Performance Management Strategies for Knowledge Organizations

Ross Dawson
Originally published in Rewards Management Bulletin

Introduction

“You can talk – you can preach… about a ‘learning organization’, but…. reinforcing management appraisal and compensation systems are the critical enablers… if rhetoric is to become reality.”
Jack Welch, Chief Executive Officer, General Electric.

Peter Drucker first wrote of knowledge workers and knowledge organisations over three decades ago, however only recently have these terms entered current usage. The inexorable trend through the twentieth century of the global economy shifting from primary production to manufacturing and on to services is culminating in information and knowledge-based organisations now creating the bulk of the wealth in the economy. The most obvious examples of knowledge organisations are in professional services such as consulting, law, and investment banking, and in technology, however organisations as diverse as BP in oil, Boeing in manufacturing and the Australian Taxation Office in government proclaim themselves to be knowledge organisations – their competitiveness and effectiveness is primarily based on their ability to make the knowledge held in their organisations more productive.

The new knowledge economy requires different approaches; the old business paradigms no longer work. The belief that hoarding knowledge is the source of personal power and job security is deeply entrenched in many, but any organisation in which that is true will find it difficult to survive in the years ahead. The foundation of a knowledge organisation must be skills, behaviours and attitudes of its management and staff which fully support the breadth of the firm’s knowledge being used to deliver competitive and high-value services and products to its clients. Ultimately this depends on the overall culture of the organisation, however establishing effective performance management strategies is probably the single point which provides the greatest leverage in developing a knowledge culture.

Knowledge-supporting skills and behaviours

The first step in establishing an effective performance management programme in any domain is to determine specifically which behaviours and outcomes you wish to encourage. There is no single prescription for this; it will depend on factors including the organisation’s industry, competitive position, values and strategy. In this article we will look at some of the generic factors applicable across a range of knowledge organisations.

The core behaviour and attitude which supports knowledge organisations is that of knowledge-sharing, and its antithesis knowledge-hoarding. The original source of all knowledge is people, and this must be available to others in order to maximise its benefit and productivity.

Knowledge can be transferred between people in two ways – directly by socialisation, and indirectly through capture on documents or technology. Both are vital, however technology’s role is making the means of knowledge-sharing scalable from small teams up to large and global organisations, as John Peetz Jr., Chair of Ernst & Young’s Global Knowledge Steering Committee, points out. Information technology allows the creation of ‘knowledge-bases’, which are often implemented as an intranet.

This provides us with three core behaviours which contribute to knowledge-sharing:

  • Direct knowledge-sharing: teamwork, socialisation and informal communication. Much knowledge-sharing takes place informally, which includes a wide range of behaviours including effective teamwork, contributing expertise to other teams, answering internal telephone or e-mail queries, and chatting in the corridor.
  • Contribution to knowledge-base: capturing knowledge and documents electronically. An effective intranet or computerised knowledge-base will include specific formats and structures for documenting experience, learnings and knowledge. Useful contribution includes not only inputting this core activity, but also looking for opportunities to add information of value to others.
  • Use of knowledge-base: tapping the breadth of knowledge in the organisation. Capturing the expertise and knowledge of the organisation will not contribute unless it is used by others. The temptation of intelligent professionals to develop ideas for themselves rather than use existing knowledge must be overcome to allow clients to benefit from the full breadth of expertise of the organisation.

The relative importance of these three activities will depend on factors including industry and size: for example a small advertising firm will probably rely primarily on direct knowledge-sharing, whereas a global consulting firm must focus on developing its computerised knowledge-base.

Related key behaviours which are important contributors to the capabilities of knowledge organisations include:

  • Learning. People must be encouraged to develop their skills and knowledge on an ongoing basis. The importance of this objective means it should be supported by a wide variety of initiatives, which could include pay-for-knowledge and paying for external study.
  • Vertical and horizontal information flow. Knowledge organisations must build open and free flow of information up, down and across the firm; transparency is essential. While everyone should be explicitly motivated to share useful and relevant information with their managers, peers and subordinates, this is particularly important for people in managerial positions.
  • Knowledge creation. The continuous development of new ideas, processes, products and services is crucial to an organisation’s vitality in a rapidly changing environment. This can be measured and rewarded in different environments by for example patents applied for, articles published, the use by others of contribution to the knowledge-base.
  • Experimentation. Organisational learning largely comes from teams trying new things, learning from mistakes, and communicating that learning to others. This is both a cultural and performance management issue; it is possible to explicitly reward new initiatives whatever their success, and in particular to encourage rather than stigmatise passing on lessons learned through both failure and success.
  • Using knowledge from outside. Many professional organisations have a “not-invented-here” syndrome, which highly values knowledge within the group, and discounts knowledge from outside the firm, or even other groups within the organisation. Organisational competitiveness requires drawing on the broadest sources possible; this can be encouraged both in the implementation of the knowledge-base and in specific behavioural measures.

Rewarding desirable behaviours

Having established the behaviours which will support the knowledge capabilities of a given organisation, one must understand the current behaviours in the organisation. Which existing behaviours should be encouraged and reinforced, which should be changed, which should be actively discouraged? This process defines the gap between actual and desired behaviours in the context of knowledge capabilities.

Effective performance management in knowledge organisations must be shaped by what motivates knowledge workers, which certainly includes remuneration, however status, position and non-monetary recognition are always significant, and are often more important than pay.

Remuneration structures

In this article we will be limiting ourselves to covering issues which are specific to encouraging and developing the knowledge capabilities of organisations. Many of the current trends in performance management, including stock options, compensation based on measures of added value, team and departmental performance achievement bonuses and so on should be considered as elements of compensation in all organisations. These can be important motivators to support organisational objectives, however are often too ‘blunt’ to develop the specific behaviours of knowledge sharing which are vital for knowledge organisations. As one element within the overall framework of remuneration strategies, we will look at some approaches which are more focused on specific behavioural change.

As is current practice, broad categories of objectives should be brought down to specific and preferably measurable objectives agreed between each staff member and their supervisor at the beginning of each review period. This enables a focus on activities which develop job-specific skills and individual opportunities for development, and relatively easy assessment for input into compensation. The important issue is formalising assessment categories which clearly target knowledge-supporting behaviours. This type of system is used in professional firms such as Ernst & Young and Corrs Chambers Westgarth, with performance on knowledge-sharing explicit contributors to compensation.

A complementary approach is to get input from team members on others’ contribution to the team. Assessment of the desired knowledge-supporting behaviours can easily be built into 360° feedback initiatives. Merrill Lynch’s investment banking group has used confidential evaluations by every executive on the team contribution of everyone they have worked closely with during the course of the year. This provides valuable input in an environment where cross-disciplinary project teams form and dissolve many times during the year, with team members often working in different countries as well as different divisions.

Recognition

Promotion is one of the strongest motivators to performance in knowledge organisations, as it is usually closely linked to status. It is important for knowledge organisations to provide more than one ‘stream’ for promotion, which allows subject specialists – who are crucial to the knowledge wealth of professional firms – to achieve high status and remuneration levels without having to take on management responsibilities.

Naturally promotion is tied closely to performance reviews, however attitudes to knowledge-sharing are particularly important at managerial level, given their visibility and influence. In a professional firm a poor attitude to knowledge-sharing should exclude candidates from promotion, almost irrespective of their performance in other areas. The US Army is one example of an organisation which formally considers knowledge-sharing in considering candidates for promotion.

Other non-monetary motivators for desired behaviours include awards and other informal recognition. Commonwealth Bank’s Institutional Banking Group recently awarded an ‘employee of the month’ award to someone who passed on valuable information on a business opportunity to another division.

Culture and leadership

Performance management strategies are only one element of a full range of cultural, technological, strategic and organisational initiatives to develop the knowledge capabilities of an organisation, and will only be effective if they are aligned with and supported by these. The development of a knowledge culture is an ongoing process, and performance management initiatives must be designed within that context.

Ultimately leadership in developing knowledge-supporting behaviours throughout the organisation has to come from top management. Performance management strategies can only be effective insofar as they are aligned with other messages.

Case study: Morgan & Banks

Listed recruitment and consulting company Morgan & Banks has an explicit dedication to harnessing its organisational knowledge. It recently enhanced its compensation system to focus on intangibles and knowledge issues. Within the framework of its regular review process, it has introduced three new areas for review: team, quality and value enhancement. The team section is focused on contribution to the people the staff member works with; quality is focused on process, in terms of continuous improvement and re-engineering of work functions; and value enhancement looks at the level of culture and morale, which includes any initiatives for the greater good of the firm. Specific objectives for each category are agreed at the beginning of each review period with the supervisor, and the results are recognised in the discretionary component of compensation.

One other aspect of remuneration is that if a team leader is above budget and the rest of the team is below budget, he or she is actually penalised, which wouldn’t be the case if everyone was below budget. This very clearly establishes motivation to team rather than individual performance. These compensation systems are part of a broad range of knowledge initiatives, which Director of Learning Ann Whyte says includes developing as a core competence of knowledge workers the ability to manage their own performance and report on it accurately.

Conclusion

An increasingly large sector of the economy is comprised of organisations whose primary activity is working with information and knowledge. One of the primary sources of differentiation and competitiveness for these firms is their capabilities in dealing with and adding value to knowledge, and this will be increasingly so in the future. These capabilities are largely based on individual skills and behaviours, particularly in knowledge-sharing. As long as they are aligned with broader cultural initiatives and top management leadership, effective performance management strategies which encourage these behaviours are key contributors to achieving organisational objectives.

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