Performance Ratings Are History: 3 Better Alternatives To Determine Employee Compensation

Performance Ratings Are History: 3 Better Alternatives To Determine Employee Compensation

It’s 2017 and companies are finally waking up to the reality that employee compensation should not be linked to performance ratings. The trend that started a few years back with only a few early adopters, has started to gain momentum. On a daily basis large & small, progress companies are moving away from tight-coupling of performance ratings with employee compensation.

It is unfair to assume low performance is the only reason that prevents them from reaching that magical number. There are a number of factors that may prevent employees from reaching their goals. Such as external factors over which they do not have any control or an inefficient manager/boss who fails to lead them in the right direction to name a few. In addition, there are a few flaws in the annual evaluations as well.

According to traditional performance management, employees are expected to achieve 100% of their targets to become eligible for their full bonus. The top performers  were identified using the bell curve method. This was an accepted practise in the 19th and 20th century when workers’ performance was measured by the output achieved or number of hours worked. In the 21st century however, these metrics cannot be used to fairly judge employee performance. It is time for companies to innovate their performance management system.

Problems with grading on the bell curve:

Today, more than 70% employees are in knowledge related jobs where performance is driven by their capabilities, skills and aptitude. Assessing the performance of these employees relative to their peers i.e. on the bell curve creates a lot of unhealthy competition. Employees should work as a team to better achieve their goals. Bell curve grading, on the contrary, discourages them from helping each other. Every individual wants to make sure his or her performance is better than the rest.

Performance ratings are certainly not efficient at determining employee compensation. Many companies such as Microsoft, Adobe, Accenture, GE have already replaced this method with models that are more efficient at compensating employees based on their unique contributions to their teams/departments.

How to actually manage employee compensation without performance ratings:

Getting rid of annual performance ratings does not mean that mediocre and poor performers will no longer be identifiable. In fact these ratings are only used to determine whether goals have been met or not by such individuals. Accordingly compensation is fixed. They do not reflect the reasons behind low performance levels.

Recently, General Electric Co. got rid of its employee rating system. They felt it does not have a significant impact on performance development. So how does one actually manage employee compensation without performance ratings?

Budget bucket: Allocated as per manager’s discretion

Management can set aside a budget for every department, based on their contributions to the company. It is the responsibility of the manager to adequately compensate top performers of his or her department. The only criteria being, the budget bucket should not be exceeded. This way there are no favorites and only those with exceptional performance will be rewarded.  

Microsoft introduced a process called “Connects” that encourages timely feedback on a regular basis for each part of the company. Every department has its own flexible timeline such as monthly or quarterly instead of the traditional annual timeline for the entire company. Employees are rewarded generously by their managers from a rewards budget that every department is allocated. Ratings were removed to ensure that employees keep performing well and consistently focus on growth and improvement.

Quarterly Assessments:

Agile performance management encourages frequent assessments. This way poor or mediocre performers can identified early-on and steps can be taken to improve their performance.  

Lear replaced annual performance reviews with quarterly assessments. Employees were encouraged to talk with their managers about their work, focus on gaining new skills and overcoming weaknesses. These quarterly reviews are not linked to employee compensation. They are meant to only make sure that employees are able to develop on a consistent basis. Their compensation on the other hand is determined as per the changing market standards. Thus every individual has a fair chance of development as well as remuneration.

Real time Feedback:

Real-time feedback is the need of the hour. It makes sure that any time there is a deviation in performance, employees or even managers can be quickly alerted and brought back on track. It helps in reducing the time and efforts wasted that could otherwise be used productively.

Adobe introduced The Check-In to counter the problems of annual reviews. It is an informal system where managers give feedback in real-time on an ongoing basis. It is upto the manager how often he or she wants to set goals and give feedback. Individuals are evaluated on the achievement on these goals as opposed to how they compare with their team members. The Check-In process ensures transparency across the entire team. It allows managers to focus on the more important aspects such as development strategies and goals instead of their team members shortcomings.

The numerical nature of performance ratings does not take into account all the contributions of an individual. Besides HR wasted an alarming amount of time behind these reviews. It is not surprising that many companies are replacing them to focus more on development rather than penalize employees. How would you ensure fair employee compensation in your organisation?