greytHR hosted yet another Expert Series Webinar, this time around presented by Sriram from Aventus Partners. The broad theme was Performance Management, and the topic addressed:
Performance Appraisals for SMEs:
Motivating high performers while operationalizing fixed pay increases
Here’s a summary - both for those of you who couldn’t make the live session and attendees who’d like a long hard look at the model proposed by Sriram in order to implement it at their own organizations.
The bell curve: A legacy of the ‘90s
Performance management and the nature and objectives of performance appraisals have changed over the decades. This change has been driven by what the business expects from its employees. In the past, the key business drivers were:
The impact of such a set of objectives on performance management and appraisals was that performance differentiation became a key component of business strategy. That is, organizations came out with systems and strategies to segregate employees into top performers, average performers and underperformers. This system soon came to be trusted across organizations and in fact worked well for around two decades because it:
But while the system continued to present all these merits, the statistical tool of the bell curve used to support this system quickly took over this system and it morphed into one of forced rankings. Thus, performance differentiation began to get equated with forced rankings. Employees began to get force-fitted into the bell curve and this became default in most organizations.
What has changed over the last few years?
In recent years, business drivers have started shifting. There is, today, a lot of demand for customization of products and services. Irrespective of the size and scale of organizations today, market domination comes from innovation and intellectual property.
This innovation is not created through silos but through interdisciplinary collaboration. So you have:
Today’s organizations are beginning to measure and reward this in an extremely systematic fashion. The generic belief that is becoming embodied is that while differentiation had its merits, organizations today want to have more and more high performers. The belief is that greater the proportion of high performers, greater is the value created for customers. And therefore performance management and performance appraisal systems are being molded to suit these expectations of superior delivery.
Differentiation still works, but the bell curve doesn’t
So, in this new scenario, differentiation still works, but the bell curve doesn’t work for the following reasons:
The bell curve basically assumes that you have 50% employees who are good performers or exceptional performers and the other 50% lie on the other side of the spectrum. This results in many dissatisfied employees whose ratings have been normalized, especially when you have to push them to comply with an overall curve.
However, forced rankings are still in use as:
The way forward: Looking past the bell curve
So, what if there was an alternative? How can we go about rewarding employees on actual performance and not force-fit them into the bell curve/other statistical concepts?
To reiterate, the fundamental behaviors organizations today are trying to drive are collaboration, innovation and risk-taking. To build such a culture, one needs to:
1. Rate absolute performance:
2. Rely on holistic assessment
3. Let the data speak: Allow the curve to emerge from the data
4. Ensure that people are rated based on consistent performance
5. Arrive at compensation increases based on a composite set of factors
Use fixed and variable pay increases judiciously
Whereas fix pay should be used on a composite (2 or more) set of factors to reward performance on a consistent, long-term basis, variable pay may be used to reward performance for half-yearly/annual periods.
So the essential distinction is: award variable pay for a defined period vs. fixed pay for a longer terms basis a composite set of factors.
You could have a host of factors based on which fixed pay increases may be awarded and organizations can decide on these factors based on what the behaviors are that you are trying to drive to achieve your business goals.
Potential factors that can be used include:
A Case Study: The 5 principles in action
This case study is a simulation created by Aventus Partners and is not reflective of any actual organization.
The case study details how one can go about implementing a new performance management system (PMS) based on the above 5 principles - primarily a system based on actual performance (and not relative performance, as in the case of the bell curve). We strongly recommend that you view/download the case study in case you’re looking to replace the PMS at your organization.
Objectives of the Case Study