Posted on January 16, 2017

Still stewing on the recommendations outlined last week?  Or have you already rejected them as irrational, overly radical, blasphemous, and/or downright wrong?  If so, consider the August 2015 announcement from General Electric.  As first reported in Quartz, GE – the company that championed arguably the most rigid form of performance appraisals – has eliminated the practice of annual reviews for the vast majority of its 300,000 employees, opting instead for more real-time feedback between managers and employees through an app, with a strong emphasis on coaching.

GE is not alone.  Others abandoning the failed process include:  Accenture, Adobe, Cigna, Deloitte, and Juniper among others.  When we say ‘failed,’ we mean that the process did not produce measurably improved results in either the individual or the organization.  As a result, according to the Harvard Business Review upwards of 70% of companies are considering making some change to their review process.

It’s time to consider more than ‘some change.’  If only to keep pace with other top companies with which you may compete for customers, revenue and/or talent.

The approach outlined here last week will get you there.  But more than the annual review will have to be jettisoned. ‘Outstanding’ will need to be operationalized, ideally at the local level.  The forced distribution of employees into a bell-shaped performance curve has got to go and the entire process must be completely disconnected from money, especially the ‘merit increase,’ a misnomer if there ever was one.

Let’s consider compensation and its impact on performance reviews and, in turn, on people.  As we know, the current, widespread practice (for those outside of Sales, which is a different animal altogether) is for managers to dole out ‘merit increases’ annually to employees.  The amount each manager has to disperse is based on analyses conducted by HR, typically involving cost-of-living data and the plans of other companies both in and beyond the industry and the local market.  A cost-of-living adjustment (COLA) is determined and some additional money is added to allow managers to reward employees who have performed at a high level.  Given a current low inflation of approximately 2%, this ‘merit’ pool – the COLA + the money for rewarding performance – has been in the 3 – 6% range.  That’s 3 – 6% of the total compensation budget for the entire organization.  The manager then has the unenviable and thankless task of allocating the merit pool to her/his employees.  Talk about a no-win scenario!  Many may get a 2 – 3% adjustment (the ‘warm body’ raise to correct for inflation) while those who walked on water may get a whopping 5% or possibly more.  (‘Whopping’ used facetiously.)

There are two immediate problems with this.  The first is structural: raising salaries annually for nearly all employees increases the organization’s cost of doing business every year.  Is it any wonder, then, why many employees report that their goals/objectives/quotas increase each and every year?  Of course not!  In addition to the quest to elevate the company’s stock price (for those publicly-traded), someone’s got to pay for these increases.  Guess who was elected?

The other problem is more serious, as it can decrease motivation and undermine one’s sense of worth.  Claiming that, say, a 5% merit increase for a top performer vs. a 2% merit increase for someone who showed up everyday is ‘pay for performance’ is, for many, insulting.  While someone in Comp may claim that the pay for performance system is working because, on average, top contributing employees received 2 – 3% more than those who were able to find the workplace each day, the reality is that for the vast majority of employees a small, single-digit percent difference is insignificant and not worth the extra effort needed to become and remain a top performer.  It’s not surprising that many outstanding contributors ask dejectedly ‘What’s the point?’ after receiving their merit increase.  It’s also not surprising that their next thought is worse:  ‘So much for my company respecting and honoring the contributions I make.’  Calling it ‘pay for performance’ is inaccurate, disingenuous and, in the end, destructive.  Nod once if you agree.  Nod twice if this has happened to you.

There are two specific ways to address these problems, both of which we’ll explore next week.  In the meantime, dream about new possibilities.  Today, Martin Luther King, Jr. Day, is the perfect day to do so.