🤌Minimum performance
© A. Kavtreva, K. Tkalich, “TRIZ-RI Group”
Designing 'smart salaries'
Salary is the “gene of the company" which, upon examination, reveals much about the overall "health" of the organisation. The extensive experience (since 1993) of TRIZ-RI specialists in consulting indicates that there is scarcely any consultancy work that does not involve the creation of salary models for employees and/or the establishment of key performance indicators. More details ...
Alevtina Kavtreva, "TRIZ-RI Group" Мaster of management, expert developer of motivation systems and salaries, expert in TRIZ and business processes optimisation.
Experience in management consulting since 1995.
Ksenia Tkalich (Remizova), TRIZ-RI Group
Leading consultant and developer of motivation systems and salaries, expert in TRIZ and business processes optimisation. Experience in management consulting since 2004
Definition
Minimum performance is the lowest acceptable ("threshold") value for each performance indicator. When this value is not achieved, the indicator is considered "failed". The minimum performance is used to guard against situations where one indicator is artificially "inflated" due to another, preventing the overall rating from being accurate.
Example 1
A new sales trader was hired in the sales department. His work was evaluated using two performance indicators: "turnover" and "number of deals per month", which together determined his overall performance. The benchmark values for each indicator were: £27,000 for turnover and 12 deals per month, respectively. Both indicators were assigned equal significance (weight).
The basic component of his salary was set at £250 and the variable component (bonus) was set at £700 (if the benchmark tasks were achieved to 100%).
Therefore, the salary was calculated using the following formula:
Total salary = Basic component (£250) + Bonus part, where the Bonus part = £700 × Overall performance.
This sales trader consistently achieved only 4-5 deals per month, and his turnover was "inflated" by deals with large Customers. At times, his performance in turnover reached 110%.
Thus:
Performance in the number of sales = 4 deals / 12 deals = 0.33 or 33%.
Performance in turnover = £30,000 / £27,000 = 1.1 or 110%
Since the weights of the indicators are equal, without considering the minimum performance, the average total performance = 72%. And the total salary = £250 + (£700 × 72%) = £754.
Surprisingly, in many companies, a sales trader who achieves only 33% of the benchmark number of deals will receive this £754. Yet, any school pupil who completed only one-third of a task would simply receive a failing grade, with no credit for 'partial' completion.
Naturally, if the sales trader had achieved an abnormally low number of deals (say, one or two), this would have been noticed immediately. However, in real business, significant losses are often caused by employees whose inadequate performance goes undetected – especially those whose performance is "average" (achieving only 50% is already questionable, not to mention one-third). Ironically, such employees often pass unnoticed, and as a result, many companies are burdened with well-paid under-performers. And unhappy managers are left seeking ways to "motivate" them.
Continuing with the same analogy, if a school pupil has missed 5 out of 10 algebra lessons and 1 out of 10 geometry lessons, his knowledge of these subjects is likely to be minimal. Therefore, the 'average attendance' (70%) would be imprudent if used as an assessment criterion.
Similarly, if a sales trader secures significant deals with a couple or three Customers but neglects the company for the rest of the month, he is mirroring the behaviour of such a school pupil.
The minimum performance safeguards against such flawed evaluations.
Should one of the indicators fail to meet the "threshold value", then the overall performance is assessed as follows:
Option 1 ("extreme") - towards "0" (i.e., no reward at all). Option 2 ("benchmark") - towards the lowest performance value.
Let's introduce a minimum performance in our example. Suppose the "threshold value" for each indicator is 85%.
Then, the overall performance for Option 1 will be 0, i.e., the total salary of the sales trader will be £250 (he receives only the basic part).
For option 2, it will be 33% (the lowest indicator), i.e., the total salary consists of £250 + £700 x 33% = £481.
For each enterprise, the minimum performance level is determined by the work technology, but even for the most "rubbish" technology, it should not be less than 70%. In cases where an employee consistently fails to achieve the minimum performance, it is advisable to check whether the benchmarks are too high. If they are not, dismissing the employee may be preferable, as their stagnation can significantly impact the business.
However, caution is advised: if the threshold for minimum performance is set very high (above 90%) and the penalty for not meeting it is severe (option 1), then employees have a strong incentive to resort to cheating and shortcuts, as demonstrated in example 2, rather than striving to improve results.
Therefore, using a combination of a high threshold for minimum performance (above 90%) and a strict penalty is not recommended. It is illogical for the "threshold" to be equal to or close to the task itself.
Example 2
In a B2B equipment company, sales traders are offered a relatively high basic salary along with a high minimum performance threshold – at the level of 100%. Thus, losing the reward was easy (when the threshold is not met, the bonus part is not paid).
The management's rationale was: "We demand a lot, but we pay well."
As a result, when employees realised they were falling just short of the benchmark by a few percentage points, they would ask customers to delay payment until the next month. This way, they were content with their substantial basic salary for the current month, and all deals were postponed to ensure a guaranteed reward the following month, even for a lower number of deals.
Let's now tackle a more complex example, where the task occurs at a different system level.
Example 3
The Supervisor of a retail chain is responsible for the operation of numerous stores. The overall performance of the entire chain is evaluated by considering the performance indicators of each store, which include the store's revenue, product turnover, the quality, net price of non-liquid assets, grading, expired products, etc. In general, the chain supervisor achieved satisfactory results. However, this was due to the performance of the best stores. Some stores were distinctly unprofitable, but the supervisor neither tried to develop these stores nor considered their closure. What should be the solution?
Let's set a minimum performance threshold. Here, we have two options:
Option 2 ("benchmark") – identical to the example mentioned above.
Option 3 ("complex") – calculates both successful and poorer values.
Option 2 establishes a rule: if any of the stores fails to meet the minimum threshold for overall performance, the overall performance of the chain supervisor is to be equated with this lower value.
Option 3 is slightly more "liberal" than option 2. It recognises the likelihood that several months may be required to achieve improvements in a store's existing operations. Thus, until a reorganisation occurs, its performance, in its current state, cannot realistically meet the benchmark targets.
It became clear that there is a risk: when the chain supervisor, upon noticing that a store fails to achieve the minimum performance and recognising the lengthy duration required for improvement, might cease striving for the best results and neglect the performance management of other stores. After all, his overall performance would be equated to that of the poorest-performing store in the chain regardless.
Option 3 offers a way to circumvent such demotivation. The overall performance under option 3 takes into account both the "general" and the "worst" performances and is calculated as follows:
For example, the retail chain comprises five stores. They are all equal in significance (i.e., the "weight" of each is equal to 20%), and the performances for the current month are as follows:
86% in the first store,
93% in the second store,
54% in the third store (the lowest value),
110% in the fourth store, and
96% in the fifth store.
First, we define the overall performance of the chain by considering the performance of each outlet and its "weight".
Overall performance = (86% + 93% + 54% + 110% + 96%) × 20% ("weight") = 87.8%.
Then we identify the lowest value. In our example, it is 54%.
Now we calculate the overall performance, taking into account both the overall and the lowest performances. Their "weight" in this case is equal; therefore,
Overall Performance = (Overall Performance + Minimum Performance) / 2 = 71%.
Clearly, if no store had "failed", we could have concluded at section 1. For instance, if the performance of the third store were not 54% but 90%, then the overall performance of the chain would be as initially calculated – we would not have any "failure"; consequently, there would be nothing to adjust.
Overall performance = (86% + 93% + 90% + 110% + 96%) × 20% ("weight") = 95%.
Let’s summarise:
If we had considered the minimum performance in the third example, the overall performance would formally have been 87.8%, and it would not have accurately reflected the situation, since one of the stores in the chain "failed".
Using the minimum performance followed by Option 1 would result in an overall performance equal to 0 – this is clearly incorrect in this context.
Using the minimum performance followed by Option 2, then the overall performance would be 54%. The inadequacy of this option has been discussed above.
Using the minimum performance followed by Option 3 would result in an overall performance of 71%. This approach is most appropriate here.
If there were no "failures", the overall performance would be 95%.
In the three examples provided above, all performance indicators had the same "weight" (i.e., their significance was considered equal). Let us now consider an example where the "weights" of the performance indicators differ.
Example 4
Compared to the situation described in Example 2, the variable portion of the salary for a manager responsible for sales in another company, also operating within the B2B sector, was significantly higher than the basic/constant salary. This variable component was determined by two performance indicators:
Contact Performance,
Sales Performance.
Contact Performance takes into account the number of telephone calls and meetings with Customers. This measure is crucial for distinguishing situations where no sales occur due to a lack of engagement with Customers, or where there are numerous contacts and calls yet no resulting sales.
Clearly, “Contact Performance” is deemed less significant than “Sales Performance”. For instance, it has been established that:
The value/weight of Contact Performance is 20%,
The value/weight of Sales Performance is 80%.
What happens if, during a financial month, the manager achieves the minimum performance level for any of the indicators affecting the variable portion of their salary (which, as a reminder, is considerably higher than the basic salary)?
Let's assume the minimum performance threshold is set at 85%.
Consider a particular month where:
Contact Performance was 70%, below the threshold,
Sales Performance was 99%, not surpassing the threshold, but nearly reaching the benchmark.
Examining our three options:
Option 1 results in an overall performance of 0%, which clearly does not reflect reality.
Option 2 yields 70%, the lower value, but does this accurately reflect overall performance, considering the second indicator's higher significance and its considerably high value?
Option 3 calculates overall performance as 81.6%.
Overall performance calculation: 70% × 20% + 99% × 80% = 93.2%. The lowest value = 70% Considering both general and lowest values, the overall performance = (93.2% + 70%) / 2 = 81.6%.
In this scenario, Option 3 is the clear choice.
By the way, taken into account here for disparate values:
If the employee fails to meet the threshold for a "critical" indicator, the overall performance is equated to the lowest value – similar to Option 2.
If the threshold is not met for a "less critical" indicator, that result can be disregarded, setting the overall performance equal to the value of the "critical" indicator.
For Example 4, this means the overall performance would be 99%. Conversely, if:
Contact Performance were 99%, and
Sales Performance were 70%,
Then, the overall performance would be 70%.
We hope this explanation was straightforward for you. It can easily be represented in a simple table:
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