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Managing rewards without performance and appraisal ratings

Reward without performance ratings

In 2015 a num­ber of large, glob­al organ­i­sa­tions includ­ing Gen­er­al Elec­tric and Accen­ture announced that they were aban­don­ing per­for­mance rat­ings. Since then, many oth­er organ­i­sa­tions have been con­sid­er­ing remov­ing their appraisal rat­ings, but are con­fused about how they would man­age reward, which is fre­quent­ly tied into per­for­mance ratings.

Rat­ings have long been a cen­tral fea­ture of per­for­mance man­age­ment. They pro­vide a sim­ple clas­si­fi­ca­tion that enables smart deci­sions around tal­ent, devel­op­ment, pro­mo­tion, and reward.

But as com­pa­nies move away from annu­al per­for­mance reviews to a more con­tin­u­ous approach, the idea of an annu­al rat­ing is being brought into ques­tion. Add to this the evi­dence from neu­ro­science that rat­ings do more harm than good, and you have a strong case to remove them.

But what about per­for­mance and reward? With­out a mea­sure of per­for­mance how do we pay for it?

Put sim­ply, if you take away per­for­mance rat­ings then there are two poten­tial paths for reward: con­sis­ten­cy or discretion.

Path 1 — Greater consistency

You can stop reward­ing dif­fer­ent lev­els of indi­vid­ual performance.

Base pay becomes the rate for the job deter­mined by exter­nal bench­mark data, inter­nal equi­ty or length of ser­vice. Any bonus (apart from incentives/​commission relat­ed direct­ly to met­rics) are based on team or com­pa­ny performance.

Con­sis­tent reward encour­ages col­lab­o­ra­tion. It is more straight­for­ward and trans­par­ent, relieves man­agers from mak­ing tough pay and bonus deci­sions, and brings cen­tral con­trol of reward bud­gets. There’s already plen­ty of debate over whether pay dri­ves per­for­mance (Dan Pink).

But for many, this is a step back. There’s no scope for indi­vid­ual influ­ence, or flex­i­bil­i­ty for man­agers to get pay right’. Per­for­mance and con­tri­bu­tion vary great­ly across indi­vid­u­als. Recog­nis­ing this through reward seems right and fair for some organisations.

Path 2 — Greater discretion

You can give line man­agers more dis­cre­tion to reward dif­fer­ent lev­els of indi­vid­ual performance.

Skilled man­agers don’t need a rat­ing to make informed pay and bonus deci­sions aligned with per­for­mance dis­cus­sions. Pro­vide the bud­get and the mar­ket data or pay ranges, and leave them to do the right thing’.

From my con­ver­sa­tions with organ­i­sa­tions who have removed rat­ings, empow­er­ing man­agers in this way enables mul­ti­ple fac­tors (e.g. con­tri­bu­tion, val­ue to busi­ness, team equi­ty) to be fac­tored into the deci­sion. But this approach brings chal­lenges around fair­ness and con­sis­ten­cy. It requires trust, man­ag­er capa­bil­i­ty, hon­est and trans­par­ent con­ver­sa­tions and safe­guards from dis­crim­i­na­tion and bias.

And there is a dan­ger here that, in the absence of a rat­ing, the pay rise or bonus allo­ca­tion become a pseu­do rating.

Is there anoth­er way?

As ever, the answer has to be organ­i­sa­tion-spe­cif­ic. Or the right approach may be a com­bi­na­tion of the two options. For example:

  • con­sis­tent pay and bonus but indi­vid­ual recog­ni­tion awards for demon­strat­ing behav­iours and values
  • con­sis­ten­cy at junior lev­els and dis­cre­tion at senior levels
  • con­sis­ten­cy for the major­i­ty, dis­cre­tion for a small dis­crete sub­set of talent

What helps is to clear­ly define your reward strat­e­gy right from the start. For exam­ple, do you want to reward indi­vid­ual or team achieve­ment? Should reward be con­trolled and annu­al, or flex­i­ble and in the moment?

So, you can remove appraisal rat­ings and still reward per­for­mance. But you should only do so if this fits with your future reward strategy.

Guest blog by Saman­tha Gee, Direc­tor at Verditer Con­sult­ing, spe­cial­ists in Reward and Performance.

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