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Economics of Human ResourcesNick Bloom (Stanford Economics)

Lecture 3: Targets Management1

Nick Bloom, Econ 147, 20112Targets managementToday we will run through 5 dimensions on targets management (questions 8 to 12)

The concept is around the setting of stretching targets

As before, while the data is mainly for manufacturing, these questions have been used in retail, hospitals, schools, healthcare clinics, tax collection agencies, charities, PPPs and law firmsNick Bloom, Econ 147, 20112Score(1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non-financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone.(8) Target balance Nick Bloom, Econ 147, 2011Setting up your clickerPress GO

Then slowly press 0 and then 5 (channel is 05)

Then slowly press GO again

A green light should appear signaling the clicker worked

Nick Bloom, Econ 147, 2011(8) Target balance(1): Goals are exclusively financial or operational (3): Goals include non-financial targets, which form part of the performance appraisal of top management only (they are not reinforced throughout the rest of organization) (5): Goals are a balance of financial and non-financial targets. Senior managers believe the non-financial targets are often more inspiring and challenging than financials alone.

Nick Bloom, Econ 147, 2011

The survey scores to question (8), target balance all countries, manufacturing6All countries, manufacturing firms (100 to 5000 employees), 9824 observationsAverage 2.89Nick Bloom, Econ 147, 2011

7India, manufacturing firms (100 to 5000 employees),1136 observationsAverage 2.44The survey scores to question (8), target balance India, manufacturingNick Bloom, Econ 147, 2011

The survey scores to question (8), target balance US, Canada and UK, retail8All countries, retail firms (100 to 5000 employees)661 observations

Average 2.74Nick Bloom, Econ 147, 2011

The survey scores to question (8), target balance: developed countries, hospitals9Hospitals, Canada, France, Germany, Italy, Sweden, UK, US, 1183 observationsAverage 2.73Nick Bloom, Econ 147, 2011

The survey scores to question (8), target balance: developed countries, schools10Schools in Canada, Germany, Sweden, UK, US777 observationsAverage 2.70Nick Bloom, Econ 147, 2011Score(1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals(5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations. (9) Target interconnection Nick Bloom, Econ 147, 2011

(9) Target interconnection (1): Goals are based purely on accounting figures (with no clear connection to shareholder value). (3): Corporate goals are based on shareholder value but are not clearly communicated down to individuals(5): Corporate goals focus on shareholder value. They increase in specificity as they cascade through business units ultimately defining individual performance expectations.

Nick Bloom, Econ 147, 2011

Target interconnection (9):all countries, manufacturing13All countries, manufacturing firms (100 to 5000 employees), 9813 observationsAverage 3.01Nick Bloom, Econ 147, 2011Score(1): Top management's main focus is on short term targets . (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other(5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals (10) Target time horizon Nick Bloom, Econ 147, 2011

(10) Target time horizon (1): Top management's main focus is on short term targets . (3): There are short and long-term goals for all levels of the organization. As they are set independently, they are not necessarily linked to each other(5): Long term goals are translated into specific short term targets so that short term targets become a "staircase" to reach long term goals

Nick Bloom, Econ 147, 2011

Target time horizon (10):all countries, manufacturing16All countries, manufacturing firms (100 to 5000 employees), 9814 observationsAverage 2.99Nick Bloom, Econ 147, 2011Score(1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard(5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale (11) Targets are stretching Nick Bloom, Econ 147, 2011

(11) Targets are stretching (1): Goals are either too easy or impossible to achieve; managers provide low estimates to ensure easy goals (3): In most areas, top management pushes for aggressive goals based on solid economic rationale. There are a few "sacred cows" that are not held to the same rigorous standard(5): Goals are genuinely demanding for all divisions. They are grounded in solid, solid economic rationale

Nick Bloom, Econ 147, 2011

Targets are stretching (11):all countries, manufacturing19All countries, manufacturing firms (100 to 5000 employees), 9819 observationsAverage 3.00Nick Bloom, Econ 147, 2011Score(1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition(12) Performance clarity Nick Bloom, Econ 147, 2011

(12) Performance clarity (1): Performance measures are complex and not clearly understood. Individual performance is not made public (3): Performance measures are well defined and communicated; performance is public in all levels but comparisons are discouraged (5): Performance measures are well defined, strongly communicated and reinforced at all reviews; performance and rankings are made public to induce competition

Nick Bloom, Econ 147, 2011

Performance clarity (12):all countries, manufacturing22All countries, manufacturing firms (100 to 5000 employees), 9821 observationsAverage 2.67Nick Bloom, Econ 147, 2011 My favourite quotesInterviewer: How many production sites do you have abroad?Manager in Indiana, US: Wellwe have one in TexasAmericans on geographyProduction Manager: Were owned by the MafiaInterviewer: I think thats the Other category..although I guess I could put you down as an Italian multinational ?The difficulties of defining ownership in EuropeNick Bloom, Econ 147, 201124Wrap up1) Large variation in targets practices best organizations set broad, clear and balanced targets which are tough but feasible

2) Variation common across all industries we have looked at manufacturing, retail, schools, hospitals, clinics and charities

3) As with monitoring potential for improvement is extensive, especially in smaller organizations and developing countries

Next lecture we will focus on incentives hiring, firing pay and promotionsNick Bloom, Econ 147, 201124