Making performance management work

One of the more popular management philosophies embraced by corporations today is that of "pay-for-performance," which uses individual ratings to assess employee performance against a peer group. The ratings are then linked to reward outcomes through a distribution curve, i.e., x% of employees each fall into one of several predetermined levels of performance. Thus, a "carrot and stick" approach is used to reward strong performance via bonuses, profit-sharing, and equity compensation.

These pay-for-performance models are quite robust and typically work well for low-to-mid level employees, whose work is transactional and output quality is easily discernible (e.g., tradespersons, assembly line workers, product/widget sales force). However, it is our contention that conventional pay-for-performance models fall short in their ability to achieve the desired objectives for productivity. The high risk/high reward outcomes inherent in pay-for-performance models are intended to motivate employees to perform better and work harder – however, research conducted by Willis Towers Watson suggests that the majority of employees would prefer relatively guaranteed, or lower-risk compensation options, even if they yield lower reward.

As a result, current performance management systems may not be effective in incentivizing employees toward greater productivity, as they can lead to uncertainty surrounding the line of sight between an employee’s actions and the corresponding assessment of their performance. In other words, since performance-based models often place higher importance on performance relative to peers, they don’t always provide clarity about how performance is defined or how individuals’ contributions are assessed.

In recent years, several companies have tried to tweak or completely redesign their performance systems. However, designing a model and implementing it is one thing, but gauging the effectiveness of these models to drive desired behaviors within a performance-driven culture is another. If goal setting, processes, and methods of evaluation and calibration remain the same, then changing the ratings structure will likely not have any measurable impact.

In our opinion, the problem lies with the performance evaluation process, including calibration (assessment of employee performance) and forced distributions (assigning ratings levels). It might be more beneficial to first understand if the core issue is around evaluation of performance or its impact on reward. From the employee perspective, the motivating concern is correct evaluation of performance, not how it impacts reward. This is not to say reward is less important, but once an employee feels that the assessment of their performance is fair, they are more trusting of managers to make the right reward decision. Employees care about individual motivation for doing good work, and being recognized for these efforts through a fair and just performance system.

Rather than a once or twice yearly review, managers can become more tuned into an employee’s challenges and achievements via a system that provides continuous feedback on their performance. This is accomplished through managers checking in with and talking to their employees more, providing guidance or coaching, and taking a more active role in ensuring their employees are succeeding. Through this approach, over time, managers will come to better understand the factors that impact performance, as well as factors they cannot control.

With more direct manager/employee engagement, managers will come to understand who their employees interact with, and which employees require more or less “managing”. This approach, including feedback from