In the first of our performance management series we considered the trend to remove appraisal ratings. The benefits are clear. But the move leaves many unanswered questions. Especially when it comes to reward.
Ratings have traditionally been used to categorise individual performance. To identify groups of people who warrant a special focus. This enables smart decisions around development, promotion, and reward.
There’s been plenty of media coverage about companies removing appraisal ratings. But a distinct lack of comment about how the pioneering companies are then managing reward. Without a measure of performance how do we pay for it?
Put simply, remove ratings and there are two paths for reward: consistency or discretion.
Stop paying for individual performance. Base pay becomes the rate for the job determined by factors such as external benchmark data, internal equity or length of service. Any bonus can be based on wider measures such as company or team performance.
There’s plenty of debate over whether pay for performance is effective; as Daniel Pink says “Carrots and sticks are so last century”. In reality, base pay already often reflects tenure rather than performance and bonus isn’t truly variable.
Consistent reward enables budgets and allocations to be controlled centrally. Managers are relieved of trying to make small budgets look meaningful and differentiated. Equal pay is straightforward. Consistency and transparency are maximised.
But for many individuals, and many organisations, pay that is based on the job alone is a step back. There’s no scope for individuals to influence their pay, or flexibility for managers to ‘get pay right’. Performance and contribution vary greatly across individuals and recognising this through reward seems right and fair.
We’ve all heard the manager riposte of “I would like to have given you a better rating / increase / bonus but HR wouldn’t let me”. Now the rating is gone, should the centralised ‘reward system’ follow?
Give managers control to make informed reward decisions aligned with performance discussions. Provide the budget (segmented or not into base and variable), the market data or pay ranges, and leave them to make the decisions.
Take this further so managers build a business case for budget or it’s allocated on a project basis so that reward is integral to business goals. Implement ‘real time’ pay and bonus awards that directly relate to milestones and conversations rather than an annual cycle. Reward ‘in the moment’ provides most flexibility and most impact.
Be forward looking, create an overall ‘people’ budget for managers to spend on reward, recognition or skills acquisition to support coaching conversations.
From my conversations with organisation who have removed appraisals, empowering managers in this way often the way forward. It aligns well with employee-centric performance management and enables multiple complex factors (e.g. contribution, value to business, team equity, negotiations required) to be factored into the ‘right’ decision.
But this approach brings challenges around fairness, consistency and transparency. It requires trust and a high degree of manager capability along with safeguards from discrimination and bias.
But the bigger challenge is; if reward is differentiated, there is a measure. If it’s not overt, pay becomes a pseudo rating or ranking system by which managers and employees calibrate.
More on how to make discretionary reward a successful move in our next blog in this series.
Is there another way?
As ever, the right answer has to be organisation-specific.
And the right approach may be a combination of the two options: consistent pay but differentiation through variable ongoing recognition linked to behaviours and goal achievement. Consistent reward at junior levels and variability at senior levels. Or consistent for the majority of employees apart from a small discrete subset of talent.
Or perhaps it’s about still having a measure to guide reward - but a different measure? Potential or collaboration for example, or a ‘Big Data’ measure that combines multiple performance metrics in a sophisticated way.
We look forward to hearing more about reward from those organisation who have taken the leap of faith and removed appraisal ratings.
But what is clear is that continuing with current reward practices when performance management is changing will only lead to incongruence and disengagement.
In the third of our trilogy we’ll consider how to ensure reward is successful where managers have discretion.
This is No.2 in our Performance Management trilogy. Here are the others:
Photo: Bamboozled by Brandon.