New guidance from Mercer says you can manage pay and bonuses without performance ratings
The effectiveness of performance ratings has increasingly been called into question over the last few years, with many well known organisations such as Adobe, Motorola, Microsoft and Expedia having abandoned them in favour of a more continuous approach to performance management.
They have done this on the back of research which has shown that performance ratings do not accurately reflect employee performance, and that our (largely failed) attempts to make them objective (calibration meetings, forced distribution) are hugely time consuming, create an administrative burden and lead to significant negativity amongst employees and managers.
But if you take away ratings, how do you manage reward and talent management processes? Mercer have attempted to answer this question in an article recently published in World@Work Journal and we’ve summarised their advice below.
How to manage pay increases
Mercer’s research across its clients found that performance ratings are rarely one of the largest drivers of base pay. Empirical analysis has shown that tenure, experience, education, number of direct reports and grade are the factors that, in reality, inform base pay decisions.
The authors therefore recommend that instead of using performance ratings as a basis for base pay increases, a better criterion may be an employee’s changing market value based on factors such as length of service, special project experience and external market forces.
How to manage bonuses
Bonuses (also referred to as short-term incentives or STI) are frequently linked to performance ratings. Yet, the actual company success that funds these incentives is typically beyond the individual’s control, especially below the executive level.
So if it is the group rather than the individual that drives organisational success, the authors suggest that organisations should reduce individual differentiation in bonus payments. They recommend basing bonuses for the majority of employees on business or group success rather than individual performance.
Doing this removes the administrative burden involved in collating and calibrating ratings and takes away arguments over the subjectivity of rating and bonus decisions.
The time saved from this approach allows organisations to invest greater effort in determining the rewards for those individuals who have significantly contributed to the organisation’s success. To do this, the authors recommend considering the contribution that those employees have made towards initiatives or projects that are critical to the organisation and required exceptional efforts and skills. The eligibility for these rewards would be based on an acknowledgement by the manager or executive who is responsible for the completion of those critical initiatives.
To ensure fairness, such an approach would ideally require a mechanism to be put in place for enabling employees to apply to participate in these initiatives. This might involve creating a strategic project posting and selection process.
Impact on Talent / High Potential Initiatives
Some organisations use performance ratings as a way of determining eligibility for fast track / high potential talent management programmes. The authors point out that performance ratings are not a necessary ingredient for these initiatives. Instead, organisations could use a system whereby employees self-nominate and go through an assessment process to be selected for fast-track career advancements.
Alternatives to the Mercer approach
Whilst this guidance from Mercer provides a compelling alternative to performance ratings, this may be a step too far for some organisations. You therefore may wish to consider the approach that organisations like Deloitte have taken which is to replace a single performance rating with one or more targeted questions, the results of which can be used to feed into reward and talent discussions and decisions.
We should point out that our Clear Review Performance Management Software can be configured to work with or without ratings, as well as the Deloitte-style targeted questions approach. It’s your choice. Whichever path you take, Clear Review will always bring you the benefit of improved employee performance and engagement through regular performance check-ins and frequent feedback.