The Pros and Cons of Tying Compensation to Performance Reviews

At Reviewsnap, we've seen firsthand the benefits delivered by a pay-for-performance structure that closely ties compensation to the performance review process. However, this isn't the right approach for every employer or every company culture.

 

Like most human capital challenges, tying compensation to performance reviews has its share of pros and cons. Here are a few of the most critical:

The Pros:

1.     It takes the “mystery” out of pay increases.—Employees often complain that raises and reviews are based on intangibles (how well their manager likes them, office politics, etc.) and not applied consistently. By tying reviews to compensation, performance clearly becomes the determining factor in compensation. The stronger the performance, the better the raise. But this approach demands that managers measure performance as accurately and objectively as possible, basing their reviews on concrete performance metrics and pre-communicated goals. If they don’t, it undermines the entire intent of pay for performance.

2.     It attracts top talent.—Research continues to show that top performers still cite pay as a main motivator. As Kerry Chou, Senior Practice Leader of Compensation at WorldatWork, noted during the company’s Total Rewards 2013 Conference and Exhibition, a recent WorldatWork survey revealed that better pay is the number one reason key people leave one employer for another.

3.     It can make administration easier.—With performance reviews tied directly to compensation, many employers find it improves the efficiency of integrating pay increase information into their payroll systems and generating follow-on reports. When compensation isn’t tied to the review process, HR or payroll staff members often have to take special steps to manually enter increases into the payroll system.

The Cons:

1.     Objective reviews aren’t easy to provide.—In order for pay for performance to work effectively, employees must be “rated” in some way but the rating must be objective and evenly applied. This simply doesn't work for all company cultures. For these companies, pay for performance can actually be counter-productive and introduce an air of unhealthy competition among employees who need to collaborate. In short, if the review process is perceived to be unfair, highly valued qualities such as trust, cooperation and teamwork can go right out the window.

2.     If the process isn’t clear, it can be confusing to employees.—Under pay for performance, a manager needs to be crystal clear in communicating precisely what is driving compensation. Is it goals, for example, or competencies? Let’s say a company's review process is based primarily on competencies but this isn’t clearly understood by an employee. She works hard all year to achieve specific performance goals and exceed targets. When she receives a lower-than-expected raise (because her communication with key team members has been consistently poor, for instance), it’s no wonder that she’ll go away disappointed, demotivated and confused. Bottom line, employees need to know how exactly they’ll be judged and what will drive their dollars.

3.     Compensation can overshadow the importance of reviews.—When a salary discussion comes on the heels of a performance review, it can be difficult for the employee to focus on the feedback he’s been given. Helpful critiques (both positive and negative) and guidance are eclipsed by the amount or lack of pay increase. Some employers overcome this by separating the review and the compensation discussion by several months. Others hold compensation discussions just once annually, while they hold several performance reviews throughout the year. If multiple performance reviews are held, employees must understand that compensation changes are based on the entire year’s worth of reviews—not just the most recent one.

At the end of the day, each employer must decide the compensation and performance review strategies that best fit its culture. Whatever your final choices are, remember they’ll form bedrock of how your employees feel about working for you—and how dedicated they’ll be to giving you their best efforts day after day.

Communicate your strategies and expectations clearly. Give your people well-defined guidelines. And empower your managers to reward top performers appropriately. These are the keys to compensation and performance success.

Heed These 5 Performance Management Realities—Before It’s Too Late!

Previously, we wrote about the pressing need to solve the performance management puzzle that baffles so many of our organizations.

As we noted in that post, Deloitte’s 2013 Human Capital Trends report addresses the issue in a section called, “The Performance Management Puzzle,” which offers a number of insights into exactly what’s vexing most employers (changing performance pressures, stagnating measurement and evaluation processes, evolving but unproven technologies, and the quality of the training and tools given to managers, to name just a few).

To “solve” performance management, we not only need to address each piece of the puzzle but we also must come to terms with a new set of realities. Progressive employers have already begun to accept these truths but many more employers need to follow suit if they want to keep top talent from slipping away.

Here are five of the most critical new realities that, once embraced, will help us all solve the performance management puzzle:

1.     The traditional performance management model has always been broken for many employers. This is compellingly illustrated in the Deloitte report: “Many companies continue to rely on traditional performance management processes .... Year after year, managers follow a well-worn routine: Fill out goal forms, track progress, fill out more forms, conduct a formal annual assessment, and then fill out more forms.” Indeed, this is the approach some employers have taken from the start but it was never what the traditional model of performance management intended. Annual reviews were meant to be more substantive than the rote formula of “fill out forms, track, assess, then repeat.” This formula is no way to motivate and engage people. As the Deloitte report’s authors point out, “Creating tight alignment between the work of the individual and the organization’s objectives promotes greater context, commitment, and pride in accomplishment.” This tight alignment and the intended outcomes have always been part of the traditional performance management model. But they demand a high level of interaction, communication and collaboration between managers and their direct reports—higher than many are providing—no matter what “model” you use.

2.     Annual reviews aren’t enough. No matter what performance management model you use, our businesses and our people move too quickly these days for annual reviews to serve them well. Performance goals and targets (for both individuals and teams) are now linked to shorter-term projects and other strategic deadlines as opposed to the fiscal year. Therefore, our people need more immediate, frequent and ongoing feedback. As a result, a growing number of employers are supplementing their annual reviews with more frequent, informal meetings. Managers and direct reports get together more often to discuss goals, track progress and strategize on performance adjustments when necessary. Many still hold annual reviews but these meetings are used primarily to address development and career pathing issues—and to discuss compensation (annual pay raises, bonuses, etc.). Bottom line, meeting only once a year to discuss performance is a dying practice.

3.     Technology is compulsory. No matter what a company’s review process is, technology-based solutions are a necessary component of a successful performance management process—especially when you factor in the tight timeframes many managers are dealing with and the widespread push to base reviews on metrics and hard data. Dedicated performance management software and systems help to keep the review process, managers and employees on track and working as efficiently as possible.

4.    Companies need to work from the bottom up to keep employees engaged. Companies should have employees either help with or initiate the review processes and be an active participant in establishing some of their performance goals and targets. This goes a long way toward keeping people engaged in their work. If your organization uses a top-down approach—placing accountability only on your managers—employees have precious little incentive to take ownership of their goals or become involved in their own development.

5.     We can’t look at the box for a “completed picture” of the performance management puzzle. There are no blueprints or reference materials because performance management isn’t a cookie-cutter issue. Yes, we’re all shooting for the same result—to fairly evaluate, compensate and motivate employee performance. But the puzzle pieces that fit together and work effectively will be somewhat unique to our organizations. Some will be served well by social tools, some won’t (at least not yet). Some will find great value in “crowdsourced” reviews, others will encounter problems. And so on, and so on, with each component. If you’d like some guidance on your particular challenges and options, Reviewsnap is just one of several highly respected performance management companies that will be happy to discuss solutions that might suit your company’s needs.

At it’s core, performance management is about helping your people deliver their best day in and day out. It’s about employee development. Organizations that treat annual reviews as a mere formality are simply going to lose out—and lose talent—to those that focus on improving engagement through the review process.

We’d love to know what your experiences have been and the lessons your organization has learned in addressing its performance management challenges.

Share your stories here on our blog or email us at info@reviewsnap.com and we’ll compile them for a future post or report.

Manager's Review vs. Self-Review - Where's the Disconnect?

We've all dealt with employees who believe their performance is well above the level of performance as represented by the performance review that we completed for them. Their self-review comes in with extremely high ratings and glowing comments about their performance. Ours shows ratings well below theirs and our comments are less than glowing.

How can there be such a disconnect? Let me count the ways:

The Manager

• The manager subscribes to the notion that no employee should be given high ratings because they need something to strive for or the infamous "no employee is truly outstanding on a consistent basis".
• The manager doesn't have a good handle on the employee's work and level of performance and hasn't been diligent about journaling (documenting) performance "events" during the review period
• The manager is a victim of "central tendency bias" whereby they are hesitant to select ratings on either end of the rating scale.
• The manager, for whatever reason, doesn't like the employee and lacks the maturity and professionalism to rate the employee based on work behavior and performance.
• The manager hurriedly completed his employee reviews and didn't put enough thought into any of the employees' reviews.
• The manager is measuring performance against poorly constructed goals and expectations for the employee.
• The manager has a great handle on the employee's performance and work behavior, has done an excellent job of documenting performance "events" during the review period, is very objective and thorough and carefully thought through the review and rated the employee according to sound logic and reasoning .

The Employee

• The employee is a narcissistic egomaniac.
• The employee is completely out of touch with reality.
• The employee has a bad attitude and is out to make some sort of odd point.
• The employee lacks a sense of self-awareness.
• The employee has an entitlement mentality.
• The employee is measuring his/her performance against goals and expectations that differ from those used by the manager.
• The employee is making mental comparisons to co-workers who are known underperformers.
• The employee knows his/her performance falls below the ratings placed on the self-review, but he/she is hoping to place seeds of doubt in the manager's mind thinking it could sway a change in the manager's ratings.
• The employee is truly performing at levels well above those perceived by the manager and is, for the most part, accurately reflecting his/her performance.

Okay, so this probably isn't a complete list for either the manager or the employee, but you get the point. In a perfect world, the manager and the employee are very objective, very professional and have a great handle on the actual performance of the employee leading to a lot of agreement on the performance review for the employee. But we all know this isn't a perfect world.

The good news is that most employees and most managers try to be as objective and honest as possible when doing reviews. It isn't all that common that a wide gap exists between the two. But it does happen.

To minimize the impact of a disparity of any significance between the self-review and the manager's review, it is important that the manager do, at a minimum, these five things:

Document all positive and negative performance events hat are of any significance for each employee over each review period. Discipline yourself to take time to make performance journal entries as the event of significance occur. This documentation will prove invaluable in preparing the review and in supporting your ratings.

When goals and expectations are being established, meet with the employee and make certain you are both on the same page in terms of what each really means. The employee should have a crystal clear understanding of what is expected of them over the upcoming review period or longer.

Carefully complete the performance review and be able to substantiate ratings with sound and logical comments.

Forget as best you can any unfair biases you might have about the employee. Rate them based on their work behavior/performance for each competency and not on things that are irrelevant to the review itself.

Based on the review as it was prepared, anticipate questions or arguments the employee might raise during the review session and be ready to respond logically and rationally to those questions.

Obviously performance reviews are a valuable component in measuring and elevating perfomance in any organization. Make sure you've done your homework so that on those rare occasions when there is a wide gulf between your ratings and the employee's ratings you can skillfully present a strong case to support.

Viva Las Vegas - SHRM Annual Conference 2011

We all know that Las Vegas is about glitz and fun and this year’s SHRM Annual Conference and Exposition promises to offer plenty of both. The conference, to be held at the Las Vegas Convention Center June 26 – 29, 2011 will have some powerful speakers and entertainment. Keith Urban will be playing to a large crowd on Monday evening and Michael J. Fox and Arianna Huffington will share their experiences and wisdom as keynote speakers. It promises to be a conference and exhibition with a lot of entertainment and educational value.

ReviewSNAP will once again be an exhibitor and is proud to be a part of this outstanding event. Our acclaimed Web-based performance management system will be front and center and some of our account managers will be manning the booth to demonstrate the power and flexibility of the system. And they’ll be rolling out some robust new enhancements including our vastly expanded ad-hoc reporting tool.

For those who stop by and visit with us, we will offer a 10% discount on their first year’s subscription fee if they schedule a live online demo within 30 days of the last day of the conference. So stop by and visit with us at booth 1028. We look forward to meeting you.