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.

It’s Time To Solve the Performance Management Puzzle

Performance management ain’t easy. At least not for most of us.

As Deloitte’s 2013 Human Capital Trends report noted, “… 58 percent of HR leaders gave their performance management process a ‘C’ grade or worse.” In fact, the report itself contains an entire section called, “The Performance Management Puzzle.

Puzzle—as in riddle. Enigma. Challenge. Problem.

It’s a fair comparison. After all, the performance management process encompasses a complex chain of moving parts including organizational goals and targets, individual goals and targets, manager/employee relationships, team relationships, evaluation tools, perceptions, judgment and communication, among others. Just thinking about all of these components and how to piece them together effectively is enough to make your head hurt.

As daunting as it might seem, we all need to solve the performance management puzzle—and the sooner the better because the future of our companies depends upon it. That’s no exaggeration. It’s the simple truth. Organizational performance is a direct result people performance. So the time to solve this particular puzzle is now.

But (you knew there’d be a “but” in here somewhere, didn’t you?) we need to proceed judiciously. The performance management puzzle can’t be “solved” all at once. The only way to raise that “C grade or worse” to something more respectable is to address one piece of the puzzle at a time:

·      The tools, systems and software we use.

·      The processes we have in place.

·      The comprehensiveness of our reviews—and our reviewers.

·      The training we provide to managers and supervisors.

·      The uniform and fair application of measurements and standards.

·      The effectiveness of our communication.

And so on.

As the Deloitte report noted, “the pressure for performance will likely increase as business decisions become more complex and challenging.” In other words, the need to improve performance management is only going to grow more urgent. So we’d better start bumping up our grades in quick fashion.

In our next post, we’ll push the puzzle metaphor just a little further and touch on some of the new realities of piecing together a strong performance management solution.

Mirror, Mirror: Who’s the Fairest in Engagementland?

For those of us prone to mirror-gazing and taking stock at this introspective time of year, here’s something worth pondering: are we really doing what it takes to nurture employee engagement within our companies?

It’s a fair question, especially when you consider the powerful benefits that derive from

superior employee engagement, e.g., enhanced productivity, improved innovation, greater profitability and reduced turnover, to name a few. The media has been filled with stories about these benefits and about the incentives that employers use to raise engagement levels.

But far less has been written about the attributes shared by companies that enjoy superior employee engagement. A notable exception is the Hay Group’s report titled, “What it takes to become a high performing company.”

In addition to highlighting the key attributes of companies with high employee engagement, the report also calls attention to this critical fact: companies boasting high engagement levels also are high-performing companies. They’re industry leaders in terms of their financial performance. “Indeed, these organizations roughly double industry averages on five-year ROA, ROI and ROE,” the authors write.

As the report shows, here are a few of the key attributes shared by high-performing, high-engagement companies:

·      They treat employee development as a priority. “Employees in high performing companies offer more favorable views of their ability to improve their skills in their jobs. As a result, they are more confident about their ability to achieve their career objectives by continuing to work for the company.”

·      They treat employees with great regard. “Those organizations that show a high regard for employees are more likely to find them willing to go above and beyond the formal requirements of their jobs, pour extra effort into their work, and deliver superior performance.”

·      They have leaders who lead. “Good leadership is widely known to make a significant difference to bottom-line performance … High performing companies are viewed as having effective leadership, leaders (whom) employees can trust and have confidence in, and leaders whose actions and behaviors are consistent with company values.”

·      They keep employees aligned with business goals. “High performing companies help employees to feel fully aligned with the organization by ensuring that strategies and goals are clearly communicated to employees and that employees are regularly informed about business plans and results.”

Again, these are just some of the attributes covered in the report, which also offers related statistical data for you digits-driven thinkers.

Clearly, as responsible employers and HR professionals, we need to give these attributes our serious consideration. But for those of us interested in transforming our companies into high-performance dynamos, our consideration isn’t enough. We must actively nurture these attributes in the New Year.

Note To Performance-Driven Companies: Yank Those Stacked Rankings!

There’s been a lot of chatter lately in the media and across social sites about the subject of stacked ranking (aka, “forced ranking,” “rank and yank” and few other colorful terms).

In case you’re not familiar with it, stacked ranking is essentially the practice of ranking

employees along a bell curve. Some employers use the rankings to openly compare workers’ performance (primarily as a way to motive those at the lower end of the curve to do better), while others actually use the rankings to fire underperforming employees.

BusinessWeek ran a story last month about Yahoo’s adoption of stacked ranking. Notably, it had this to say: “The Institute of Corporate Productivity says the number of companies using either a forced ranking system or some softer facsimile is down significantly from previous years. Companies performing well were less likely to be using forced ranking systems than those that weren’t. Just over 5 percent of high-performing companies used a forced ranking system in 2011, down from almost 20 percent two years earlier.”

In our experience, stacked ranking is most commonly used by enterprise-sized companies—those with seriously large employee populations. While this might make sense to some degree, we would never recommend stacked ranking to any employer, no matter how large its workforce is. The reason? The practice can easily become misleading, unfair and demotivating. Equally important, it can stretch out the review process unnecessarily.

Under stacked ranking, a manager is able to give a particular ranking to only a limited number/percentage of employees. (For example, only about 10 percent or so of a group can be ranked as “top performers,” and so on down the line including a specified percentage who must be ranked as “poor performers.”) Once the manager has dispensed the total allotment of a particular ranking, she/he must give all other employees a different ranking—even when these employees deserve to be put into the already-filled ranking. Managers often find it an arduous and time-consuming exercise to carefully work through the problems this system causes and distribute employee rankings as fairly as possible.

In addition, stacked ranking can be demotivating to employees. Example: using a scale of 1 to 5 (1 being poor and 5 being excellent), manager Jane rates employee Dave a 3. Dave deserved to be rated a 4 but all of the 4s were already handed out. Jane explains this to Dave and sends him on his way, thanking him for his performance. How do you think this is going to sit with Dave? Maybe he’ll trot back to his desk happy, engaged and motivated to do even better … but we wouldn’t bet on it.

Bottom line, employees should be rated according to their merits—not according to a predetermined scale or a set of forced categories.

In other words, for truly performance-driven companies, stacked ranking simply doesn’t stack up.

5 Must-Have Features for Your Performance Management Software

Talk about your troubling data …

Asked to describe their confidence levels regarding their own workforce management, employers surveyed by Ventana Research were nearly evenly split: while 51% expressed moderate or high levels of confidence, 49% are only somewhat or not at all confident.

That’s troubling enough but when asked about their workforce management systems:

·      Just 41% said they’re satisfied or very satisfied with their current system.

·      42% are only somewhat satisfied.

·      15% are flat-out unsatisfied.

·      And another 45% indicated they need new applications to improve their workforce productivity and results.

It’s no wonder that talent and performance management software are among today’s most sought after HR solutions. After all, these solutions deliver a powerful set of benefits including greater productivity, stronger employee engagement, better alignment between company strategy and employee performance, and a stronger capacity for conducting sound succession planning.

So, whether you’re in the market to buy new performance management software or you’re simply looking to upgrade your current solution, remember this important (and often overlooked) guideline: don’t compromise ease-of-use just to get the features you want.

Sure, the solution you choose has to offer the right features. No doubt about it. But if the software is difficult to use, your people will avoid it. No amount of training or clever “promotion” can overcome difficult software. In the end, you’ll not only waste your money but you’ll also let down your customers (i.e., your managers and employees at large) and your senior leadership. And you’ll have gone a long way toward losing their trust.

Fortunately, with the array of robust performance management solutions now available, you don’t have to compromise ease-of-use for features. Not if you do your homework properly and research your options online.

However, when it does come time to consider features, certain ones do top the lists of most organizations. In our experience, are five must-have features:

1.     Customizable Performance Review Forms—Cookie-cutter reviews are worthless and a waste of time. The same is true of cookie-cutter software. If a solution doesn’t allow you and your managers to tailor it your needs, move on to another option.

2.     Goal Management Tool—Having the ability to manage and track concrete performance goals is not only wise, it’s an imperative for any company that wants to become truly performance driven. A goal management tool that can be used/accessed throughout the entire year (or performance cycle) helps to maintain strong alignment between employee performance and the company’s goals and targets.

3.     Journal Entry/Notes Tool—This is an especially useful feature—not just for managers but also for their direct reports, as it helps to keep both parties informed and engaged in ongoing communication about goals, action items, areas for improvement, education and developmental matters, etc.

4.     Strong Reporting Function—This makes it easy for managers and HR to run performance reports, conduct proactive succession planning, and share this information efficiently among key personnel, department and functional heads, and senior leaders.

5.     eSignatures and Automated Notifications—These are features that enhance compliance, facilitate administrative actions and maximize convenience—all of which help to ensure that people actually enjoy and utilize your software.

If you’re looking for added value, be sure to explore software that offers these additional features:

1.     360-Degree Feedback Module

2.     A Learning Management System and Learning Content Integration

3.     Compensation Management

4.     A Mobile App

These features are becoming increasingly attractive to organizations that value comprehensive solutions that can be accessed from a wide range of devices and technologies.

Bottom line, you no longer have to sacrifice ease-of-use to get the features you need in your performance management software. Research your options carefully and you’ll make the right choice. Even better—you’ll help your company become significantly more performance-driven.

From the Flight Deck: Clear a Runway for Your High Performers

A Bersin by Deloitte study has shown that organizations with highly effective employee development plans have about twice the revenue per employee as organizations with poor plans. And earlier research from Bersin & Associates revealed that senior leaders who coach and develop employees (and who hold others accountable for doing so as well) are three times more effective at producing improved business and talent results than those who do not.

Of course, to get these kinds of results you can’t rely on a one-size-fits-all employee development strategy. You need to tailor strategies to fit your people. One perfect example: design strategies specifically for your high-performing employees.

These are the individuals who keep your company running right now. Their work and their contributions are vital to your success today. Don’t confuse high performers with high-potential employees—those who aspire to holding top leadership roles within your company. While high-potential employees are often high performers, high performers don’t always have their hearts set on holding senior leadership roles.

Distinguishing between these two groups is important because your high performers need their own “runway” to maximize their success. This runway includes dedicated development plans and budgets as well as timely, ongoing performance assessments to ensure their work remains aligned with key company goals and targets. Without these regular assessments, it’s all too easy to allow high performers to keep plugging away at tasks and responsibilities that no longer reflect the company’s evolving needs and goals.

Here are three tactics that you can use to help your high performers take flight:

1.     Set clear expectations with managers: Give your managers a clear understanding of what high-performance behaviors are—and how they might vary by function, department, team and role. Sharing these expectations makes it easier to identify high performers and communicating back up the chain to executive leadership who those individuals are. It also makes it easier to build out development plans and anticipate what an individual’s or group’s productivity will look like after further development.

2.     Manage performance proactively: True performance management is relentless and requires proactivity—anticipating the challenges you’re your employees will face and then providing them with the tools, guidance, support and constructive feedback they need to overcome these challenges as quickly as possible. Development doesn’t always have to focus on the long-range or on future roles. And don’t forget to reward success. While simple recognition and pats on the back are useful, they’re not acceptable on their own where your high performers are concerned, especially not for those making serious contributions to the organization.

3.     Keep everyone on track: Make sure that high performers are getting the support they need, particularly when their work environment changes or becomes chaotic. Temporary assignments and rotation of team members, for instance, can decrease the productivity of even your highest performers. Managers should focus on the individual performance of team members first and then look to manage disruptive external factors. Managers who put performance first—and do what they can to facilitate success—also build trust with their teams.

Some employers are tempted to focus most of their resources and attention on high-potential employees because they foresee a greater/longer return on their investment. But this is a mistake. While high-potential employees are important, high performers keep our businesses running in the here and now. Ignoring them can prove far more costly than we imagine.

Download our white paper, “Giving High Performers a Runway,” to read more about creating robust development strategies for your company’s high-performance employees.

4 Trends That Are Transforming Performance Management and Organizational Learning

At its core, performance management is all about giving our people the information, resources and guidance they need to achieve specific goals. Sounds simple enough. Of course, the devil is in the details.

One reason performance management is so challenging—the business world isn’t static. Our organizations evolve. Our business goals and targets shift. Our customers’ needs change. Some of these changes occur swiftly while others take time. But there’s no stopping them.

It’s a good thing, then, that significant changes are occurring to the tools, technologies and techniques at our disposal for managing performance and developing our employees. In fact, here are four trends that are on their way to becoming standard operating procedure for improved performance management and corporate learning:

1.     Bring your own device (BYOD) policies—Many companies are adopting these policies for a variety of reasons including their cost-effectiveness, their appeal to younger workers, and the 24/7 connectivity mobile devices provide to workers who travel frequently and work remotely. In addition, a growing cadre of talent management and learning/development providers are now delivering mobile solutions as part of their offerings, which enable companies to share powerful tools and resources with their people in exciting new ways. (See Gartner’s interesting research on BYOD here.)

2.     Bite-size learning—This refers to the practice of breaking topics and lessons into smaller, more “digestible” pieces. The rationale: to enhance retention of information and to allow busy employees to consume a topic in a few minutes. It also makes learning incredibly more effective in the age of the mobile, fluid, and multi-generational workforces.

3.     Location-based learning—This is the kind of learning you see taking place in museums and tourist sites. The learner is presented information on the spot via sound, images or text—or a mix of these three. Sound is delivered through headphones or speakers while images and text are delivered to a variety of devices including smartphones, laptops, tablets or screen projectors. Smartphones, in particular, have dramatically increased the popularity of location-based learning.

4.     Cloud computing—The “cloud” offers a convenient and inexpensive way to access an increasing selection of tools designed to help organizations track and improve employee performance, learning and development. Cloud-based solutions eliminate the need to update software manually, and they facilitate the easy sharing of information, resources and tools (especially those related to learning programs and knowledge sharing). Plus, cloud-based solutions are particularly attractive to enterprise organizations and companies with large, dispersed workforces.

Without question, those of us who want to improve all aspects of performance management—from assessments to learning and development programs to compensation management—need to take better advantage of these concepts and technologies.

For most of us, this means arming our companies with systems and solutions that enable us to do several key things well:

·       Empower our learning leaders to easily create development goals and recommend specific learning activities based specifically on an employee’s performance appraisal ratings.

·       Give employees easy access a full external learning curriculum that supplements our internal training and development content.

·       Provide our people with online access to a comprehensive learning management system.

·       Provide our managers with real-time access to reporting analytics and transcripts of learning activities.

The more we embed these strategies into our business cultures, the better we’ll become at building workforces that deliver real competitive advantages.

Interested in reading further about the convergence of talent management and transformational technologies? Download our white paper, “Performance Assessments in an Increasingly Mobile World,” which is available here.

Is Your 360° Feedback a Few Degrees Short?

For many companies, the answer to this question is a resounding, “Yes!”

The reason—their employees aren’t conducting self-reviews.

If this is the case at your company, your “comprehensive” feedback is not only incomplete but

it’s also causing you to miss out on a golden opportunity—the opportunity to drive truly targeted performance improvements, to raise employee engagement levels and to manage your talent more effectively.

Properly instituted and utilized, self-reviews impart all of these benefits to employers by helping them facilitate open communication between managers and direct reports; by encouraging personal growth in individuals at every level of the organization; and by making performance management a responsibility that managers and employees share.

Additionally, self-reviews help employers:

·      better understand how employees “see” their performance and the contributions they’re making;

·      address critical gaps between employee perception and reality;

·      and determine whether performance goals are being communicated and understood clearly.

Employees themselves also benefit from self-reviews in a number of ways. For example, employees gain a greater sense of control over how they’re being judged and evaluated when they conduct self-reviews. This translates into greater satisfaction and commitment. Self-reviews also give employees the opportunity to:

·      engage in a constructive dialogue with their managers in a setting that’s devoted entirely to them (as opposed to team and departmental meetings where performance may be discussed);

·      highlight their significant achievements and how they’ve addressed past performance issues;

·      ask for support, education or training to address skill gaps and weaknesses;

·      and think/talk about their performance in a larger context (i.e., how they’re helping to achieve the goals of their teams, departments, functional areas and the organization at large).

Bottom line, all of this adds up to more engaged employees. And, as a growing body of research has shown, organizations that have high employee engagement are more profitable, more productive and enjoy greater customer loyalty.

So here are a few suggestions that can help your company make better use of self-reviews and reap the considerable rewards:

Have employees begin their annual reviews with self-reviews. This is a clear demonstration of your respect for employees and your interest in hearing what they think about their performance. Instead of feeling like a one-way critique, your performance reviews will take on the characteristics of a two-way exchange of ideas and information. And you’ll be able to address gaps in perceptions and expectations more proactively.

Encourage employees to focus on the aspects of their performance that are most important to them. Again, this gives you the opportunity to make sure there is agreement between what employees consider important and what management considers important. As a result, fewer disputes are likely to arise and differences of opinion can be discussed more easily.

Use self-reviews as a reason to hold more frequent (and less formal) performance appraisals. We’re always encouraging clients not to get stuck in the annual review cycle. Companies that hold reviews and performance-related discussions more often can make small, steady adjustments to performance and resolve problems before they become epidemic. Employees are far more open to small “course corrections” in their performance, and they won’t feel blindsided by negative feedback as they might if you wait an entire year to critique their work.

Have employees get personally involved in creating their own performance goals. Don’t just hand your employees their performance goals. Make them your partners in goal-setting and creating performance targets. Employees who have a direct hand in these activities embrace their goals and take ownership of their performance to a greater degree. It’s another way to build up their engagement—and to build a workforce that will give you a true competitive edge.

For other ideas on transforming your performance review process, download our white paper, “From Dread to Moving Ahead: Taking the Pain Out of Performance Management,” available here.