A specific target that can be expressed in numbers lets employees know what level their work needs to reach to count as on target, giving them a way to measure their own progress. At an annual or quarterly review, managers can likewise use these indicators to measure an employee's performance and, alongside the company's reward scheme, reward those who hit target — motivating them to keep striving in the future.

Where KPIs Fall Short

In recent years KPIs have drawn the heaviest criticism precisely because they can lead employees to fixate on hitting the targets, putting the cart before the horse and producing what is known as the "cobra effect". What does that mean? When Britain ruled India, the colonial government, trying to deal with a plague of cobras, decided to offer a cash reward for every dead cobra. Local residents, however, took to breeding cobras on the quiet to claim more reward money — and when this was discovered, the breeders set their cobras loose en masse, leaving the original problem unsolved.

Within a company, the parallel is that employees pour too much attention into the KPI itself, losing sight of the business's broader development and of the reasons behind the indicators, and resort to gaming the system to hit their targets — for example, drawing in customers with clickbait tactics, or prizing "quantity" so heavily that "quality" gets neglected. Granted, problems like these can be headed off by setting more thoughtful targets that keep employees' behaviour from causing side effects; but there is no denying that the KPI model has a flaw of its own — a culture in which employees strive only to hit indicators handed down from above is not a corporate culture worth encouraging.

In the article "What Is MBO, Management by Objectives? Learn How to Manage a Team with Psychology in 6 Minutes", I have shared with readers the possible problems of managing by objectives. KPIs usually start from the company's goals, yet they overlook employees' individual needs and sense of fulfilment, giving rise to the phenomenon where "for every policy from above, there is a workaround from below".

KPIs are now gradually being replaced by OKRs. That said, any management model has to fit a company's distinctive culture and environment to have the greatest effect. TreeholeHK is dedicated to providing professional training for companies of every size, turning psychological knowledge into practical skills; it has already brought innovation to a range of large enterprises, with training that spans professional skills and personal wellbeing. To find out how to use psychology for corporate training, do get in touch with TreeholeHK.