Pay Differentiation without Performance Ratings: How's That Working for Us?

I'm picking up what might be an interesting pattern.  It's still a very limited data set, but I have now encountered several organizations who have seen employee satisfaction with compensation decline in the years following a decision to drop performance appraisals and performance ratings.

It's too small a sample and, of course, these variables are far from isolated.  Each of these organizations has a ton of other things going on that could impact satisfaction with compensation.  Nonetheless, it was enough to get me thinking.

Like Adobe (see Jacque Vilet's Café interview here), these organizations still have a merit increase process in place.  It simply functions without an explicit set of merit guidelines tied to discrete performance assessments.  Salary increases continue to be made and position-in-range examined with consideration of "merit" -- but said merit is now a largely discretionary determination or (in a few cases) determined via a separate process (e.g., 9-box, topgrading, etc.), the results of which are not explicitly shared.

So what's the problem?  I think it's this.  Employees are forced to draw judgments about the fairness of their pay in the absence of clear, unambiguous information about how well they are performing.  Given our collective inability to accurately gauge our own performance (either in isolation or in relation to others), it isn't hard to imagine that this might lead to a lot of people believing they are being under-rewarded for their contributions.  Hence the dip in pay satisfaction.

In my mind, it all boils down to the following:  Treating people differently (especially in a sensitive area like their pay) based on conclusions which you are unwilling to make explicit or clearly communicate to them is unlikely to be perceived by them as fair.

This raises questions about where we are headed with performance management and whether we will ever be able to reconcile the challenges of gauging people's performance contributions with the desire to reward them for those contributions.  I'm inclined to agree with my friend Tony's prediction that performance appraisal will likely survive our awkward and unhelpful attachment to "annual reviews" as well as our current romance with ratinglessness to become "continuous, 360 degree and closely monitored by both machines and humans."  Drawing on advances in data mining and analytics while not losing sight of the fact that (ultimately) people should make people decisions.

To the degree that we can arrive at this place, bring sufficient art to bear on the science and turn this information into helpful, meaningful, compassionate and actionable feedback, we will indeed have a solid platform for performance-differentiated rewards.

That's what I think.  You?

Looking for the definitive guide to compensation leadership? Ann Bares collaborated with Margaret O'Hanlon and Dan Walter on the ebook Everything You Do (in Compensation) is Communication.  Find it at www.everythingiscommunication.com.  Ann is the Founder and Editor of the Compensation Café,  Author of Compensation Force,  and Managing Partner of Altura Consulting Group LLC.  Ann also serves as past President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.

Image "Piggybanks Eating Money Showing Financial Counselling" courtesy of StuartMiles / FreeDigitalPhotos.net

Comments

[E. James (Jim) Brennan]

Right, Ann. More feedback is needed! When performance is irrelevant to compensation, the organization gets less than it pays for. We know that P4P is vital. But it should be more than only a monetary transaction.

The communication feedback about the performance reward judgment involves employee perceptions that are based on both hard cash and soft words. Tiny pay increase amounts won't say much, especially when no words amplify the intended message. Communication that lacks either meaningful action or descriptive language tends to be ineffective. Workers need reassurance.

[Dan Walter]

I think Performance Reviews / Evaluations / formal processes are a bit like stop signs on a quiet country road.

When come upon them you are annoyed. They stop your progress and distract you. They generally are pointless since the only occurrence is the aforementioned slowdown in progress. So, some people decide they can simply ignore them.

It works for a while, perhaps a very long while, right up until it doesn't. Then someone, in the best case, ends up off the road and in the worst case ends up never coming back.

Wow that was a long-winded way to say that most of the companies that have gotten rid of these do not have the culture, training and fortitude to ensure the new process will work.

[E. James (Jim) Brennan]

Agree that pointless interruptions create distractions, task interference and message confusion, Dan. Better analogy might be the GPS device that shows your current position compared to your intended destination. Yes, it can be a dangerous distraction to safe driving, but it is supposed to be a helpful guide for a successful journey.

Personally, I dislike the "annual surprise party" approach where the supervisor can't sleep the night before and the employee can't sleep the night after. I have always strongly endorsed a regular stream of steady updated feedback conversations as a vital part of the working environment. A series of documented periodic joint sessions can be accumulated for an annual summary, if necessary.

That's harder, of course, because then it becomes the regular management responsibility it should be. But why else have supervisors?

[Jacque Vilet]

I think about all the "firsts" in history: the world is round not flat . . .the sun is the center of our galaxy not the Earth ... lobotomies don't cure mental illness . . . pay should be based on performance not seniority, etc.

Are we looking at a real change in compensation or just a fad. Change is difficult. I agree with pay for performance but it's very subjective no matter the method used. And we have talked about management skill/lack thereof in conducting discussions on past performance ad nauseum for decades.

I personally applaud these new attempts to put employee development ahead of past performance. And pay? Setting increases to match market movement, team rewards and company-wide profit sharing may be the way to go. And an internal calibration system could be used across the company to ID/agree on top performers for special cash/stock awards.

I can't forget the remark made by Tom DiDanato at Lear: “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.”

It's difficult to put the past aside and begin to realize there are other ways to reward people. Pay for performance is still king --- but maybe the way we define it needs to change.

[Tony Bergmann-Porter]

'Personally, I dislike the "annual surprise party" approach where the supervisor can't sleep the night before and the employee can't sleep the night after.'

I am totally stealing this, Jim.

[Tony Bergmann-Porter]

My (anecdotal) observations, based on many years' experience, is that when there is a mathematical/algorithmic relationship between performance rating and pay, one or the other or both processes will be corrupted.

IMHO, it's way past time to blow it up.

[E. James (Jim) Brennan]

You are welcome, Tony. Think it was in my Brennan's Laws, too, but I've published the phrase a number of times in the past... glad to see it repeated as a caveat.

Any relationship between performance and pay brings tension, except when pay is disassociated with performance: then you typically have government service, must rely on continued employment status (membership) as the binary reward condition and need to shift reinforcements to non-cash elements; or the enterprise goes broke if it doesn't already print its own money. Pay without regard for performance is usually a waste of resources.