Compensation Force

How Many Performance Categories are Right (and Are They Being Used Well)?

In response to a client question, I did a little research recently on the number of performance rating categories that organizations most typically use in their performance appraisals, and I found a QuickQuestion poll that WorldatWork did on this topic in 2005.

The poll, which features the responses of 569 members, shows the following responses to the question:  "How many performance rating categories/levels does your organization use (not including levels such as 'Too New to Rate', 'New Hire', etc.)?":

• Five - 52.0%
• Four - 20.6%
• Three - 16.3%
• Six or more - 7.4%
• Do not use levels to categorize performance - 2.6%
• Two - 0.9%
• Other - 0.2%

Clearly five categories is the most popular choice, which doesn't surprise me (or probably anyone else who has seen a few performance management programs in their time).  But a few other thoughts occurred to me in response to this information that I thought I'd share here:

• I wonder how many of these organizations with five performance categories are "balanced" around a middle ("3" level) "meets job expectations" rating, with two rating categories ("1" and "2") describing performance "below expectations" and two rating categories ("4" and "5") describing performance "above expectations".  Then I wonder, in this era of overpraising and grade inflation, how many really need and use both of the "below expectations" levels.  Or, alternatively, are the categories really "centered" around "2" as "meeting job expectations", leaving three levels to describe performance above that level?
• I admit being slightly taken aback by the number of "Six or more" responses.  There is, I know, that universal desire among performance raters to have more choices, even to create them where they don't exist (as evidenced by ratings of "4-" or "3++").  What I struggle to understand, though, is  this:  Why is it that the same people (performance raters, being mostly supervisors and managers) who believe they are given too few rating choices on the back end of the process will often find themselves unable to articulate, at the front end, in the spirit of proactive performance managemet, the difference between these performance levels?  For example, why is it sometimes so difficult to inform employees, up front, what you would expect from them in order to award them an "above expectations" rating?  I guess I lean toward fewer, clearer performance rating choices.

How do the rest of you react?  What is your experience with different numbers of performance categories?  

Low Cost Family Education Benefits May Be a Way to Boost Retention

An article in the June 1 issue of the Minneapolis-St. Paul Business Journal tells us that there are more than 1 million families supporting college freshman in the U.S.  Draw a one to two year circle around this and you can further estimate that there may be several million families in the throes of college exploration and preparation.  This presents employers an opportunity to distinguish themselves by providing a small array of low cost benefits geared to support and assist these employees.

The article offers ideas for several potential offerings, including:

• Hold college prep seminars.  Offer a noontime seminar covering topics such as college search techniques, making the most of a college visit, college entrance requirements, financial aid and scholarships.
• Establish a scholarship program.  Employers can support employees by setting up a scholarship program, with only one or several scholarships, depending on budget.  Scholarship America, for example, is an organization that helps companies set up scholarship and tuition reimbursement programs.  One of my clients, a specialized transportation services company, offers scholarships to children of employees who plan to attend college in pursuit of a transportation career.  The founder sees this offering as a critical part of the company's mission.
• Offer career exploration.  Participate in career days at area high schools, offer job shadowing opportunities or host a field trip luncheon for eleventh graders to learn about your industry.
• Add college advisory services assistance to your menu of benefits.  Do some basic due diligence by interviewing local college planning and test preparation services to insure their quality and professionalistm, then provide this list of reputable services (with whatever disclaimers are appropriate) to your employees.  You might even negotiate employee discounts with these businesses.

I admit that I might be biased favorably toward offerings like these, being smack in the middle of the target demographic as parent of a college student and an eleventh grader, but I thought these suggestions represented good ways that an employer - even a small business or nonprofit - could differentiate themselves.

Highway Construction: A New Arena for Incentives

Evil HR Lady has an intriguing post featuring the story of a performance related bonus awarded by no less than the California Department of Transportation.

The story, featured in today's New York Times, tells of how the highway construction company owned by C. C. Myers, earned a handsome bonus for completing repairs to an interstate highway ramp in record time.

The state estimated that repairs to the 165-foot-long ramp between Interstates 80 and 580 would take 50 days and cost $5.2 million.  For every day short of the June 26 deadline, it promised a $200,000 bonus, not to exceed a total of $5 million.  The highest bid came in at $6.4 million.  Mr. Myers's company, C. C. Myers Inc., won with the lowest bid - $867,075 - and completed the project in 17 days, winning the full $5 million.

"This ain't no $800,000 project," Mr. Myers said in an interview, adding that he hoped to realize a $2.5 million profit.

On the surface, this story seems describe a win-win scenario.  Being who I am and having seen the fabled "unintended consequences" of performance bonuses rear their ugly heads a few times, however, I lean a bit toward skepticism.  Particularly since the bonus appears to be rather one-dimensional in its exclusive focus on completion timeframe.  Apparently others share this thought, including the head of the Massachusetts Department of Transportation who is quoted in the article as saying, "When government excessively priorities its schedule, you can end up accepting quality below that which should have been insisted upon."

The article goes on to mention other instances of incentives in highway construction in states like Oklahoma and Utah.

Nevertheless, I applaud the effort and intent, and note that local residents (who, according to the article, "are used to growing old waiting for new roads") seem pleased with the results.

Considering Skill-Based Pay

Frank Giancola, in his article "Skill-Based Pay - Issues for Consideration" in the May 2007 issue of Benefits & Compensation Digest introduces his topic with the following sage advice about this - and other - newer and trendy compensation approaches:

New approaches in compensation management generally are characterized as being simple in concept and complex in execution.  Unfortunately, not all compensation professionals are aware of this principle, and some may find themselves moving ahead on a new idea without fully understanding all of its implementation issues.

So, so, SO true.  Many compensation - and human resource - professionals rush into new and/or trendy compensation models without realizing that these approaches have broad implications for overall human resource management.  Frank uses this statement as a springboard to examining the challenges surrounding skill-based pay, what many consider to be the "wave of the future" in compensation.

The phrase "skill-based pay" refers to programs where compensation is based on the skills of the employee, rather than that employee's job, so it is a person-based approach rather than a job-based approach.  This means that rather than inventorying and establishing a pay structure based on the monetary value of jobs, it requires inventorying and establishing a pay structure based on the monetary value of skills.  The impact, challenges and potential pitfalls associated with this "pay paradigm shift" are considerable and must be (but rarely are) fully appreciated before such an initiative is undertaken. 

To help the practitioner considering implementation of skill-based pay, Frank provides a detailed, objective picture of the steps, which I attempt to briefly summarize below.

1. Determine the skill requirements of the organization.  This includes skills currently needed as well as those anticipated for the future.  The step entails inventorying, organizing and establishing progressive paths and timetables for skills and their development.  Note that the application of this approach to professional and managerial employees typically focuses on competencies, which are considered broader and higher level than skills (which tend to be narrower and more task-oriented).
2. Inventory current employee skills/competencies.  The article recommends the practice of developing a folder for each employee detailing current skills and levels of proficiency, areas for development and plans to help the employee acquire new skills.
3. Value skills/competencies and establish corresponding pay structure.  This involves using market pricing to determine the monetary value of skills and skill sets, a challenge since most pay surveys are job-based (rather than skill-based).  Frank notes that most skill-based pay programs are coupled with broad band structures (fewer, broader ranges than a traditional structure).  Implementing the new structure will likely result in costs; pay adjustments made to bring employees in line with the new program.
4. Develop training resources to enable employees to develop the desired skills.  One of the most common major errors made in skill-based pay implementation, according to the article, is underestimating this need.
5. Establishing skill certification procedures.  Another potentially big stumbling block for skill-based pay systems; there must be a process and set of procedures for certifying employee skill acquisition before associated pay increases are awarded.  This must address "on what basis certifications will be granted, who will conduct them, when they will be conducted and whether re-certification is necessary for seldom used skills".

The article quotes well-known compensation consultants N. Frederic Crandall and Marc J. Wallace as saying, based on their experience, that firms implementing skill-based pay will experience a 15-20% increase in their pay rates.  (As the article notes, there are other costs as well including increased training and development investments and the additional time and staff required to accomodate cross-training.)  I believe that organizations considering skill-based pay must go into it with this increase in payroll costs as a foregone conclusion.  The question then becomes:  Is the organization positioned to derive sufficient benefit from a more highly skilled/cross-trained workforce so as to receive an adequate return on that investment?

To cap off this long post, I want finally to share some of Frank's suggested reading list on designing and installing skill-based plans:

• N. Frederic Crandall and Marc J. Wallace.  "Paying Employees to Develop New Skills" in Aligning Pay and Results: Compensation Strategies that Work from the Boardroom to the Shop Floor, Howard Risher, ed. New York: AMACOM. 1999
• Barbara J. Dewey. "Changing to Skill-Based Pay: Disarming the Transition Landmines."  Compensation and Benefits Review, January-February 1994.
• Edward E. Lawler.  Rewarding Excellence: Pay Strategies for the New Economy. San Francisco: Jossey-Bass. 2000.
• Leslie A Weatherly. Competency Models - An Overview.  SHRM Research.  (February 2005).
• Patricia K. Zingheim, Gerald E. Ledford Jr. and Jay R. Schuster.  "Competencies and Competency Models:  Does One Size Fit All?"  WorldatWork Journal, Spring 1996.
• Patricia K. Zingheim and Jay R. Schuster.  Pay People Right!  San Francisco: Jossey-Bass.  2000.