Performance Management Systems Decoded
In today’s episode, we have Rupali Sharma, ( VP, Human Capital, Matrix Partners India ) and Rajinder Balaraman, ( Director, Matrix Partners India ), they cover performance management systems & HR best practices for early-stage startups. We work closely with founders in this area and have tried to summarize some of the key learnings from our experience.
Salonie:
Hi & welcome to Matrix Moments, this is Salonie an in today’s episode we will be talking about performance management systems & HR best practices for early stage startups. We work closely with founders in this area and have tried to summarize some of the key learnings from our experience. Through this episode you will learn more about: performance management & incentive systems, how the company culture plays an instrumental role in this, how one can go about setting up an effectiveperformance management system without over-engineering the process – as well as the recommended tools/softwares that can be leveraged. We also cover incentive structures viz a viz your company stage and much more. Tune in.
Rupali:
Thank you for Rajinder for being a part of this episode, indeed a pleasure to be on my first Matrix Moments episode and especially on a topic that is professionally very close to my heart.
Given my background of 11 odd years in multiple facets of human resources in my role as a VP human capital at Matrix Partners, I work very closely with founders to support them in building the core founding team. And one key trend that stands out is that startups tend to generally focus more on talent acquisition versus the other aspect of human resources early in their journey. But there are very simple HR practices that one can easily adopt even at a very early stage.
So knowing what we know and seeing so many businesses scale up and some scale down one can easily adopt that in a company’s evolution stage be it hiring and onboarding, organization culture, performance management, incentive systems, organization design talent management and succession planning and employer branding. We've done previous podcasts on hiring and onboarding and one can refer to Extreme Hiring by Vikram and Extreme Referencing by Tarun. And we've done one podcast on Crafting Your Company Culture with Avnish and Ahana Gautam and Rajinder.
So in my role at Matrix in addition to helping founders identify and hire great talent, I do get pulled into some of these topics very frequently. So it is crucial I believe to look at the human capital function holistically versus very purely from a talent acquisition perspective. Even though a team at an early stage might not have a very dedicated HR professional on board. And generally, we do advise companies to have a dedicated HR professional in place as they approach a series B stage, if not already done at a series A stage. So today in this podcast we’re going to deep dive on the topic of performance management and incentive system. We'll be hearing more from Rajinder on some of the views he has on these topics.
Rajinder:
First of all, thank you for seeding the thought that we do this and for all the content that you put together on this as well. It certainly helped me collect my thoughts as I was preparing for this. Performance management- I think you kind of hit the nail on the head. It's one of those topics which tends to get ignored in the first year maybe first two years of a company's journey. But it is supremely crucial at a very early stage. I think there is no doubt that the founder is often building their company either for the first time or the building towards their vision this new project or vision that they have. But once they grow beyond the organization size of 30 or 40 people they don't necessarily know what everyone in their team is doing on a day to day basis right. They can't maintain direct oversight over the execution activities of each team member. And so it becomes super important. We generally invest in seed, series A and occasionally series B companies as well. And so we are often investing in companies where the team strength is somewhere around that mark right 20/30/40 people. And that's kind of the place where founders know what everyone is doing. Once you get to a scale of managing a hundred plus employees it becomes practically impossible, right? And then there's multiple management layers also that gets set up there's possibly a VP layer there's possibly a manager layer. And so all the more important for a performance management system to be put in place.
I think the other point that I wanted to kind of bring up is that once you start adding key hires both laterally, or even with freshers, many people are still very early in either the their professional careers or in their startup journey and they don't necessarily know how startups are built. I think it's very important for a founder who has a vision and who's constantly thinking about how do I get to product-market fit? How do I drive execution and faster execution to win against my competitors. It's very important for implementing some version of a performance management system to drive that execution. Otherwise, people will end up working on different kinds of tracks, and people are not necessarily aligned and working on the key initiatives of the company. And that feedback loop that could take weeks or months, sometimes it ends up taking quarters or years. And that's the difference between life and death for a startup right? You need to accelerate the execution journey. So I think it's just absolutely imperative that a performance management system is put into place right up front and very early. You cannot scale, you cannot drive execution if you don't have it in place.
I think another kind of unsaid topic is performance management and culture somewhere also do intersect right? I mean there's, I’ll just put it out there and say when you're building your team for the first time we are trying to add people to the team who are obviously high performers but also people who fit the culture. And if I just put people on a simple two by two and you say high-performance + great fit for the culture. I mean these are the people you want to just retain, incentivize you somehow make sure that they stay committed to the company's purpose. There may be people who don't perform and who don't fit the culture. I think the answer there also is very clear right? That these people just don't belong. I think it's the other two quadrants that are frankly interesting right? At times you have great performers but people who just don't fit the culture. And I think those are the people that you have to really think hard about right. Because my personal bias and I think I've had other colleagues at Matrix also echo this, those people I believe don't fit in your company because they may be great performers in the short-term but long-term they will not be of value for the company because they just don't fit the culture. And then there are other people who perhaps aren't performing up to the expectations that you may have had but who are great cultural fits. I think the question to be thought through as Hey is there something about the role that they're currently in and the targets that they are driving towards that maybe they don't have specific capability around that particular role, and where can you actually plug them into another function within the company to make sure that the overall company execution effectiveness continues because they're a great cultural fit performance is somewhere close to the mark maybe just short at the mark but maybe it could actually inflect if they played a slightly different role. So I do think that when you are building this company getting to a few hundred people in your org, in performance management and culture go hand in hand, you have to measure both.
It’s very easy for us to sit and say Hey this person fits the culture, because of whatever reasons but then there's also it's also important to objectively measure performance. And if you don't have clear objectives that you've set measurable outcomes that you can measure on a regular basis then I don't see how you scale.
Rupali:
Thank you Rajinder, that’s very helpful. And I think I'm sold if I was a founder. But I think as a recruiter I also know how difficult it is to get a high performer on board. And I think that just half the battle won if you're not able to engage and retain them. I think the problem sustains. I would want to quote 2016 publication by PWC. And I think that would give us another reason to go for PMS (Performance Management Systems) would be it shows very clearly that the perceived effectiveness of performance management system by your employees and the employer itself is very high when the company is small in size. So in fact on a scale of one to four, where four is highly effective. The perceived effectiveness towards PMS is as high as 3.43 if the company sizes less than 1000 employees and naturally enough it goes down as the number of employee goes up. Right?
Rajinder:
That makes perfect sense, right? It's more the company more important it is to make sure that everyone is kind of driving towards the same objectives because it's not like a large a multinational where there's enough companies enough functions et cetera. So I fully agree with you.
Rupali:
I agree. But on the same topic what are the no brainers and must do’s?
Rajinder:
So I think let's set theory aside. I think if you just put it into basics, first and foremost it starts from the top. Every founder should have a fixed and a variable comp structure for themselves as well. And I know it's counterintuitive, but I can't recommend it highly enough. It's very hard for a founder to implement a performance management system in their own company if they don't measure themselves also in some objective way against that same system.
The second thing is I think every hire that you make founders are trying to hire in a competitive talent market right? I think every new hire always expects there to be some carrot right. I need to see some version of either you're meeting my compensation or your meeting my current compensation through some version of an incentive. So I just think every key hire should have anywhere between 20 to 50% of their CTC coming through variable pay. And this is separate from ESOP, right? The more senior you go the variable pay obviously will end up being higher but even at a junior level, I think it is just absolutely imperative for people to be aligned through variable pay. And I think the rules for this are actually very, very simple right. First and foremost is the variable pay has to be something that is measurable. It has to be something that is paid out on the basis of some factor that is A measurable, B something that is really objective right. It can't be something that you and I disagree on. And then the third is I think the best companies and especially those that are in the tech industry I think it's very possible to make these real-time. I mean imagine like if you had a salesperson or a BD person actually knowing where they stand almost on a weekly if not daily basis this is something that they probably know right? This is the how many customers I have onboarded, how may suppliers I have onboarded, you should absolutely be able to measure it and be able to tell people on a real-time basis where they stand.
I think the second thing you need to think through is obviously there are some functions where things are more measurable than others in terms of output. And there are some functions which are more measurable in terms of input, right? But I think both of these need to be managed in more or less the same way right. Outputs can be measured. Inputs can also be measured. Outputs can also be real-time. Inputs can also be more or less managed real-time. So I don't think the rules change depending on you can say Hey my sales and BD function is measured in output but what about my tech product function? I think tech product can be measured as well. There's clear inputs which drive growth - it's product releases, it's version changes et cetera. which are very very easy to measure.
I think the other thing to think through is how should individual contributors be managed differently from same managers and here I would lean on some things that we've learned from some of the founders that we work with and I've had the good fortune of working with Asish, Ruchi, Bhuvan, Vasant and Nitin and others at Ofbusiness, I think fantastic team. I think this is one insight I picked up from them which is, for individual contributors actually you just need to manage them differently. They can't have end metrics they're chasing right. They're more junior in your company typically, they have less experience. They need to have ideally one metric maybe two max, and they generally feel somewhat ill at ease it if they don't know where they stand almost on an every quarter basis. So this whole notion that what we will do reviews maybe once a year we will kind of decide where your performance stands at the end of the year. I think you can actually measure it every quarter. Maybe even measure it every month. If with tech you can actually probably measure it every day right. So why wait until the end of the year. To let pay people out and give them that satisfaction what you did X, you what Y, especially at an individual contributor level.
And then I think the third thing is there should only be metrics that are sanity metrics right? No vanity metrics. There's more reason to like reward people on GMV. Right. I think because GMV can be artificially inflated by discount. So it's much more important than to kind of set some version of a sanity metric maybe for some companies that's cross margin, maybe for some companies that's contribution margin. I think because sanity metric, pick very few metrics that you pay out on for an individual contributor. The second stakeholder in the system is the manager, I mean and of course, there are cascading levels of managers. I think the simple insight here again that I picked up from them is that managers in performance should not be only a summation of the peoples that they manage and their performance right. Every manager should actually have an individual set of targets as well. And the reason for this is two right. One is you'll have to be able to walk the talk right? You can't just be managing a team and expecting them to deliver for you when you're not out there yourself in the market interacting with customers, selling, or building in the case of tech. So its just no way that a manager can command the respect of the team without actually being out there and working as well. So there has to be an individual target for a manager. And then the second is a team target. Which is some version of a summation of the team that they manage. You can figure out whether the weight it should be 50-50, 40-60, 30-70. I think every company can take something different but managers absolutely should have an individual target and should also have a team target. And ideally, all of these should be cascading right. In the sense that it can't be that the team's targets are very different from what the manager's targets are because then that is clearly overall lack of alignment which will roll-up.
The next set of insights I picked up was how do you actually decide what the payout is? Right. Which is let's say you've kind of set some version of a metric, for me maybe my metric is a number of customers acquired right. So there was an expectation set at the start of the year. This is our growth target. This is what it translates to in terms of new customers that we acquired. How do you payout? I think here the answer is very simple because the more complicate it, the more that people don't understand. Right. So if you tell someone you have achieved 17.5% above your target and therefore X, it just doesn't make sense. So I would say step simple bands I would say just keep a simple ABC kind of a band exceeds expectation, meets expectations below expectations, and decide what that band is right. Maybe it's plus or minus 20% maybe it's plus or minus 25% kind of depends on what the company is what stage it is. I would say one more choice for you is should the payout happen only on the basis of these ABC bands or should it also somewhere link back to the earlier point that we made which was around culture right. Which is should an individual only optimize for their performance or should they also optimize for their peers and their colleague's performance. And I think there the insight was very simple that, if you only reward individual performance then it ends up being a rat race. Right. And then you're kind of at the average like you cannot ever raise the average level of performance of the entire company because basically everyone is kind of somewhere competing with each other. So I think there is a there is an importance for seeing whether an individual is actually not only able to raise their performance but also raise the performance of someone else. not just in a managerial capacity but in a lateral capacity some version of a cross-functional capacity. I think it's supremely important. So think about whether you want to add some kicker for how people are able to raise collective performance. Cause then you can keep raising the overall bar right. I've gone on for a long while so I'm going to pause but maybe the last point I'll make is, in general the principle of under promise over deliver is great.
The other thing that I've heard from some companies I won't reference who is that it's not just about fixed and variable compensation. It's perfectly okay to actually set up an incentive system even on top of that. So that truly high-performers see that if they're able to drive certain outcomes then their payout actually links very closely to the overall company performance. So take for example let's say it's some version of hyper-local business right? And let's say you are the manager for a city manager. Now if your business was supposed to be call it a 10 million business at cross-level and let's say one and a half million dollar business at the gross margin level but you've kind of hit it out of the park and that 10 million businesses it's not even like 10, not 12 or 13 or 15 but you've gone and built something like much larger let's say 40 right? I mean absolutely. There should be a clear incentive payout. I mean it's a no brainer right. Such an individual it shouldn't just be that Hey this person has done well so let's promote them. It should be well beyond right? Because that person has really contributed to the company's success materially that company could go on to raise the next round of financing well in advance of the earlier plans they may have built very strong moats in that region to supply-demand et cetera. I think you absolutely have to set up an incentive for your high performers that go over and above just the normal performance stuff that we do. A long answer to a simple question, but that’s my view.
Rupali:
No, interesting. I'm going to take you back to one statement you made about founders and key employees having variable component and it has to be top-down. But I'm going to deep dive here Rajinder, why do you think founders or key employees, should have variable competent considering they will have so much equity already in the company.
Rajinder:
Yeah, see. I think it's very important in the context of founders and key employees for multiple reasons. I think the most obvious one is that equity is a long-term incentive versus variable pay as a short-term incentive. And you have to manage both the short term and the long term.
The second is I think founders and many key employees or key hires actually take meaningful pay cuts. Founders of course are going after the larger dream of building a very, very large company. But still, I think they're often on very modest salaries, because I know that they recognize that every additional hire, key hire that they can make in lieu of the compensation that they're giving up maybe actually helps the company accelerate faster towards this vision. So there has to be some way at a more structural level to actually even for founders make sure that they are rewarded if the company does really well.
We'll come to it in terms of tools, but let's say there was an annual plan and let's say the founder has beaten the annual plan. I think it's perfectly reasonable to have payout set up for founders as well. I think these conversations are very important to have very early in the company's journey. and how do you have a conversation with a key hire saying that Hey listen what 40% of your CTC or 30% of your CTC is going to be in variable compensation when you yourself don't have variable compensation. I think you have to walk the talk in every respect. So it aligns everyone. I think it's just very simple. It's very clean, helps manage short term and long term. And, it forces everyone in the org then to actually spell out what their goals are. If you have a performance management system in place and everyone will be very clear on what are the goals that we have as an organization what are the measurable targets that we are driving towards because basis those measurable targets then you're going to actually pay out the next. So it forces clarity for founder's key hires and then obviously down to the individual contributor level as well.
Rupali:
Okay great. Interesting. So pivoting from the topic of why we need PMS. To the topic of how do we implement a good PMS process because we've seen there are so many different kinds of tools and framework available in the market. And in sometimes it can get very confusing. So in your opinion what would be some of these tools that a startup can do get?
Rajinder:
I mean I don't want to complicate this. Let me frame it more in terms of the key processes. And then I think there's the software or the more tools part of it. First and foremost if you don't have a process in place no software is going to help you.
So let's start with the basics of what are the processes you should set up? I think the most obvious one is what's the annual plan. The reason the annual plan is important is actually the founder and the board actually then align very clearly on what is the company driving towards over the next. I think it ties very closely into whatever incentive and performance management plan you design because another thing that I've seen in companies is they create an incentive and then they change the incentive three months later or six months later. And it just creates havoc, because people who are running towards a certain goal, incentives drives behaviors in some ways. Culture also drives behaviors but incentives drives behaviors. If you will have one incentive for six months and another incentive for six months people's behaviors just keeps changing and it just confuses everyone around them. So I think an annual plan is very important because then it's clear 12-month view of what the company's trying to achieve. And then basis that 12-month view you can actually design all of the performance indicators and incentives that you would then cascade down starting from the top all the way down to the last person. I think the other thing is you have to pick one of the frameworks that are out there. I think a balanced scorecard is one and I encourage people to read books on this, OKR’s is another one which is very often used in the startup ecosystem. And actually, I'd like to call out the entire X to 10X team Saiki, Neeraj and others. They've been very kind to multiple companies in the ecosystem including some in our own portfolio to actually educate them on how to actually drive execution effectiveness through OKRs – and it’s very simple, there's objectives, there's key results that are measurable that aligned to those objectives. So there is an annual plan. How does that annual plan then cascade down into what are people working towards in terms of objectives and what are those key results that they are trying to drive which are measurable and controllable in some ways. OKR’s is a great one Balance score-card is a great one. I think there are a few more now that people use.
I think the other process that is absolutely important is reviews and reviews linked to 360 feedback, hopefully from my arguments about I I've made a case for why it should be more frequent rather than less frequent because especially at a junior level I think it really helps drive performance. I think these are the basic ones I would say don't over complicate it there should be an annual plan linked with annual plan, there should be MIS statements that are available to both the board and as well as to each individual team within which is driving projects so that everyone knows where they stand and then figure out between OKRs, balanced scorecard one of these.
Rupali:
So simplicity is the theme. I get it.But do you also feel that having a dedicated software which manages performance management system will help a team better than not having it?
Rajinder:
In general Yes. I have seen some companies actually just develop something in house and something simple. I think that's great. I think there are some software out there. I think you've spoken to a few companies you should reference I've seen some companies use Excel now Excel isn't great because it isn't a single store of truth, files float around, we can modify data whatever. But an early stage. You should just assume that if you have one internal champion who's driving the overall performance management function they can manage all of this on Excel too. I think it's about the process. It's not about the software and if you can establish the process and make sure that people are tracking it. And if it's linked to incept payouts and incentives I think absolutely people are going to be all the more interested in making sure that it's the single store of truth. So yes software is helpful. We are a tech investor so yes of course we believe in the value of software for variety of reasons but even in the absence of software don't let it hold you back excel is not that bad.
Rupali:
No no. I agree with you. I think Excel is great. Comparatively cheaper also and I think almost everybody knows how to use it. But I would like to call out one pitfall Rajinder there from my personal experiences there is this tendency of history getting lost many a time during transitioning and standardization can be an issue because we all love to have our own version of excel. I think one theme would be that we need to ensure that standardization is there on how we are measuring and what we are measuring and also to ensure that there is continuity of data. We're not losing that. I think if you're able to crack those points excel sounds great. But I think with a pinch of salt that as we scale up we should be open to having more user friendly as the number of employees goes up in the company. Yeah. I think from my experience I can definitely call out a lot of tools that a lot of companies use. I personally use some of them I think top of my mind SuccessFactors, Workday, are some tools that larger companies use. A lot of larger companies also have their in house tools, but I think smaller firms can stick to lean light PMS systems like Zen HR, Keka, Zoho are good tools.
Rajinder:
That's helpful.
Rupali:
So Rajinder, assuming that we have convinced most of our listeners and founders to have a PMS system in, please. Any last word of thought for people who are still not convinced.
Rajinder:
I’ve clearly not done a good job if that's the case but I will I'll accept it, but I'll say something very simple? I mean performance management systems drive performance and I don't think any founder is starting a company out there to now not succeed and win. So if you want to drive performance you have to have some version of a system in place. I mean just let's look at any company that's gone on to become successful. There is absolutely 100% some version of a performance management system in place. The sooner you've adopted it the better it is for you because you will be able to build a company that is aligned much earlier. I mean in the first few months everyone is just hustling trying to do something. But at some point, some structure needs to be put in place after you reach a certain size of the number of employees et cetera. So performance management systems have to drive performance and that should be the expectation going in. It's not a guarantee but that should be the expectation. I think the second thing is I think employees feel far more satisfied in a company where there is some version of a meritocracy in addition to of course a great culture, And what better to judge a meritocracy than a performance management system. without a system in place. I just shudder to imagine how people are interacting with their peers, their managers, their counterparts across functions, everyone kind of trying to push and pull to drive their objectives forward. I just can't even imagine.
I've been fortunate to work in organizations where I've always felt that there's a high degree of clarity around what we're going after. And I think the system is largely a signal of that. And I'll close by saying that if you have a high performing org, if you have employees who feel like there is a meritocracy that they are part of and that the success can be successful at, I think eventually you will end up building a fantastic organization. Like your best performers will never leave. Your worst performers will very quickly figure out that this is not the place for me. And every single new employee that you're trying to convert to join your company or every campus hiring program that you run or every lateral hire that is difficult to convince will when they are doing the reference checks on you, will find out that Hey, you know what this company actually walks the talk, under promises over-delivers on compensation and incentives. And as a meritocracy I mean I can't, if I were a founder it would make me very proud if someone came and told me that I really want to join your company because of these reasons.
Rupali:
Great thank you, Rajinder for your thoughts and inputs, really enjoyed being a part of this session and hopefully, our listeners find this helpful. And we hope to come back to you with more in the future. Thank you from our end.
Rajinder:
Thanks, Rupali. Appreciate it. And thank you, Salonie for setting this up thank you.
