It's that time of year. Performance reviews. Comp adjustments. Fear and loathing for so many. It got me thinking about the problems that show up in the merit increase process, and how they often have a deeper cause.
Darcy Dees does a nice job of covering the definition of the topic in her November post over at Compensation Cafe. I don't really need to tell you that there are several approaches to the subject of pay for performance. Best practices would say that there are multiple factors that impact pay for performance – upgrading skill levels, company and departmental performance, team goals, etc. In this post, I'm only talking about the merit based portion of an overall pay for performance program, specifically, using overall appraisal scores to drive merit increases.
Why? Because that's the reality of what many organizations are using as the foundation for their pay for performance program. When that happens and the scenario below unfolds, you'd better believe the problem isn't with your merit increase program, but with the performance management process.
Here's the scenario. Your company has been doing fine despite the economy, and you're running a P4P program that's based on merit increases. The employees are aware that pay increases are supposed to be linked to performance. In their minds, the annual review is the basis.
Now, what do you do about Richard? According to his performance history, he's a very solid performer. Appraisal data shows 4/5s across the board for the last three years. No concerns raised by his manager logged anywhere. But Richard is sitting across from you, pretty vocal about the fact that he got shafted on his raise: 1.5% – the same as everyone else. There may be a reasonable explanation, but most of the time there isn't, and there really is a gap. Based on the data, you are inclined to agree with him.
Herein lies the problem in this all too common scenario: if you don't actually do the performance management part, the "merit based pay" doesn't work. Shocker, I know.
So what happened? Why did Richard get a good review, but get royally….overlooked when it came time for the raise? One of three things happened here:
Explanation 1. The manager was assigning merit increases based on their own personal preferences/mood that day. A pretty subjective approach, with no link to performance and more akin to playing favorites.
Explanation 2. The manager doesn't like the pressure of assigning increases and decided to split the pot evenly across the team – Richard got what everyone else got. That's not pay for performance either, unless of course all team members are equal performers. And we all know how often THAT happens in real life. So if you are going to let managers evenly spread their raises, that's cool, just stop calling it pay for performance. It's not even close.
Explanation 3. Richard isn't really a super high performer and shouldn't have earned 4/5 on his review to begin with. But his manager was too weak to let him know that he was average, leading to grade creep in the appraisal process and a major disconnect on his raise.
So the manager was unwilling to deal with performance, but when Richard gets his next check he's going to come to HR and dump the problem in your lap. When this all blows up, the merit increase process gets blamed. But where was the problem really?
- The first failure was the manager not dealing with performance all year long with regular feedback and coaching.
- The second was not addressing performance issues honestly and objectively in the appraisal process. Yup, still not willing to have tough conversations.
- Managers up the approval chain in the appraisal process weren't doing their jobs. They didn't read it, or if they did, they just rubber stamped it.
Richard ends up with a raw deal not only on his merit increase, but when it comes to development and feedback too. He's not a mind reader, but he's being told in one instance "you're 4/5" and in another….."you are not really that great, and we won't tell you why." Nice, shaft the guy when it really counts and don't bother to help him improve or grow.
Cue the broken record, but I've said it at least a million times to anyone who will listen, performance management is not a once a year deal. It needs to be a day-to-day priority. If a manager isn't plugged in with their employees and truly coaching them and dealing with issues immediately, there's no way that any performance appraisal reflects reality, or that the employee is going to understand, let alone happily accept their merit increase.
The end result is that your employees get the short end. I'm positive I don't need to tell you that does zilch for employee engagement or retention or establishing a culture that strives for high performance. But these factors were pretty much the rationale for implementing a pay for performance program in the first place – right?
Issues in P4P are often like diagnosing an illness – you can't stop at the symptom, you need to work out the cause and treat it. You have to be bold enough, and brave enough to tackle this beast and fight for the integrity of your talent management programs.
You up for it?
Editor's Note - Don't Feed the Vendors is a new series at FOT. The goal of the DFTV series? We get hammered by third parties who want to write at FOT, so we give them a challenge. Write something cool and significant we can learn from/talk about in the FOT style, and you can roll with the FOT crew. Try to sell our readership your product and/or provide a whitepaper, and we'll openly mock your company in public for not understanding the DNA of our readership. Many inquire, few follow through once they learn they can't post a workup of their latest "research". For those that make the cut, we'll offer up associate FOT membership as part of the Don't Feed the Vendors stable.
Sean Conrad of Halogen Software is one of the ones that made the cut. Show him some love in the comments for being up to the challenge and not writing something that should be read on PBS.
Huzzah! Managers have gotten away with being weak for too long. HR needs to kick these back to the manager to solve.
Actually, this brings up a question in my mind – should HR have input into a managers review based on these issues? And make it highly weighted. Who else would have the skinny on a managers ability to manage than the person who takes all the crap for bad management.
Just spitballin’ here.
Explanation 4: Richard is seriously overpaid per his market value in the job and therefore is not worth more than 1.5% above what he’s already making. If Richard does not like he, he should work to advance his skills, seek a promotion or leave. The organization can replace him with someone else, still within the market salary range in which Richard falls.
Regarding weak managers… I’ve never had a manager who cared about the performance process and I’m in HR!!!! So from my limited experience I don’t believe in the p4p process at all because there are too many variables. It’s a great concept but it will never work right because everything is confidential and the good-ol-boys will always get the $$. There’s not transparency in the program. Why can’t we put our money where our mouth is and show our employees what kind of performance we reward by publicly posting merit increase data. This would ferrite out who got the increase based on real performance and who got it on the BS buddy club.
I know that there are major obstacles to transparency and that it takes some guts but is there any other way? Right now the HR Director is the pay czar in my organization and that’s not effective….
Why has nobody pointed out that Richard was publicly talking about HOW MUCH he got. That’s broken rule #1 on my book – don’t discuss your pay with coworkers. It’s no one else’s business what you make, and it sure isn’t your business what they make.
On a related note, I think a lot of people miss the whole point of *merit* in that merit raise. You have to actually earn it – unless you’re working in a union situation.
I really don’t see merit pay as “merit pay” at all. Wages are set by the market. Most budgets only allow for inflationary increases anyway. Your super-high performer may only get a percentage point or two more of an increase than your lowest performer.
I usually tell people that where they will really see their salaries increase is through promotions and bonuses, not the annual budget increase, and that’s where they need to focus their energy if they want to see their pay increase.
The performance management process will always be flawed because humans are flawed. A “4″ or a “5″ will always mean different things to different people. So much so, that we completely removed ratings from our system and just focus on narrative.
@Paul Hebert
Thanks for the spitball! Er comment.
One of the ways I have seen HR pros have great constructive into the process is using approval steps for both self appraisals and the manager’s appraisal. HR pros that force evaluators to give good constructive comments, examples, and attach development plans before the review is allowed to proceed to the meeting with the employee can have a very positive impact. I have seen that work very well in a couple of examples.
@Joe
Good point, I hadn’t tackled that possible issue in my article, thanks for adding it! In some cases organizations will adjust the pay ranges based on market, and if Richard’s increase of 1.5% puts him at the top of the range, but the merit scale would give him say 3.5% normally, that extra 2% gets turned into a lump-sum that rewards his good performance but does not increase his base above the top of the range.
@Phil N
Good point there, but I think in many organizations people will talk about these things. In some cases the merit matrix itself may even be available or public, so Phil might know what the range of increases is. I’d agree that keeping it all hush-hush definately has challenges.
Woops I messed up the attribution, the above one was in response to Amybeth Hale as well as Phil N.
@Angelique Andre
Of course these systems will never be perfect, but you do give something up when you remove ratings all together – and that is reporting.
I have seen many cases where organizations will go for the best of both worlds: Hide the scoring and use long behavioral rating scales with a focus on development. In this way the organization gets reporting it can use to look for areas of development in the organization, but the numbers are not on the appraisal itself. Add a focus and tight integration with development for each competency and the value proposition for all involved changes quite a bit.
I did a post in the fall about the development focus if you want to dig into it further: http://www.fistfuloftalent.com/2009/08/your-all-stars-they-wont-take-you-to-the-playoffs-without-development.html
Thanks for the great addition to the discussion.
Great insight and if the organization had adopted the 5 Point Star Model this would be quickly identified.
Also, people in general do not know their own talents and hence may focus on weaknesses or non-talents.
Sorry, but you HR folks don’t get it. Managers are forced to work within the constraints of what you decide, and this is why people get shafted on their performance reviews and pay. If you can’t rate people what they deserve (forced ranking) and then can’t pay them what they are worth (salary compression and/or lack of market based pay) then there will always be problems and this is MOST of the time a result of HR policies. Granted there are managers who do not properly rate employees but there are many who CAN’T properly rate because of HR.
@ Leanne Hoagland-Smith
A best-practice performance management process will focus on development – both of strengths and weaknesses.
@Dave the manager
Forced ranking has a whole bunch of additional issues that come along with it certainly, but that’s a whole other article! What I am trying to get at is what happens when the merit increase doesn’t match the performance appraisal results – which we see happen quite a bit.
You do make an interesting point – when they don’t match we should investigate if a too-constrictive rating scale or system is causing an issue, or possibly that merit guidelines and budgets can cause a problem on the other end. This all needs to be balanced with the needs of the organization for things like staying in budget and having a consistent and comparable rating/scoring system for reporting purposes.
I will say that a good manager I think can always provide value and make it work – granted within the constraints of the system. For a good manager, the appraisal and merit processes are just formalities at the end of the year and the good work has been happening all along. If you feel the system is keeping you from doing the right thing for your employees, I’m sure HR pros in your organization will want to hear from you about it!
I was told it was a standard percentage increase for the company set by the CFO, yet when I saw everyone’s on paper in black and white, it was clear it had always been about favoritism. Who was a follower/suckarse that actually got the biggest raise and a title change to boot. I find that deplorable and causes long term morale decline.
It is interesting to see all of the comments from both sides of the situation. As a Corporate Trainer, it has appeared to me for years that many managers lack significant training in order to develop their staff. Most are promoted from within with no regard to quality training, further education for how to deal with staff, people, situations. For most people, confrontation is avoided at all costs and managers are hard pressed to avoid confrontation unless they ‘allow’ behaviors. The performance appraisal sets a manager up for confrontation. The merit part sets the tone.
It seems that proper training, making the best of your in-house management, is the key to a better merit based system.
I think companies have historically shot themselves in the foot due to lack of transparency about how pay is determined. I’m not saying that the salary list should be posted on the corporate intranet, I’m saying that HR needs to explain basic compensation theory. When left to their own devices employees will assume the worst; that pay policies are punitive and are set by indiscriminately throwing darts at the wall.