Many companies are looking to move away from annual appraisals to a more continuous approach to performance management. As this usually involves removing ratings, the big question then becomes how to make reward decisions?
In our recent webinar with Clear Review we explored how to reward performance without appraisal ratings. Nearly 600 of you signed up and over 1/3 responded to the poll saying they were considering moving away from ratings. The reward ‘conundrum’ is clearly very current.
Ratings have long been a central feature of formal performance management. They provide a simple classification to enable smart decisions around talent, development, promotion, and reward.
However, annual ratings are at odds with the purpose of performance managemen which is to improve individual and organisational performance, develop relationships and provide ongoing feedback, coaching and development.
My view is that the ‘admin’ process of allocating reward should not stop you from making performance management as effective as it should be. We don't need appraisal ratings to make performance-related reward decisions. Here's three options:
Option 1 – remove individual performance
The first option is to focus your reward strategy on team and/or company performance rather than individual performance.
When it comes to pay, spot rates could enable a consistent ‘rate for the job’ regardless of individual performance. As an alternative, incremental scales or market-driven ranges provide the scope for pay to progress over time according to service and experience.
This can work well if your company has many similar roles, such as in a call centre or retail environment, or structured career paths such as in the accounting and legal profession. But, for some roles, this can be a step back as there’s no scope for individual influence over pay, or flexibility in recruitment conversations.
When it comes to bonus and incentives, awards could be based on team or department performance, or aimed at sharing company success.
Although 64% of our webinar respondents use individual performance as the primary driver of reward, we’re definitely seeing a shift amongst our clients towards more team and company reward in an effort to encourage innovation and collaboration.
It’s worth noting that this approach doesn’t have to exclude individual behaviour and contribution altogether as it can be rewarded through a recognition scheme.
Option 2 – a different kind of rating
A second option is to have a different kind of measure to guide reward that is distinct from any performance management process or conversation.
One option is to ask line managers to identify just the top and bottom performers at the end of each year for reward purposes. Rather than fretting over assessing all employees in order to make small tweaks to reward, this simplifies the process by only differentiating pay/bonus awards at the extremes.
Or alternatively, you could use a specific set of questions. For example, Deloittes use four future-focussed questions throughout the year to explore what a line manager would do in the future, not what they think about the past. Data from the answers is then collated to inform year end reward decisions.
The key here is to keep the reward assessment separate, and distinct, from performance management.
Option 3 - a holistic approach
A third option is to adopt what we call a ‘holistic’ approach to reward. This is where line managers are empowered to make informed pay and bonus decisions based on multiple factors.
Research has shown that line managers know what reward they want to give their team members, and end up having to ‘retrofit their ratings to align with the pay increases they want or need to give employees’ Pulakos et al.
So this approach involves removing the ‘hoops’ (i.e. ratings) and allowing managers to make multi-faceted reward decisions.
For example, holistic pay decisions could be based on factors relating to the role (e.g. market rate, recruitment challenges and pay of others in team), the individual (e.g. knowledge, skills, experience, performance and potential) and the organisation (e.g. budget and reward goals such as paying the Living Wage).
This approach can bring challenges and requires trust, manager capability, honest conversations and safeguards from discrimination and bias. In our webinar poll, 70% saw manager capability as the main obstacle.
What is critical here is to have a clearly defined reward strategy and pay principles, and have line managers with the right tools and skills to apply these in a consistent and transparent way.
Which approach is right?
There isn’t a right answer. The best approach will be different for different organisations, and may also vary in different parts of the organisation.
To find the best approach for you:
- Be clear on your reward strategy. In particular, what does ‘fair pay’ mean and what behaviours do you want to re-inforce to deliver the best company performance?
- Identify a purpose for each reward element. For example, is pay about a rate for the job, or should it reflect the individual. Is bonus about more for those who contribute more or sharing success with everyone?
- Find a vehicle to translate performance into reward. Once you know what input is required for your reward decisions, you can decide whether this should be a distinct measure, or whether to empower managers to make holistic decisions
What is clear to me is that organisations that empower line managers to make complex decisions, including about people and reward, will be best placed to survive the future in our complex world of work.
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