Compensation Will Be Just Fine Without Your Dysfunctional Performance Appraisals

I have been calling for the death of traditional, scored performance appraisals for a long time.

Today, there is a chorus of voices singing this same hymn.

But, despite there being pretty clear evidence that this practice is fatally flawed, most companies persist, leaving their employees and managers to suffer from HR’s version of Chinese water torture.

What is holding us back from putting this nonsense behind us for good?

When I speak to groups and mention that I led HR at an organization several years ago that did away with performance appraisals and evaluation scores, the same question always arises. Someone inevitably asks, “What did you do about merit increases if there weren’t any performance ratings?

This question alludes to one very obvious misconception: performance ratings drive merit increases.

Merit increases = better performance ratings

The truth? Merit increases drive performance ratings. This is why your organizational average performance rating is “exceeds expectations.” Higher ratings are a result of bigger merit increases. Bigger increases are given because employers want less conflict, less drama, and happier employees.

So why is compensation still the single factor stopping most HR leaders from killing their performance appraisals? They just can’t get over the hurdle of how to make compensation decisions in the absence of a number to anchor it to — even when that number is known to be at best flawed or at worst manipulated.

This bears some exploration.

The fear holding organizations back from replacing their performance appraisal and rating system is rooted in their awareness of how important compensation is to employees (see note about less conflict, less drama, and happier employees above).

Compensation is, after all, why we show up to work in the first place. So any time we make changes that may influence comp, we naturally go on high alert.

Rarely do reviews give a clear picture of performance

The real issue at hand here is one of clarity and communication. Compensation expert (and TLNT contributor) Ann Bares does a great job of describing this challenge in her post, Pay Differentiation without Performance Ratings: How’s That Working for Us?  She writes: 

So what’s the problem? I think it’s this. Employees are forced to draw judgments about the fairness of their pay in the absence of clear, unambiguous information about how well they are performing.”

The irony, of course, is any assertion that performance ratings actually provide clear, unambiguous information about how we are performing.

Even when a scored appraisal tool is better than most, there’s the issue that humans just aren’t good at assessing other humans. So asking a manager to translate their flawed, subjective (read: inaccurate) assessment of an employee’s performance into a number to be used to drive compensation seems pretty sketchy.

Article Continues Below

The solution lies in recognizing that the goal isn’t to eliminate the performance appraisal or the rating. It is to deliver on the promise these ineffective solutions hoped to fulfill — to create greater clarity for employees about what is expected of them — and then to provide feedback about whether they are meeting these expectations.

It must be a process that impacts performance

I work for a company that designed a performance management system that provides an alternative to the traditional, scored appraisal. It’s simple, effective, and provides greater clarity for employees by helping you:

  • Set clear goals and objectives;
  • Provide regular recognition and feedback in regards to achievement of these goals and objectives;
  • Coach and provide support towards achievement of these goals and objectives.

Traditional performance appraisals are lousy at assessing performance, and I think we can all agree we need to do away with them.

But when you do, it’s critical that you replace that practice with a process and training that actually impacts performance. The bullet points above give you a good starting point on what that should include.

If your organization is practicing good performance management AND managers are able to have open and honest conversations with employees, then it’s likely that employees will clearly understand the decisions made related to their compensation.

Make the pain stop

Managers should be educated in how to have constructive conversations about compensation and also about their role in making good compensation decisions. If comp decisions are business decisions, then those who are managing the business should be skilled in making them.

The moral of this story is that many organizations have both a performance management AND a compensation management problem.

Don’t let one stop you from addressing the other. Your managers and employees are counting on you to make the pain stop.

This originally appeared on the Quantum Workplace blog.

Jason Lauritsen a keynote speaker, author and advisor.  He is an employee engagement and workplace culture expert who will challenge you to think differently. 

A former corporate human resources executive, Jason has dedicated his career to helping leaders build organizations that are good for both people and profits. 

Most recently, he led the research team for Quantum Workplace’s Best Places to Work program where he has studied the employee experience at thousands of companies to understand what the best workplaces in the world do differently than the rest. 

Jason is the co-author of the book, Social Gravity: Harnessing the Natural Laws of Relationships. Connect with Jason at www.JasonLauritsen.com

Topics

5 Comments on “Compensation Will Be Just Fine Without Your Dysfunctional Performance Appraisals

  1. Jason,
    I agree with many of your points particularly for performance rating processes that are so tightly coupled to compensation that they are basically a compensation justification exercise. A quick test of this is to ask “if there was a pay freeze would there be any reason to conduct performance reviews?” If the only thing you use performance ratings for is to guide compensation decisions then there is a real risk that managers aren’t focusing on measuring performance, they are just making compensation decisions.

    However, there are many reasons why it is important to have consistent, well-defined methods in place to measure employee performance in and of itself. This includes things like tracking turnover of high vs. low performers, or correlating pay decisions with performance measures to ensure managers are investing more in those employees who contribute more to the company. Validating that compensation decisions are based on merit is particularly important given a recent study in Academy of Management which suggests compensation decisions made without any form of performance rating are likely to be much more biased against women than processes that link compensation increases and performance evaluations: “The mean sex difference in rewards was 14 times larger than the mean sex difference in performance evaluations.” (http://amj.aom.org/content/58/5/1516.abstract)

    Many companies I work with are using our tools to get rid of annual rating processes, but they are not getting rid of ratings completely. They are just rating in a different manner. (https://staging.eremedia.com/tlnt/how-to-ditch-performance-ratings-and-still-evaluate-employees-fairly-and-accurately/)

    Totally abolishing performance ratings is an extremely risky and I would argue futile endeavor. Companies are always going to rate some employees as being more valuable than others, no matter what HR does or does not do. The question is not whether employees are rated, but whether they are being rated in fair, accurate and transparent manner. (https://staging.eremedia.com/tlnt/haunted-by-performance-reviews-how-can-you-kill-something-that-wont-die/)

    Many companies have demonstrated that is possible to create performance rating processes that are accurate, efficient and useful. (http://scn.sap.com/community/business-trends/blog/2015/08/11/5-examples-of-effective-performance-management-lessons-from-the-2015-successfactors-performance-management-throwdown) But no one ever seems to talk about the companies that like their performance rating methods. Sadly, it seems like a popular fad in HR right now is to always say performance ratings are always bad – even if they aren’t.

  2. Great perspective, Jason. Designing a compensation philosophy is extremely difficult. Most organizations get by with three standard platitudes: our pay is fair, competitive and driven by performance. Each area is experiencing its own disruption. “Fair” is being subjected to new expectations in transparency and top-down comparisons, not just peer-to-peer. Traditional salary surveys are being challenged by crowd-based sources. Defining performance, as you stated, is in the midst of upheaval. So all of these require a compensation professional to not only clarify what these terms mean for their organization but how they can prove it to internal and external audiences.

  3. Hi
    I agree this article I think Employees are forced to draw judgments about the fairness of their pay in the absence of clear, unambiguous information about how well they are performing

  4. By far this is the most challenging part in HR field. Everyone looks at the convenient way to evaluate and record. Everyone wants to play safe plus by the virtue of different work experiences everyone has some ideas to be incorporated. I feel to start with, HR should create a base for objective setting and performance ratings. These fundamentals can drive merit increases….360 degree feedback for large organisations is still little impracticable and time consuming….

  5. Agree! The needs to establish merit increases is what drives the annual review process. The lack of an alternative is what perpetuates “the madness”. I do have some tips on making pay decisions without ratings, which includes an alternatives to ratings as a measurement of performance. Here’s my article and a short video: https://www.halogensoftware.com/blog/3-things-you-need-to-determine-merit-pay-without-ratings If more HR pros could crack the “making comp decisions without ratings” code then they will be just one step closer to moving toward the ongoing conversations model.

Leave a Comment

Your email address will not be published. Required fields are marked *