Reconciling Pay for Performance & Ratingless Performance Systems

Over time, I've observed an interesting dichotomy at work in the design of performance management programs.  Design ownership very often has its roots in one of two distinct camps:  the compensation staff or the organizational development staff.  (In fact, at one of my "big consulting firm" gigs where this pendulum had swung far away from the compensation group, I had to secure myself an OD buddy before I was even allowed to practice in this area.)

In many cases, I can discern the background of the individual or team behind a particular performance program simply by looking at its tools and process descriptions.  There are a number of signs, but one of the most telling is the presence or absence of a performance rating.

If my experience is any indication, ratingless performance systems are enjoying a lot of popularity.  It isn't difficult to understand or appreciate the reasons why.  Focusing on development, coaching and maximizing strengths - without the difficult (and, let's face it, potentially demoralizing) "grading" conversation - is undeniably attractive.  Even to compensation professionals.

The problem comes (not the only problem, but one I want to talk about today) when the organization wants to take its enlightened performance process and connect it to pay and other consequences.  When they need to tie salary increase, incentive, promotion and other decisions to individual performance.  It becomes necessary to create that summary judgment about an employee's performance outside the realm of the performance management program.  Which is fine, perhaps even ideal, if this separate process for rating performance is as objective, rigorous and transparent as your formal performance management process.  What is less fine is to allow it to occur off to the side in an informal, discretionary, opaque and (gasp) undocumented manner.

I've seen a number of organizations struggle to pull this off.  To provide a positive, development-focused, rating-free performance management system and then create a second process by which individual performance is determined and documented, in support of compensation and other decisions.  Some are managing this dichotomy better than others, but I have yet to encounter anything in practice that I would consider "best in class".

In the end, I think, most programs have to represent the principles and the needs of both rewards and development.

How about you, dear reader?  I'd love to hear from those who have put in place - or who are familiar with - great approaches for reconciling pay for performance and ratingless performance systems.  Or who simply have strong feelings on the matter, one way or another. Share, share, won't you?

Comments

[Darcy Dees]

The topic of separating the pay and performance discussions comes up every year at my office. Philosophically we'd all like to be able to have discussions about performance that aren't colored by the desire to give a certain merit increase. But the reality for us is that we do at least try to pay for performance and we want to be as objective as possible, so we need the performance review score to support this attempt.

This is a great topic, I'd love to hear about other's experiences.

[ask a doctor]

It's proper to give merit to those people performing well in their work. They deserve it.

[Ann Bares]

Darcy:

Interesting that you have this discussion every year. So do a few of my clients. Like you, I'm interested to hear about the ideas and experiences that others have had here.

Ask a Doctor:

I don't think we're arguing against that here!

[Steve]

I would argue that a ratingless performance review is not doing the employee any favor at all. It may be easier for the supervisor (avoiding the difficult disussion), but it allows the employee to continue to believe they are already a "star performer". I've read that the vast majority of employees (over 85%) believe they are among the top 10% in job performance. Effective coaching and mentoring must begin with agreement about where we are today, if we hope to help an employee grow and develop new skills. If one then considers the difficulty in tying rewards to performance without a performance rating as the basis, it becomes difficult for me to argue in favor of a ratingless system.

[Ann Bares]

Steve:

Great to see you weighing in here! Your points are good ones; and I also find it difficult to argue in favor of a ratingless system. I'm hoping some fans of the genre will chime in here and enlighten us - or help us see how to reconcile that approach with effective pay for performance.

[E. James (Jim) Brennan]

Performance improvement and career development are topics that should be kept separate from merit pay increases. One involves engagement, resolution of issues, essentially subjective personal preferences and long-term lifetime goals; the other is a single judgment focused over a specific time period affecting short-term economic results (well, not really, but it appears so to many).

The former should be a relaxed, nothing at stake, mutual exploration of partnered interests. No way you can have that, "let's talk about what ain't perfect yet," discussion when money is on the table. Separate the two temporally, use different and topic-specific processes and you separate them psychologically and make both more effective.

"Performance" needs to be defined in a more granular manner in this string. Otherwise, you're discussing fruit when some people mean apples and others talk about oranges.

[Steve]

Jim,
I like your comment about the need to be clear as to the meaning of "performance" here. I also support the idea of seperating the discussion of job performance from the pay discussion. I would love to hear more detail about the "different and topic-specific processes" you suggest. Are you saying that one should not use the final rating from the performance discussion as a basis for allocating rewards (including pay)?

Tell us more...

[E James (Jim) Brennan]

No. Merit ratings justify P4P for the instant year. Joint planning for long-term career paths and promotional tracks involve different metrics, different forms and different procedures applied at a different time and affecting the total future rather than the immediate past.

If one has a merit review in December, they get their merit increase based on the performance appraisal rating for the past year. There should be a separate developmental review at least 3 months or maybe 6 months later using different career interest/opportunity forms with certain amounts of self-directed options. Rather than listen to a verdict presented as an edit by the boss, this session is interactive, often involving goal setting and counseling, with much less judgment involved and much more focus on remedial and developmental planning, usually with no money at stake.

[Harold Fethe]

We moved the compensation meeting and the performance feedback meeting to opposite points on the calendar. Salary / bonus / promotion discussion was in Jan, performance analysis in June. Both were based on multi-rater, comparison-based, multi-ratee feedback. This meant that the supervisor received a consensus opinion from multiple co-workers on each of her / his reports, showing who was doing a better job. This helped the supervisors counter the perception that "it's only you, my supervisor, who's unhappy with my work," and conversely, provided candid feedback to supervisors who may have been protecting a favored subordinate excessively. Yes, data collection was significant, but on-line rating sessions with your company's competencies are available from multiple vendors nowadays.

During 20 years as head of HR at a very successful S&P 500 biopharma company, I often heard "fairness" advanced as an argument against compensating higher performers differently than their co-workers. My response to those managers was, "Your first obligation of fairness is to the most productive people." If you, as a manager or HR professional, create an environment where the rewards are no different for the person who does the best job, you are creating a perverse incentive.

Bottom line--providing feedback is a significant management challenge. Even senior managers / execs often feel free to "cut themselves slack" and sidestep the process to a surprising degree. Because universal support can't be mandated, the process needs to be as robust, timely and well-managed as possible, to offset critique that's based on individual managers' inadequate support and execution.

And lastly-- Leniency and central tendency are two classic reporting errors when people evaluate their co-workers. Lots of research shows that comparison-based feedback, where the evaluator considers multiple performers simultaneously, is much more reliable than a one-at-a-time system. We demonstrated this many times in data sets where mono-raters were consistently off consensus, and consistently more lenient, than raters who made comparisons between performers. (We had heavy design consultation from scoring model experts, including the head of the statistics department at a leading university nearby in Silicon Valley.) Evaluating multiple people at a time (on the same screen, or however it's done) brings more fairness and consistency into the evaluation.