We’ve been talking about how to develop a value-enhancing strategy that’s tightly aligned with your organization’s vision. Management, shareholders, investors and other stakeholder groups are all on board. Your projects and processes are all pointed in the right direction.

Now you need to make sure that your employees stay as focused on creating value as you are.

The traditional means to this end is performance management. Unfortunately, many of the usual approaches to rewarding performance have become as outmoded as the carrot and the stick. Some are too heavily skewed toward rewarding individuals at the expense of the team. Others reward short-term performance at the expense of achieving long-term value creation.

Some compensation methods – such as passing out stock options like candy – are even coming under attack by regulators and being scrutinized by shareholders.

The Holistic Approach
There’s a better way: Taking a more holistic approach to performance management. That means fostering a value-driven culture that rewards people for their contributions to long-term value creation process.

Easier said than done.

Even the highest performing and hardest-working employees can be unclear exactly how their jobs and daily tasks can create or destroy value.

In last year’s Deloitte Consulting LLP/Economist Intelligence Unit survey for the “Adopting the Value Habit” research paper we asked respondents to indicate their agreement with the following statement:

“Employees are completely aware of the company’s strategic objectives and how their own job performance goals are linked to these objectives.”

Only 8% of respondents completely agreed. Another 26% agreed somewhat. That leaves two-thirds who have employees that either:

• aren’t aware of their firm’s strategic objectives, or
• can’t explain how their jobs fit into the picture.

That’s scary.

Survey participants were also asked whether individuals are rewarded with incentives linked to results in meeting strategic targets. Only 10% completely agreed and 31% agreed somewhat – a slightly better response rate, but still disappointing.

With this sort of mindset among employees, it’s not surprising that many companies struggle to create value.

Source: “Adopting the Value Habit (And Unleashing More Value for Your Stakeholders," Copyright © 2006 Deloitte Development LLC, in association with the Economist Intelligence Unit.)

The solution is to treat all your people – not just top managers – like any other stakeholder group. Make sure they are crystal clear on your strategy and vision, and reward them for value-creating behavior.

This requires translating high-level goals and concepts into specific performance measures for each job. You don’t need to turn every factory worker or computer programmer into a mini-CFO. But you can teach them the things that really matter to the bottom line.

Case Study: Costco Wholesale¹
Employee perceptions of how they contribute to the company’s results can vary widely. “Performance” might mean one thing to a marketing executive and something entirely different to a store manager. The challenge is to create the right strategic targets for everyone and make sure they understand how what they do each day is related to those goals.

Costco Wholesale uses specific metrics that are most relevant to its business when determining variable compensation. One key example is inventory shrinkage. “No matter who you are in the company, one-fifth of your bonus [is tied to] inventory shrinkage,” says Costco chief financial officer Richard Galanti. “We all have a role in it.”

Inventory shrinkage is a critical metric for Costco. The basic definition of the term, which includes things like shoplifting and employee theft, would seem to be confined to operations at the store level. But it’s important to remember that inventory ultimately represents capital, and anything that diminishes it in an improper way hurts everyone —merchandising staff, buyers, even the accounting department.

“Low inventory shrinkage indicates a clean operation because shrinkage is not just pilferage,” Galanti explains. “It includes things that are damaged, get stale, or lost. It can be caused by paperwork problems in accounting due to discrepancies between the actual shipments and billings. So low shrinkage is indicative of a clean operation in our mind, from many operating perspectives.”

Costco doesn’t need to explain the arcane details of inventory accounting to all of its people. All it needs to do is be sure that everyone knows that things like theft, pilferage and paperwork errors will take a bite out of their bonuses. Once that’s been established, the next steps flow naturally.

Now It’s Your Turn
Depending on your industry, your performance metrics may differ from Costco’s. But the principle is the same. Value creation isn’t just a big-picture exercise. It’s the result of getting thousands of small decisions right each day. Every employee plays a role. Make sure they understand that – and reward them accordingly.

¹This case study was drawn from “Different Paths to One Truth: Finance Brings Value Discipline to Strategy Execution,” a 2006 research report prepared by CFO Research Services and sponsored by Deloitte Consulting LLP.

*As used in this document, “Deloitte” refers to Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP.

This publication contains general information only and Deloitte Consulting LLP is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte Consulting LLP, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

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