Bye-Bye Performance Ratings and Pay for Performance…

carrot-and-stick

I’m going to let you all in on an HR secret – performance measurement and rating systems are a complete waste of time and often cause more harm in the organization than good. And, if that’s not enough, this whole pay for performance idea? Yup, you guessed it, that’s a myth too.

So, why do companies spend so much time and money on trying to come up with new rating systems and fancy pay for performance plans? Actually, I have no idea. I’m hoping someone out there can help me on that one. But, this week is a milestone week in my career – I’ve officially decided to do something about it – I’ve propsed to my executive team that we eliminate our performance rating system and ditch this whole pay for
performance idea.

Here’s why:

  • We’re a company trying to develop innovative medicines for patients and we know that real innovation is often preceded by multiple failures that we can learn from and improve upon. By rating short term employee performance through semiannual reviews, we’re preventing employees from focusing on the big picture, taking long-term risks and being innovative. We want employees to fail early and often.
  • A rating based system actually encourages a manager to give less frequent performance feedback to employees preventing real-time learning. That’s a bummer.
  • Having a compensation and reward system based on the faulty premise that financial incentives improve performance, we are undermining powerful intrinsic employee motivation towards achieving our mission of curing cancer. These guys don’t need to be “bribed” to do a good job, they just want to be paid fairly and competitively.
  • There’s no evidence that I’ve seen that convinces me that a performance rating system acutally improves performance.

So, I’m staking my professional reputation on the idea that nibbling around the edges and tweaking the rating system or introducing a new reward program is old news and that it’s time for a whole new approach. Now, I suspect right about now many of you are reading this and saying that will never work at my company. You’re probably right. But, that’s not the point. Here are a couple ideas that I do think you can use no matter what your situation:

  • It’s all about the process. We’ve had an internal group of employees working on developing, refining and testing these ideas for almost 7 months and there’s no way I could have made this recommendation without this group. Yes, it took a lot longer than I would have liked but we’ve got momentum and we’ve got buy-in (so far at least!)
  • Know who you are. I believe this system will work for us based on the type of organization and culture we’re trying to build. That’s called creating a competitive advantage, not just implementing best practices that everyone else is already doing.

Now, I’m under no illusions this will be all flowers and candy. There are going to be some tough times for sure… but I’m going to share these challenges with you as part of my blog posts over the next several months. I’ll also be part of a panel discussion at the 2011 Human Capital Management Summit where I’ll give even more of the lowdown.

So, wish me luck, friends. My reputation’s riding on it!

FOT Background Check

Andy Porter
Andy Porter is a VP of HR/OD with Merrimack Pharmaceuticals in Cambridge, MA which means he works with some wicked smaaht people. Some days, he indeed does wear short shorts around the office(call it a morale booster) but it really just makes people uncomfortable. Other days, he spits some mad game on cheese. No really – he’s somewhat of a cheese aficionado. But more importantly? At Merrimack he gets to contribute his small part as an HR Pro towards improving the lives of cancer patients.

8 Comments

  1. Paul Hebert says:

    You said it all when you said: “I believe this system will work for us based on the type of organization and culture we’re trying to build.”
    Every company is different. You’ve identified all the important elements to drive the behavior YOU want.
    I wouldn’t go as far as to say monetary incentives don’t work (they do – maybe not for you but they are proven – no matter what Mr. Pink wants to ‘believe’.)
    But let me ask this question – how will you social “failure” as an objective – one you want more of (faster, better failures) without some sort of reinforcing tactic? Recognition would be a good one for that (not incentive – two COMPLETELY different things.)
    Recognition cements the new paradigm and regardless of organization – there is a paradigm in place that failure is bad. Somehow you’ll need to continually reinforce failure as an acceptable outcome.
    But based on your quick overview – it should work like a charm!

    Reply
  2. Gina says:

    I know that our team has their own way of tracking their performance. The expectations for us all have been clearly spelled out- what equals success & what obviously doesn’t. We manage our own performance & it is up to us to change it if we see we are slacking- long before it comes to a supervisor. It doesn’t take special pay for performance programs for an employee to know that they are meeting or exceeding expectations. One huge reward for everyone is seeing the company have success. When the employees know that they were instrumental in that success becoming a reality, the pride & feeling of security can’t be matched by anything else.

    Reply
  3. Well, I certainly look forward to how this will play out. I’ve seen and heard rhetoric about doing away with performance appraisals and processes for a long time–even thought through much of it myself. So, I’m very interested to see what ideas and approaches you take within your work environment–approaches that will foster innovation rather than stifle it. I agree with you that most processes seem to suck the spirit out of the room and out of the personnel when they are followed; hence the reason why so many from the top to the bottom bemoan performance appraisal time.

    Reply
  4. Have you read Daniel Pink’s “Drive”? It’s a fascinating read, and suggests that pay-for-performance can screw up the results. (http://goo.gl/AhYP2)
    You can still get paid, and paid well, but attaching dollars to the result may actually serve to screw up the product.

    Reply
  5. Darren Bond says:

    Notwithstanding all of the issues related to performance management, I still have to believe that pay-for-performance is the way to go. It certainly does, though, take a lot of transparency and treating people like adults, sharing in the risks and rewards of running the business.
    Do you have thoughts around “differentiation” among people?
    I think most agree in principle that some contribute more than others (they may be more passionate about their job and career) and should be compensated differently. Otherwise, you can end up with rewards tied just to seniority and education…
    Good post!

    Reply
  6. Sara Kmiecik says:

    Very interesting post – I do agree that performance review systems are a bit pointless.

    Reply
  7. Nick Koenig says:

    I think that performance measurement systems should reflect the product cycle to a certain extent. A quarterly or bi-yearly performance measurement system may not make sense in an organization where the product cycle is much longer. I think that alot of organizations fail to take into account the product and the amount of time it takes for a person/group to be properly appraised. I also think with some careful thought some process measures can be developed to guage progress along the way. Are there certain things that happen every month or so in successful vs. unsuccessful teams or product launches? Can these be used as informal feedback? etc.
    But you do bring up an excellent point when you mention the utility of the product cycle in the development of a good performance measurement system.

    Reply
  8. Jason Thompson says:

    Now that its been over 18 months, how well have the changed worked? Has the business and employees wholy embraced them?

    Reply

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