The Hidden Profits of Performance Management

One of my client CEOs has blown millions on an underperforming sales team over the years. The VP of Sales, who’s been on the job for over a year and brought no sales, once even dared to ask the CEO to hire him a personal assistant because he had too much to do! Are you flipping kidding me? Too busy not making a single sale the whole year?? 

The Problem

For most of my clients, payroll is the first or second largest expense line item. So how does a CEO make sure that they’re getting the best ROI on the largest expense line item in the business? No one wants to talk about the multiple elephants in the room:

• Not every employee is worth the expense

• Not every company is qualified to properly manage employees

The Hidden Profits

Let’s walk through an example and hone in on a hypothetical sales team that is significantly more successful than the one I describe above, one that is producing results but they’re not impressive. Let’s say that team is small: a team of 5: 

1 Director at $175,000/year

2 managers at $125,000/year each ($250K combined)

2 lead gen assistants at $50,000/year each ($100K combined)

Total Cost of Sales Team: $525,000/year

This applies to any functional group in the business: tech, finance, HR, etc.Sales is obviously just an example.

Question: How much of this $500K annual bill is a waste? Let’s be really generous and say that all of them work equally hard and produce the same results - just so you don’t get to the obvious conclusion that someone is likely underperforming - that would just be too obvious and boring. 

 Answer: In a well-functioning team, you should be able to 

1. Identify ALL of the work required to be done 

2. Identify the skills required to do the work 

3. Calculate approximately the time required to do it all at each skill level (i.e. man hours required at each skill level). 

The difference between the cost to do the work and the amount you’re spending is your hidden profit. You’re either:

• Paying too much (you have hidden profits to take advantage of)

• Paying about right (if you’re within 10%-15%)

• Paying too little (which means you’re a happy camper and are already enjoying the hidden profits). 

Perhaps, you’re thinking: “crap, identify all the work AND the time AND the skills required for an entire department? That’s a lot of work!” YUP! Expected an easy answer? Sorry, this ain’t the place for easy.

Performance Management System as a Solution

So what am I suggesting? Fire a bunch of people? No. The first problem is not the employee - most employees do not wake up every morning and think “how can I be useless today?”. Although, there are some mooches and leeches who need to be fired - most people have skills and want to perform well! The CEOs job is to create the environment where that can happen!

The first problem is the business (and therefore the CEO). The business needs to have a system in place to manage the performance of every individual who draws any sort of compensation. If you’re thinking “but this is an HR matter and we don’t have the money for an HR team” - please imagine a loving but disapproving smack to the head from yours truly. No HR person can possibly manage the performance of a sales team who focuses on relationships, a tech team who specializes in lines of code and finance team who focuses on financials, etc. etc. HR teams just don't have the technical capabilities to manage the various functions well. It is the job of each individual manager to manage their employees and it’s the job of the CEO to put a system in place to enable this to happen.

The Art of Skill

A good software engineer can code better and faster than an average one. A good graphic designer can produce better content and can do it faster. Whether it’s because they’re naturally good, have expertise, experience, or magic powers, some people are just better than others at their chosen craft. I fully recognize the art present in every profession that is the result of natural talents, education, experience and general expertise. If you’re in a position where you have a magician or even better an entire team of magicians and you’re happy with their performance, then you don’t need a performance management system like this. Instead, you need an incentive system to perpetuate such success. 

Do You Need a Performance Management System?

Got a team of magicians who are successful and crushing it? Then you don’t need one, just put together an incentive plan to perpetuate the success. But bear in mind that without a performance management system, you're going to have a black-box function in the business that is vulnerable to talent loss and scaling problems. A performance management system is required when you’re looking to:

• Establish Consistency of Performance

• Fix a performance problem

For the Haters: You may take issue with the concept of taking such formulaic approach to work and say “there’s a lot more to sales than just tasks and time to do them”. To you I say, if you can’t define the “a lot more” and allocate time to it, then you probably don’t know what that is or haven’t spent enough time thinking about it. I say, sit down define it and estimate the time to do it. I can appreciate the art of sales, marketing, HR, tech, finance as much as any founder who’s worked hard to build a business, but you’re not drawing paintings here, you’re scaling a business, which means systems and processes baby!

Or perhaps you’ve spent too much time listening to “not everything is a number and all people have their place in a business” type of advice. To you I say, go back to your finger painting.