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Do you need performance ratings to manage reward and talent?

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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.