What’s the Point? Decoupling Performance Reviews and Compensation

While I enjoy blogging here on the Compensation Café, my primary (selfish) benefit of doing so is the tremendous amount I learn every day from my fellow bloggers and readers who regularly share deeply insightful and thoughtful learnings, lessons and applications in the broad field of compensation.

Today, I’d like to tap into your collective knowledge on the subject of performance and compensation. A complex and nuanced topic, certainly, to many outside of our profession it seems as if it should be quite simple.

So my questions to the group today:

1. How does your organization approach performance management? Formal or informal? Annual, bi-annual, frequent? A combination?
2. Is the performance management process tied to compensation – merit increases, pay decisions, bonus awards, etc.?
3. If the performance appraisal process isn’t tied to raises directly, do employees understand this clearly? How is this communicated?

I’m asking because of recent research from BambooHR showing that few non-managers find the performance review “very valuable”:

• 34% of non-managers
• 58% of management (non-HR)
• 70% of HR

A quick search of Twitter reveals similar results in more colorful terms. The image below is from my session at SHRM last month:

Why is the traditional annual performance review such a failure? Because few prefer to receive feedback in such a format. And because this formal process exists, too many managers defer feedback to the formal, scheduled session. The BambooHR research cited above showed the very low percentages of respondents who preferred to receive feedback in a scheduled performance review:

• 18% of non-managers
• 16% of managers
• 16% of HR

That’s a primary reason why more and more companies are moving away from the traditional review process. The Washington Post recently reported:

“[Accenture] will disband rankings and the once-a-year evaluation process starting in fiscal year 2016, which for Accenture begins this September. It will implement a more fluid system, in which employees receive timely feedback from their managers on an ongoing basis following assignments…

“[Accenture’s] answer was that performance management had to change from trying to measure the value of employees’ contribution after the fact. It needed instead to regularly support and position workers to perform better in the future.”

Indeed, going back to the BambooHR research, “Only 4% of all respondents feel that performance reviews are the best way to motivate and engage employees… They prefer to motivated through:

• Open, informal conversations (24%)
• Getting raises (18%)
• One-on-ones more geared toward career path (17%)
• Managers listening to their ideas and using them (15%)
• Getting more employee recognition (13%)”

So why do we keep doing formal reviews? An easy argument is that the review process is a good way to assess and compare performance to assign raises or merit increases. But in the last decade or so, it seems many organizations are moving away from this traditional linking of review and compensation.

I argue it’s time for a more human approach to providing continuing recognition, feedback and compensation adjustments.  A blend of formal and informal, annual and frequent, manager feedback and peer-based praise – a truly crowdsourced performance review.

In addition to my three questions at the beginning of this post, let me ask another. Why do we stick with a century-old process we know doesn’t work well? From a compensation perspective, what’s a better way to determine those deserving of increases?

As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[Darcy]

This is a very thought-provoking post. Here are my answers to the questions posed:
1. Formal annual process
2. Performance process is tied to merit increases and can impact annual cash bonus payout
3. N/A

I think the reason we stick with the process is because there isn't a magic silver bullet to take its place (if there were, we'd all be doing it).
* From a legal standpoint, we need documentation to support pay and performance decisions that suggest those decisions were made based on non-discriminatory reasons.
* Managers aren't always good about having regular conversations with employees, and this process ensures that something is occurring at least once per year.
* People in general crave regular feedback and want to know what they're doing well and what they should adjust.
Arguably, all of those could be better addressed with frequent, real-time feedback. Unfortunately that's much harder to monitor to make sure it's happening, especially as companies get larger. I personally don't enjoy my own review, nor do I enjoy managing the process, and wish we could change it. But because there isn't an easy replacement option, we are currently keeping a process that no one enjoys, and that few people find objective.

[E. James (Jim) Brennan]

Agree that it is way past time for those long-recommended sensible suggestions to be enacted. Darcy was completely right about why the formal status quo establishes minimum requirements and Derek also properly summarized why much more is actually needed. Other articles here have explained that HR can't easily compel supervisors to be responsible people-managers.

"Surprise party" reviews have always been unpopular and ineffective. Better methods exist and have been well publicized for decades. But top leadership usually ignores them and declines to enforce the best (rather than the most popular minimum) practices. Short term economic interests tend to trump long term behavioral needs, I'm afraid. Seems like we total rewards people have been abysmal failures in our ongoing crusade to persuade senior management to adopt people-friendly feedback systems that are actually implemented rather than simply offered.

[Sharon McKnight]

Interesting post. If you'd like more data on performance appraisals, check out BLR's most recent annual survey on performance management here: http://compensation.blr.com/surveys/Performance-Management-Survey-Summary-2015/

[Jacque Vilet]

I agree there has been no "blinding light" with light bulbs going off everywhere with a guaranteed to work replacement for traditional performance reviews. But some companies are fed up enough to be willing to try other approaches. No one likes PRs --- not employees and not managers. My opinion is that lawyers have created an obsession with focusing on past performance. The talk now is to look forward which is much more palatable then looking backward. The real question is how to fit compensation into this new approach. Yes, pay for performance is still alive --- but instead of pay for individual performance we now can pay for team and company performance. Everyone is fed up with the current system --- let's not get hung up. Let's break free and try something new.

http://www.hci.org/blog/compensating-employees-new-normal-performance-management

[Gunars Jemeljanovs]

This is very nice post and as Darcy commented - provoking topic. We do:
1. Annual
2. Tied to Salary and Annual Incentive payout, but not directly - at managers discretion
3. NA
We did our internal survey just weeks ago with all kinds of responses, but I would like to emphasize is that both Managers and Subordinates both recommended that performance discussions should be "Development discussions" and should be done more often, at least twice a year; especially for Younger generation employees - they are thirsty for feedback and Guidance, they want to grow fast in their career so they want and Can learn much faster than their managers think.
Also if Pay is tied to Performance there must be direct correlation. What I mean is - employees discuss, share their pay and it is so easy for our employees to learn if system is fake - if higher performing employees get lower increases or incentives as lower performing employees - system is a bluff and looses the trust in it in very short time. System must be transparent and clear that is other success key... do not keep "gray" or "black" boxes on Processes and policies in HR folders... keep them clear and open on everyone's desktops!
Cant wait to see how discussion develops...

[Karen Kervick]

1. Formal
2. Tied to annual increase but we have been trying to separate the timing of the processes at least. We do use performance rating to determine the annual increase per an increase matrix.
3. performance rating is tied to increase

We actually have two systems. One for operations and one for the sales organization. Sales uses monthly meetings and constant feedback because of goals. Those employees do not get annual increases and know where they stand all the time. It seems to work.

Operations departments work under the old system of review and pay for performance but only recently had a salary structure added in order to differentiate raises by compa-ratio and % in range.

The only reason I think that the sales model can't be adopted is the time it takes to be a manager and conduct the weekly or monthly feedback meetings. Managers are too busy "doing" with little extra time to manage people. We need more worker bees so those designated as managers and leaders in the department can actually perform that role to develop the next leaders.

[Dan Walter]

Good way to restart the conversation on this topic. AND already several great responses. so I will simply add:

Let's start with the list of things people say they prefer to performance review (Note: none of these is preferred by anywhere near a majority of people, so none carries a ton of weight on its own).

Open, informal conversations (24%) - Requires allowing managers to have the time (doubtful in todays "productivity obsessed world) and training (doubtful in today's, "promote the best performance, rarher than the best leader" world.

Getting raises (18%) - Need a way to determine who deservs them, hence the Performance Review. Of course people would just like to get raises without formally understand the reason or justfication. Much like a high school in the US recently had 222 Valedictorians (roughly 20% of the graduating class (http://blogs.edweek.org/teachers/teaching_now/2015/06/how_many_valedictorians_are_too_many.html)

One-on-ones more geared toward career path (17%) - see my response to the first preference. This is essentially the same thing.

Managers listening to their ideas and using them (15%) - This is also a subset to my first response. It requires leaders not high performers, in the role of manager.

Getting more employee recognition (13%) - Since this is seldom defined well for respondents, I would guess that this could mean almost anything.

A formal performance review process can be almost anything. It does NOT need to be an annual 5 point scoring system. Formals may mean a series of conversations, formal and informal documented in a systematic matter and combined to create a score, in conjunction with actual job behavior and delivery results. (although, let's face it, almost no one does it this way). WE NEED TO REDEFINE THE MEANING OF "FORMAL PERFORMANCE REVIEW"

[E. James (Jim) Brennan]

Dan nailed in a few paragraphs what took me 492 pages to detail in a 1989 book on Performance Management. Best practices are rarely new but are usually infrequently encountered, if they require more than a little effort.

We know the bad methods and the better options; so why can't we persuade top management to dump the bad stuff and implement the best? That's the real question.

[Dywane]

Current performance reviews are , in my opinion, driven by legal. Like Darcy stated, we need documentation to support pay and performance decisions that suggest those decisions. Many times in my career as a manager the formal documented performance review that was tied to merit and annual bonus was critical in winning terminated-employee lawsuits and terminating employees. You simply cannot term an employee without the formal review process.

[Meagan Palatino]

Really interesting post. My team recently participated in a group discussion at the NYC HR Analytics Meet-up, and witnessed a live debate between HR professionals at companies ranging in sizes. The entire summary is here in a post I wrote after the debate: https://blog.uppercasehr.com/why-you-shouldnt-eliminate-the-annual-performance-review/, if you're interested.

In a nutshell, this was our take on it: It is clear that no matter the size or experience level of your team, effectively evaluating performance and motivating employees is hard. Performance lacks a consistent definition among organizations and cultures. Humans are unpredictable and prone to bias, and these factors shape the experience of performing, and evaluating performance.

While we agree with many of the points in the argument in favor of the annual performance review, we believe they should trend towards more frequent, real-time feedback. It is important to encourage employees to take risks. Managing that well requires more consistent discussions about performance. Employee reviews and feedback should be tied to near-term goals and objectives, where all too often we find these to be separate elements in an organization. An individual’s goals should be performance-focused and be measurable.

While we feel that social data and peer recognition are a valuable source of informal feedback, we don’t see them as replacements for the performance review. This information can certainly augment a manager’s understanding of their team member. With the incorporation of this data, and an increase in review/feedback frequency, an organization moves closer to real-time recognition & professional development.

[Molly Schissler]

Thank you for the timely post. I'm enjoying reading the comments as well!

I am in the midst of a pilot process with a large portion of our company, to dump the annual review and performance ratings. Have been wanting to be in this type of forward-thinking organization for a long time, and we are lucky to be in a work environment that "allows" for the process of eliminating these dreaded annual reviews.

It is going very well, and by the beginning of our next fiscal year (Oct. 2016), we will no longer have annual reviews. The most important part of this, for me as an HR leader, is getting away from rating individuals with a number. What makes Joe a 4.2 and Mary a 3.6?

Also, while we don't time merit increases at the same time as our annual reviews, they have been tied in terms of the old-fashioned merit matrix. Again, this relies on a numerical performance rating which will now become irrelevant. I will be working toward some combination of market pricing as well as calibration discussions to achieve appropriate compensation levels and merit increases going forward.

I think we'll be seeing much more of this coming soon - the elimination of the annual reviews.

Thanks for the post!

[Molly Schissler]

Also meant to address a comment from Dwayne - you absolutely CAN terminate someone without having a formal performance review. HR types who have followed this erroneous path do a disservice to their organizations and their profession by believing this and "enforcing" this.

Sorry if that seems harsh - but I feel strongly about this issue.

[Scott B]

1) Formal and informal. Formal reviews are done quarterly; informal reviews should happen all the time (timely feedback).

2) Non-Sales Bonus is paid quarterly; almost all Non-Sales employees have 50% of their bonus tied to individual performance which is directly tied to their eval. Merit is annual, and the average eval for the past 4 quarters is one factor that determines merit allocation.

3) N/A

Our employees like getting their bonus quarterly enough to tolerate the frequent formal reviews, and the bonuses do much more to drive performance than the annual merit increase (no surprise there).

If done correctly, nothing on the quarterly review should be a surprise due to the frequent informal reviews (often a weekly meeting) that are expected.