Not Even Pay-for-Performance Is Safe

This post is meant to “stir the pot”.  So grab a cup of coffee, sit back and be sure you have the modern day equivalent of “smelling salts” handy.

There have been countless articles on the problems with performance appraisals (PA’s) and the need to either do away with them entirely or “fix” them.  I’m sure you’ve read your share.   Two of my colleagues here, Derek Irvine, and Howard Risher have written a fair amount about not only the problems but some potential “fixes”.

But PA’s as such are not the focus of this post.  I’m not going to talk about the process of reviews, training of managers on how to conduct/write them, what they should cover/include, how many times they should occur in the year, and legal reasons for --- none of these issues.

The focus here is strictly on compensation.

Some companies have become fed up and are trying new approaches.  A fair number of these “trailblazers” are start-ups, but some of them are large companies like Lear, Kelly Services, Adobe, Medtronics and Motorola Solutions.  These new approaches include removing performance ratings and compensation completely from the process.  

Let’s look at a few of these companies and see how it actually works.

In 2010, Lear rolled out its new program to 115,000 employees across 36 countries ---- a major undertaking.  In this new system PA’s have no connection to decisions on pay. None. Lear dropped annual individual raises. Instead they adjust pay only according to changing local markets.  In addition they pay a bonus annually to employees based on company profits.  They also give stock grants to their top performers below the VP level.

Kelly Services’ management didn’t feel their performance management program was working well.  As well as some changes to the PA’s themselves, they also decided to abolish performance ratings.   Now, like Lear they provide annual market adjustments as appropriate given an employee’s position within the salary range.  In addition, they have developed a more robust approach to their total rewards program to include more incentives, recognition and other rewards.

Motorola Solutions Inc. eliminated ratings from their PA’s in 2012.  They designed a two-part process including a business-performance-factor bonus and a discretionary award. While the former is awarded to virtually every employee – except for those that are under-performing -- the latter is an extra bonus amounting to as much as 40% more than the business-performance-factor bonus. It is given only to the company's top 25% performers.

The obvious question is how these 25% are identified in the absence of performance ratings. According to Shelly Carlin, SVP of HR, they are the easiest employees to identify.  Not only do their immediate managers know who they are but other managers they interact with in the company do as well.  “We've found that managers don't need a label or a rating to identify their best performers," says Carlin. "They know who they are by the contributions they make every day."

Although these are only three companies ---- there seem to be some similarities.  They are:

1)Using a type of profit-sharing plan to reward most all employees based on company performance. 
2)Making adjustments to base salaries for changes in market rates. 
3)Giving outstanding performers either stock or cash bonus to recognize their “above and beyond” contributions.

You might say that by giving bonuses based on company results, there is no tie-in to individual contributions and might be de-motivating.  But as workforce demographics shift from a majority of “Boomers” to a majority of “Gen Y” this concept may be changing.

Gen Y tends to believe more in terms of “we’re all in this together” instead of “I did this myself”.   The work environment is evolving to accommodate them.  It is a lot more collaborative now, and teams are much more common.  Gen Y tends to think more like “collectivists” than “individualists”.   And that may be helping to foster this new thinking.

As Tom DiDonato, head of HR at Lear says:   “Individual pay for performance is a fallacy. We all work in interconnected, interdependent systems. The value that is delivered to our customers depends upon the quality of the interactions of the people and processes in the company, not upon individual, isolated performances that are added.”

Regardless of what each of us believes, we might see more “disruptive” changes ahead.  What’s your thinking at this point?  Can you see any value in this new type of thinking?

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career.   Her true love is working with local national issues.  Jacque has the following certifications:  CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA.    She belongs to SHRM, Human Capital Institute and World at Work.   Jacque been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications. 

Comments

[Joe Rice]

I see value for sure. Taking pay out of the mix can make the performance process more objective (it focuses fully on performance improvement rather than compensation correlated to performance). I'm guessing it shines a light on freeloaders too as managers will want to take action on poor performers set to receive a standard bonus. I think you still have find a way to recognize high performers, but there are other ways to accomplish this.

[Dan Walter]

We have been counseling our clients for years to de-link the performance review process from the compensation discussion. In an age of 3% "merit" increases it is hard to make a case for high performance if you provide only a low performance increase.

[[email protected]]

Hi Joe ---- It might be that Shelley Carlin (above) has a point.

I know that when I was in the corporate world we were very focused on "calibrating" across the company just who was rated Excellent. That was the category most visible to each VP. The VPs presented their list in a peer meeting with the COO/CEO. Oddly many of the top 25%/Excellent were known by other VPs or had feedback from their manager about them. These are the most visible. (In a very large company you could take the process down to the Director level and then work it up to the VP level).

The bottom Poor rated employees are the most difficult ---- or worse yet the cutoff in the list of employees between Poor and Meets Exectations.

But I do agree with you that taking PA's out of the pay link has promise.

[E. James (Jim) Brennan]

Identifying the best producers is generally quite easy. Dealing with challenges over variable rewards to the vast majority below them is always the issue. The more experiments, the better. Changing reinforcement methods can help and becomes more popular as cash compounds and is in short supply as well.

Performance will be a perpetual factor, however, because even the membership and service models require a minimum level of acceptable output results to retain employment. Being fired is the ultimate negative performance appraisal. Also, bottom line remains, you can't have a team without individuals and some will resent suppression of their diversity.

[Jules]

One has to wonder, how would the best performers feel about getting the same increases as the average or poor performer? I wonder how do you peg the position to the market? We talk about benchmarking the job (good ole survey) but the company practice has always been to pay people for their capability and performance. And if all Analyst I are all doing the same job, 3 years down the road the differential would clearly exist and I don't see any high performing employee feeling happy being paid alike.

As for performance evaluation, let's not blame the lack of management training/brainwashing for the inefficiency of the system. A lot of good managers would take time to do a real evaluation because they know that their people matter. If they can't even be bothered because they are too buzy doing 'real work', then maybe they should not be supervising anyone but take the technical specialist path.

[Steven Honeyman]

Given that many Gen Y employees may be more comfortable and motivated by collective, connected and collaborative work experiences, it seems there is an opportunity to also re-think team evaluation, reviews and rewards. What innovations are working on the team side of improved performance?

[[email protected]]

Dan --- thanks for the comment. The crux of this whole new system is not to separate development discussions from performance(looking back)/merit pay discussions. It's not to have performance/merit pay discussions at all. No performance ratings. Just development discussions at least quarterly.

No merit. Just adjust salaries with market. Everyone gets profit-sharing (percentage of pay) except low performers. Top performers may get a bonus and/or stock.

So the real kicker here is no performance review (no looking back) and no ratings.

Jules --- it's not the same increases. No increases to base except as market dictates. Profit-sharing as % of base except for poor performers. So employees are not getting the same increases.

Lawyers say that using PA's for paper trail doesn't work because majority of reviews are not written worth a hoot. So most of the time lawyers tell managers to start from scratch documenting performance issues. And some companies are not going through the legal process at all--- just offering very large separation pay.

I think companies are tired of PA's not working --- and HR is tired of pushing a system that doesn't and hasn't worked for umpteen years. So they're changing it --- at least they're trying even though they may not have gotten all the kinks worked out.

Truthfully I don't know if I would be "gutsy" enough to do it ---- so I will watch and see how this new trend plays out.

[E. James (Jim) Brennan]

Performance gets evaluated all the time. The labels applied to the process just keep changing. Before I converted one very well known public utility to P4P after 100 years of seniority progressions, I quietly informed top management that they HAD been paying for performance all that time, without ever saying it.

My research into their own employee records had allowed me to identify their high, low and nominal performers of the past with great accuracy. They had rewarded top workers with plum assignments, promotions, reclassifications and new titles. Performance appraisal is not a magic form or a pipe dream but a practical process which some do better than others.

[Jules]

I find that interesting.

While dealing with reservoir enginners/geologiest who can be easily poached by another company, doing something like this might just make them up and leave. People who are tagged as HiPo would not be happy to be paid average increase.

In fact, an enginner of 3 years who had 5 others like him in the same position was desperately unhappy to be paid the same as his peer each time, when he goes above and beyond what everyone does. No one underperformed, he just went further. At 3 years, he we had invested A LOT of money in training him. Sure they are other ways to reward him, but what we don't want to start is for them to look outside.

People underestimate the hunger in the latest generation. They were not brought up only to work together, they were also brought up to compete with each other.

While paying all the same (excluding poor performers) might work during a sluggish economy, once things improve and there are a lot more opportunities out there, they might just leave.

I would be interested to see the impact to the organization in 5 years. I would like to see if the new change would support the company's mission, vision and culture.

[[email protected]]

Hi Steve ---- I don't know names of companies that are doing team assessments, evaluations and rewards. It would be difficult to do that unless the team worked together a year. If a shorter period the calculations might be difficult. This might be a case where recognition would be best ---- rewarding the team when it accomplishes its goals.

I do know that in technical companies teams that are working on a long-term project like a new product sometimes have "milestones" built into the process. Maybe one for design buy-in by management, one for design completion, one for beta testing success, one for rollout, etc. They do that so the team won't have to wait 2-3 years for their reward.

I do know that some companies allow their foreign locations that are "collectivist" do team rewards. Culturally that is much more acceptable than individual rewards.

I did a post here on Japan:
http://www.compensationcafe.com/2012/07/a-japanese-win-win.html It wasn't about a team reward --- but a team pay-out! They turned individual performance into team payouts!

[Kenji Nojiri]

Hi, Jacque,

I have a comment on your post on Japan.
I am a Japanese HR consultant who is watching HR practices in Japan.
You wrote " In reality, however, in Japan you will typically find that employee performance ratings, salary increases, bonus/incentive awards, etc. are clustered very closely together so that, for all practical purposes, every employee gets about the same amount of money, rating, etc." I think you wrote this as a general trend in Japan.
However, in reality, in Japan, a lot of companies were influenced by American "Pay for Performance" idea. Major HR consultants recommended that Japanese companies should follow American ways of Performance evaluation and compensation programs. Many major Japanese companies including Fujitsu, Takeda Pharmaceutical, and Sumitomo Chemical implemented such ideas. For manager level employees, they implemented "Nenposei" program with which there is a huge difference of compensation among managers based on annual performance evaluation. Many companies introduced five level of performance rating.

Therefore a lot of Japanese companies which introduced American way of performance ratng programs are facing loss of team spirits which were once Japanese tradition.