Tag: performance management

Recognizing and rewarding employees for their contributions is required to motivate and retain staff. But “Pay for Performance” as we know it just doesn’t work!

For the longest time, companies have used performance ratings to decide merit pay increases and sometimes, annual incentives. Typically, merit increases are determined according to a combination of performance ratings and position in range (compa-ratio) – those with a combination of higher performance ratings and lower compa-ratios are eligible for higher increases, while those with lower ratings and higher compa-ratios get less.  The idea is that such an approach provides a differentiated reward to those with better performance, while ensuring that, on average, the company is paying at the market rate (compa-ratio of 100).

The level of differentiation between strong performers and good ones isn’t much with annual salary budgets of 3% or less in many countries.  Employees don’t get excited about getting an increase of 3.2% instead of 2.9%.  It’s not really motivating, and does little for retention, which are the two primary goals.  Not to mention employees and managers probably hate your performance management system and do not trust the results are fair.

What’s Wrong with Pay for Performance?

Putting aside that last thought, and assuming your performance management approach is working well and is perceived by management and staff to be fair and effective, the problem with pay for performance is one of alignment.  Pay for performance rewards a one-time achievement (as measured by the annual performance rating) with a salary increase forever. That’s a huge misalignment!

Merit increases are essentially “baked in” and will remain a part of salary until the employee leaves the organization.  On the other hand, performance is variable, and usually changes from year to year.  If an employee is a high performer one year, and gets a “high” merit increase, and then in the next year, their performance is lower, how much do they give back?  Yeah, right.  The penalty for lower performance is a smaller increase going forward.

Using annual performance assessment to determine salary increases is crazy.

Alignment is Key

To align your pay for performance strategy, the first thing you need to change is the role performance management plays in determining rewards.  Birches Group believes performance management, which measures periodic, time-bound achievements, should be used to grant one-time recognition such as bonuses.  When performance is higher, bonuses go up.  If performance drops, bonuses go down, sometimes to zero.  You should do something else for salary movement.  But what?

Using Skills to Recognize Growth

In Birches Group, we believe that pay movement should reflect one’s experience. As an employee gains more experience in their job over time, they develop a deeper understanding of their role and accumulate the necessary skills that enable them to be more efficient and produce results of increasing quality. Linking an employee’s growth in skills and knowledge to the determination of their salary movement makes sense, and it’s totally aligned.  The accumulation of skills and knowledge stays with your employees and can be applied continuously in the future.  Skills are like an annuity that keeps paying over and over – like salary!   The challenge with such an approach has always been how to measure skills and knowledge.  Until now.

Birches Group Community™ Skills provides a framework for measuring experience.  Skills uses five skill levels – Basic, Proficient, Skilled, Advanced, Master – anchored to our job levels.  For each job level, explicit measures or milestones are defined, enabling managers to evaluate employees’ accumulated skills and knowledge.  Companies can link their compensation administration to the progression of Skills in any number of ways, and provide increases based on employee growth in their jobs rather than performance.

The New Pay for Performance

Employee’s should be recognized for both the growth they demonstrate in their job and their achievement during a performance period.  By structuring your pay for performance philosophy using two concepts instead of just one, you can solve the alignment issue and create a pay for performance program that works.

If an organization’s goal is to motivate and engage their staff, the approach must be clear and fair. By linking salary movement to growth in skills and knowledge, you will be paying for increased capacity, while also recognizing achievement. Contact us to learn more about our Community™ approach to recognition and reward.

Bianca manages our Marketing Team in Manila. She crafts messaging around Community™ concepts and develops promotional campaigns answering why Community™ should be each organization’s preferred solution, focusing on its simplicity and integrated approach. She has held various roles within Birches Group since 2009, starting as a Compensation Analyst and worked her way to Compensation Team Lead, and Training Program Services Manager. In addition to her current role in marketing and communications, she represents Birches Group in international HR conferences with private sector audiences.

There is a lot being written about these days about the ineffectiveness of performance management.  Some writers suggest that we just give up, throw in the towel and get rid of performance appraisals entirely.  Others claim to have a better way.  Many focus on the fact that performance discussions and feedback are actually more useful and more critical than the appraisal itself.

Of course, we also all know that even though appraisals can be difficult or tedious, they are necessary.  All people need to know how they are doing, and they need to know this in a qualitative manner measured against well-understood, objective standards.  Staff usually put great effort into their work.  They need to know how their employer values this effort.  To paraphrase New York’s famous ex-mayor, the late Ed Koch, they need to know “how they’re doing.”

The reason performance management is such a mess is because we are assessing the wrong things!  We have made it into a pseudo-science, artificially dense and hopelessly complex.

In classic performance management, the employee develops a set of objectives, often aligned with corporate initiatives that are set at the top of the organization and cascaded down to all levels.  Through these cascading objectives, employees focus on the critical activities which management believes will deliver the business results desired during that year. This approach fails to recognize that work is dynamic.  Objectives change, become superseded, and new priorities emerge.  Using cascading objectives for work planning has value, but as part of performance management it is highly flawed.

So how can the employee get a fair and useful evaluation?  In many organizations, there will be some negotiation to remove unmet objectives and to substitute with tasks that actually got done.  Companies spend inordinate amounts of time “calibrating” ratings in an attempt to promote some uniformity which in the end further undermines transparency and management accountability.

So what is the alternative?

Assess Performance Based on the Job

We think performance can be effectively measured by considering the job instead of the cascading objectives.  Think about it.  The context of the job defines expectations.  These expectations remain constant through various operational challenges and changing priorities.  You always expect your finance officer to ensure integrity in managing financial transactions.  You always expect your brand manager to be seeking opportunities to promote your products and bring you market insights.  These expectations have been designed into the job role.  In each and every interaction, staff are judged against three simple measures:

  • Does this individual know what they are talking about?
  • Is this person listening to me and understanding my needs?
  • Can I count on this person to deliver to my expectations?

From the lowest position in the company through senior management, each and every day we are individually judged against these three basic parameters, which are informed by the job roles we encumber.

Here is a simple example:

Remember the last time you ate at a restaurant?  There was a server who took your order, brought your food and looked after you from the moment you were seated until you finished your meal.  You have no idea what objectives were agreed upon between the server and his or her manager.  But I bet you have a very good idea of the server’s performance for your meal!

For example:

  • Were you greeting politely when seated?
  • Were the daily specials explained and were all of your questions about the menu choices answered efficiently and effectively?
  • Was you meal well-prepared and delivered promptly?

You get the idea. You can easily answer the above questions about your server at a restaurant.  And if the answers were all yes, I think you’d agree that the server’s performance was excellent (be sure to leave a nice tip!).

We’ve assessed performance in this example based on our expectations of the job – the things good servers in restaurants are expected to do .  Objectives are not needed because we know how to assess performance based on our expectations of performance for the job.

Performance can be measured against three factors – Purpose, Engagement and Delivery.

Think about our restaurant server again.  The purpose of the job is to take your order, serve your food and maintain a high level of satisfaction through excellent customer service.  For engagement, the server must communicate effectively with each customer, as well as the kitchen, busboys, and other restaurant staff, to ensure that everything goes well for your meal.  Delivery is probably the easiest to understand – was the order delivered on a timely basis, accurately and in a way that makes the dining experience a pleasure for the customer?

The Birches Group Solution

At Birches Group, we’ve built our Community™ suite of applications around the three core factors of job evaluation – Purpose, Engagement and Delivery – mentioned above.  Our Community™ Performance Management (PM) module uses the underlying job levels to create a consistent, graduated scale on which to rate performance based on the expectations of the job, rather than the completion of specific objectives.  It’s a 360° approach which includes self-evaluation, manager assessment and feedback from peers and customers (internal and/or external to the organization).

The best part about Community™ PM is its simplicity.  It is easy to use and takes just a few minutes to complete a review, but provides both employees and managers with robust feedback suitable for a meaningful performance discussion.

Let’s not give up so fast on performance appraisals.  Instead, let’s try managing them differently.

We have — and it works!  Contact us to learn more.

Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.