Contributed by Robert Sher

How Mid-Market Companies Can Develop High-Performers: For the last 12 years, Gallup polls consistently indicate that more than two-thirds of employees at U.S. companies are not motivated to be productive. They are either “not engaged” or “actively disengaged.” Even more important, companies with high “employee engagement” financially outperform those with low engagement. Clearly, low morale is widespread – and costly.  But how does this apply to middle-market companies?

A 2011 survey of 2,700 middle market companies by Ohio State/GE Capital’s National Center for the Middle Market found that one of their biggest concerns was about talent management — the development of future leaders — with 80% highlighting this area as one of their most pressing challenges. In addition, around three quarters were challenged in attracting top talent and providing development opportunities that increase retention.

So how important is it for mid-market companies to have employees who consistently strive to perform at high levels?

Knowing that the atmosphere at every company goes through highs and lows, should mid-market CEOs worry when some employees are unenthusiastic about their work? The answer is an emphatic yes – if strong company growth is crucial. The OSU/GE Capital survey found that creating a culture of high-performers can make a real difference for middle market companies. That survey grouped the best-performing companies into a category called “Growth Champions.” These firms tend to invest more in employee skill development, with 29% putting greater emphasis on employee training and education compared with only 17% for other companies. A larger percentage of the Growth Champions (24%) emphasize measuring employee performance through reviews, compared to 16% for the rest of survey population.

Members of the Alliance of Chief Executives agree. A February 2012 survey of 126 Alliance companies ranked a dedicated workforce as the third most important element of success. (No. 1 was a solid growth strategy and No. 2 was a cohesive top team.)

But even though they recognize the importance of strong employee morale, middle-market CEOs don’t make it an investment priority.

In an April 2012 survey by OSU/GE Capital’s National Center for the Middle Market, only 4% of the 1,000 respondents said they would allocate an additional dollar of investment into increasing HR training and development. They considered other priorities – building up cash, investing and other capital expenses, making acquisitions and others – to be far more important.

Lack of investment in HR and training isn’t the primary cause of low workplace performance.  A bigger factor is that many mid-market CEOs do not take a strategic and disciplined approach to shaping the workplace environment. The workplace environment is the sum total of what it feels like to work at the firm. Most CEOs I know feel responsible for achieving the company’s mission by using their management team and resources.  They need their team to perform. But creating a highly productive working environment beyond the top team requires far more: a CEO and top team with a long-term commitment to create such an environment, and then a step-by-step plan to put it in place.

Paul Limbrey and Andrew Meikle of Elkiem, a firm that researches human high-performers, spent 15 years investigating high-performers’ environments (workplace and otherwise). They found and developed:

1. a way of describing such environments,
2. a way of measuring those environments, and
3. an approach to changing the environment for better performance.

There are five common causes of low-performance environments.

1. The measures of individual and team performance are not spelled out and accepted. 

People aren’t clear about what they should do and how their success will be accounted for.  Without good measures, people become political and try to stay on the boss’ “good side.”  Only 7% of Alliance members believe they have completely clear performance measures.  In fact, 60% do not measure employee performance.

2. The definitions of success and failure are not crystal clear. 

Even if measures are in place, people aren’t sure at what point they have succeeded and will be commensurately rewarded.  More often, they aren’t sure at what level of poor performance —the failure point— they will they be dismissed.

3. Individual and team performance are not sufficiently visible throughout the organization. 

Without such exposure, low performers can hide behind their team’s performance without detection or peer pressure. Without enough team exposure, people may act selfishly and not work as a team for the greater good—since nobody can tell how the team is performing.

4. The leader is not willing to make it emotionally uncomfortable for low-performers. 

People aren’t held accountable.  Deadlines are missed, results fall short and there are no consequences.  The leader doesn’t counsel poor performers, doesn’t push them or give them “extra attention.”  They’re not put on notice that if they don’t improve, they may be demoted or dismissed. In the Alliance survey, only 18% of CEOs report that their underperformers are “very uncomfortable,” with another 46% saying underperformers are “uncomfortable.”

5. The range between high-performers and low-performers is too great. 

Average performers know that others on their team do much less, so they feel safe about easing up.  Top performers become arrogant and hard to manage since they are “so much better” than their peers.  From the recent survey, 82% of Alliance members believe they have an A player on the team, yet 50% believe their worst-performing executive rates a C+ or lower.  This means at least half the Alliance firms report an A player and a C+ or lower player on the same team.

The Elkiem research has shown that the workplace environment affects the behavior of the people in that environment.  In institutions from Harvard, Julliard and the Olympics to the Special Forces and corporate America, the research shows that shaping the environment around any population—including the workforce of a company—has profound effects on performance.

Over and over again, Elkiem has measured work environment, applied changes, then re-measured to observe the effect.  While such measurement is the ideal approach to any new environment, the following is an approach that I have found to work well in a number of middle-market companies: Every six months, the CEO and the leadership team must review five “levers” that correspond to the root causes of low-performance environments noted above.  Choose no more than two levers for adjustment in the given six-month period.  Making two changes is a sufficiently ambitious challenge, since each move requires follow-through.

For firms with very low-performance environments, starting with the first and second levers makes sense.  But most firms are not starting at ground zero—they have some level of proficiency in applying each of the levers.  They may choose the two that will best shape the performance environment.

The Five Levers of Workforce High-Performers

Lever 1: Clear and accepted measurements. 

At the company level, there are business plan objectives, and in addition, each department often has supporting objectives.  Now extend this discipline to the individual level.  Each employee should have one to three key objectives that, if achieved, represent success.  Ideally, everyone agrees upon and communicates these objectives at the start of the review period, then evaluated at the end of the period.  This notion of individual measures (management by objectives, or “MBO”) is not new (Peter Drucker, 1957). But individual measurement is seldom implemented properly and with full commitment.  In a 1991 comprehensive review of 30 years of research on the impact of management by objectives, Robert Rodgers and John Hunter concluded that companies whose CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in productivity. Companies with CEOs who showed low commitment only saw a 6% gain in productivity.

Lever 2: Clarity on the definition of success and of failure. 

The next step after measuring the right results is to define the point at which we are successful, and the point at which we have failed.  For example, we might say that if our year-end gross margin lands below 32%, we have failed and that if it is above 41% we have succeeded.  Avoiding failure is a huge motivator.  Winning by “planting the flag at the top of the hill” is a powerful motivator too.  Don’t throw away the emotional incentive tucked away in a crisp definition of failure and success for each person and each team. 

For maximum performance, have a small number of goals, so that failure or success is a black or white matter.  For example, a biotechnology firm had a major opportunity to release a revolutionary product before year-end in 2011.  Normal product development forecasting pointed to late Q1 2012.  After sharpening its definition of success and failure, the firm decided that releasing the product later than Dec. 15, 2011 would constitute failure for the VP of product development, and releasing by Nov. 1 would constitute success.  There were no other measures of success or failure.  Other members of the leadership team had similar definitions of failure and success.  The product released on Sept. 1, 2011, two months earlier than the target, with excellent results.

If there is clarity on success and failure, you can easily generate a list of employees who succeeded and those who failed.  Many will most likely fall in the middle.

Lever 3: Team and Individual Visibility. 

Visibility means that individual, team and/or departmental performance is exposed for all employees to see. This motivator is vastly underutilized.  Would our Olympic athletes strive to be the world’s best if nobody knew whether they got the gold medal or not?  The emotional pleasure of standing on the top podium and wearing the gold medal for the whole world to see is a powerful motivator.  Likewise, the thought of video footage of a last-place finish playing before their countrymen is motivating.

In a firm I once ran, such exposure worked well.  My shipping department had a high error rate. When we exposed the error rates to the entire company, it threatened the team’s pride, and errors dropped.  We never chose to expose individual error rates, but we counseled poor performers and moved them out if they didn’t improve.  I’m not advocating complete exposure in all cases. But CEOs must consider exposure as a lever they need to use.  People deeply care what their peers think of them.

Lever 4: Emotional discomfort with low performance. 

Too many of us have learned that people should be happy and secure about their work. We’re taught that self-esteem and self-worth issues are paramount, and that the “I’m ok, you’re ok” philosophy must be our modus operandi.  I disagree.  Adults who join any company known for its high-performers must know that the modus operandi for the CEO and the team is, “Acceptance is conditional on performance.”  Low performers must feel uncomfortable.  They should feel under the gun and ought to question their own ability to deliver value.  They must seek help to step up their game and their company should help them and should feel the scrutiny of their peers.  If they’ve got what it takes, they’ll improve, performance will recover, and all will be well.  If it doesn’t recover, they will be dismissed.  Of course, this applies to the CEO too!

Being the tough leader who holds people accountable, has more frequent review sessions, measures more closely and otherwise keeps the pressure on is not a fun job.  But any leader owes it to the underperformer, to the team and to the company to signal the need for improvement. That signal is emotional discomfort.  If the signal isn’t heeded, move on to Lever 5.

Lever 5: Tighten the Range. 

People naturally measure themselves against their peers.  Imagine “Joe” the sales executive whose performance has him in the middle of his six-person team.  He’s not at risk of getting fired; his performance is average.  But after firing the two lower performers, Joe’s becomes the worst of four salespeople.  He’ll feel the pressure immediately and will step up his game to try and avoid being the worst performer.  The range has been tightened.  The sales manager will continually be hiring people she believes will challenge their best performer.  If they don’t, she fires them quickly and tries again.  As she collects high-performers, she narrows the range again, dismissing the poorer performers.  She knows she’s arrived when most of her team are “A” players. These players know they must run hard to stay ahead of their peers since they are all talented.  This describes high-performers.

This article only touches the tip of the iceberg flowing from the research and model pictured above.  Yet these five levers are an excellent starting point for many firms to begin actively managing the work environment.

Think of all the money, time and effort companies pour into finding, training and retaining talent in the hopes of seeing the number of high-performers rise.  But high-performers show a combination of individual attributes and the environment that surrounds those individuals.  CEOs who put effort into tuning the work environment will be rewarded with more and better high-performers all around.

Robert Sher is the founding Principal of CEO to CEO. He has been a Member & Director of the Alliance of Chief Executives since 1996.