For most people, the end of the year signals that it’s time to start calculating and reassessing your employees’ compensation. But for those who have followed the growing number of companies that have ditched the annual performance review for continuous, 360-degree and/or ratingless reviews, there may be more confusion and concern around this process. I spoke with two experts, Professor Edward Lawler, Director of the Center for Effective Organizations, and Steffen Maier, cofounder of Impraise, on the subject.
Here's what they shared:
Kathy Caprino: Why are companies switching to new, continuous, peer based and/or ratingless performance management systems, and what concerns them about his switch?
Steffen Maier: As a cofounder at Impraise we’ve helped over 100 companies switch to continuous, peer based and also ratingless systems with our tool. The reason so many have decided to move away from traditional annual performance reviews is because they don’t provide employees with the growth and learning opportunities they need in order to keep up with constantly changing industry trends. By receiving feedback when they need it (continuous), from more sources than just their manager (peer based) and based on more qualitative, rather than quantitative information (ratingless), employees have the tools they need to take ownership of their development plan.
However, a common question we receive from potential clients is how performance management can be decoupled from pay. The reason many want to take this additional step is because they want to make the process more focused on professional development, rather than rewards. If feedback is linked to pay, it can often be harder for employees to take constructive feedback and use it as an opportunity for advancement, thereby undermining the purpose of the new system.
Caprino: So, the key question seems to be “How do managers continue to make compensation decisions without hindering learning and development?”
Edward Lawler: Through discussions with clients, potential clients, contacts and research we’ve discovered five interesting trends.
Along with Professors Gerry Ledford and George Benson, I published a study on the use of cutting edge practices this year at the Center for Effective Organizations. For this study, we interviewed 244 companies using continuous, crowd sourced (360 degree) and/or ratingless reviews. In one section we looked specifically at the impact cutting edge practices have had on rewards systems.
The chief concerns companies had with these systems were: the possibility that they could lead to an over inflation of a company’s budget based on closer relationships between managers and reports, overly generous peer assessments or, in the absence of ratings, the inability to make a proper assessment.
Caprino: What is the most common method of delinking pay from performance that you’ve seen so far?
Maier: The most commonly used method (and the one most similar to traditional compensation practices) is to introduce more continuous informal feedback and quarterly performance reviews, but keep one annual review specifically for making compensation decisions. The difference is that employees will know where they are and how they’ve improved at each quarterly check-in, rather than being in the dark until the annual review. Compensation in this sense is still linked to end of the year feedback but the feedback they receive throughout the year is focused on development.
Caprino: How about in ratingless systems?
Maier: Ratingless reviews have become increasingly popular as studies have emerged arguing that ratings can actually demotivate employees and impact performance . Some companies have switched because they found managers often spent more time discussing the rating, than the person’s actual performance. The issue is that without numerical scores, compensation must be based on qualitative reviews, leaving much more leeway for rater bias.
Rather than leaving the decision up to one manager, calibration meetings include a group of managers who discuss the performance of each employee and together come up with the best way to allocate pay and bonuses. This is meant to separate rater bias from reviews and make more accurate compensation decisions.
Caprino: How about in peer based (or crowd sourced) feedback systems?
Maier: Instead of attempting to decouple pay from feedback, some companies have actually gone in the opposite direction using peer recognition based bonuses to fuel engagement. Numerous studies have already shown us the impact that recognition can have on turnover and motivation. For example, Bersin by Deloitte found that organizations with effective recognition programs had 31% lower voluntary turnover. Here are two different ways companies have implemented this:
1. To encourage positive feedback and collaboration, some companies are actually giving employees a budget that they can use to award cash bonuses to others for a job well done. The interesting part about this system is that it gives employees the opportunity to allocate bonuses rather than leaving it up to managers.
2. One gaming company we work with created their own innovative way to gamify peer feedback. In this system employees award gold, silver and bronze ratings to each piece of feedback they receive. The people who gave the most helpful feedback are given a bonus.
Caprino: What are some other ways you’ve found?
Objectives And Key Results
Many companies are allowing employees to set their own Objectives and Key Results (OKRs). Performance is then assessed based on how well the individual did in working towards and achieving their goals. By setting clear targets and ways of measuring achievement, employees know what they need to do to perform well and take ownership over their performance plan. In terms of setting compensation, the benefit is that individuals are given the opportunity to decide the basis by which their compensation should be decided. This also leaves less room for subjective reviews based on a manager’s assessment of an individual’s performance.
Setting A Standard Formula For Complete Transparency
Some have decided to eliminate the question of pay entirely by creating a standard formula. For example, Buffer has made their salary formula completely transparent, even to the public. This insures both equality and a division of feedback and pay. Without the money question looming over teams, motivation can be focused on growth and innovation.
Other companies have decided to keep monetary rewards in place but make them dependent on team and company-wide achievements, rather than individual performance. If your team performs well, everyone will receive a bonus. While the possibility of free-riding team members can be demotivating, especially to talented employees, a study by PWC found that 53% of people would still increase their effort even if it meant others would benefit.
Caprino: What impact are these cutting edge practices actually having on compensation?
Lawler: We found that 89% of respondents did not see any major changes in overall budgets. They did report more transparency and rewards for top performers. Overall these systems were deemed to have a positive impact on effective pay decisions, with a combination of all three practices being the most effective in meeting rewards systems objectives.
What you actually see is that each practice helps companies make more effective compensation decisions in different ways. Continuous feedback gives managers a more in-depth view of each employee’s performance , as they are encouraged to concentrate on giving more advice and coaching throughout the year. This means that they also have a better understanding of each person’s strengths and areas for improvement, enabling them to more easily identify top performers. With ratingless reviews, the conversation is geared more towards performance than a number. Meanwhile, peer feedback provides a richer view of a person’s performance with multiple perspectives being taken into account.
Though the results were positive overall, ratingless reviews can present the most difficult challenge. In this situation we sometimes found that compensation decisions continued to be made by one manager based on “shadow ratings” which were not shared with the employee. This creates a system in which there is less transparency around how these decisions are being made, possibly creating a negative perception of the practice. To avoid this, decisions should be made by multiple parties with clear communication of the criteria which will be used to determine pay.
Caprino: Do you have any advice for companies going through this process?
Lawler: We often saw that rewards professionals within the company were not main drivers in the design and implementation process of cutting edge practices. This makes it more likely that compensation practices will fall behind, as the performance management process undergoes a revamp. Instead we encourage companies to utilize the knowledge that these professionals have from the beginning to create a strong plan and smooth transition.
Maier: Ultimately, it’s not possible to completely separate pay from performance (except when creating a standard formula). There is also no set answer about the best way to do compensation in this new type of work environment. What is certain, is that you should choose the option that works best for your particular culture and what you want to achieve. Then make sure to clearly communicate to your employees how compensation decisions will be made and what criteria will be used. Our clients come from very different work cultures and industries, but what they all have in common is they want to steer their companies towards a learning driven approach and they found our solution as a great way to achieve this.
Read the original article on Forbes.