Even in these dark days of recession, there are rays of light; many organisations are seeing that they can fix processes that created only the illusion of effectiveness. The last twenty or so years have been largely successful so, organisations were more concerned about the availability of talent than about the funds to pay for it. We saw many advances in HR especially in the use of web-based tools, the largest volume of HR research ever, and the largest number of newly published business books. Add to this all of the socio-economic changes and it has been a time of real change. However, many things have changed very little. For example, organisations have continued to:
- simplify and further simplify performance appraisal, often to the point of trivialising this critical process; and
- calibrate overall performance appraisal ratings rather than create such ratings from more objective assessments of the components of performance or fix the cause of the rater bias at source.
A number of them also became complacent, characterised by:
- annual pay increases based largely on inflation and last year’s business performance;
- individual pay adjustments to attract or retain key talent; and
- performance-related pay schemes linked to a single overall performance rating
salary rises based on past achievement rather than capability to do so in the future.
Some, who saw tougher times approaching, tried new approaches like forced ranking and out-placing the bottom 5% but, again based these on single overall performance ratings. The stark reality is that many of Performance Management and Incentive processes simply don’t work – even if they ever did!
But, at last the wind of change presents an opportunity. Now, we have to do something and do something that works. If not, we may still be invited to the boardroom – but merely to bring the coffee and biscuits…
Do we pay for the job to be done or for the person who does it?
Legislation and pressure from staff and unions will force many organisations to revisit the basis on which pay is determined. Pressure for efficiency and effectiveness will demand that we achieve a step change improvement in the way in which we:
(a) identify the worth of a job; and
(b) match people to those jobs.
Demands for efficiency and effectiveness mean that we have to be more rigorous in determining and defining the requirements placed on a job holder so that we can make better matches. Budget constraints, combined with pay and discrimination legislation, demand that we pay what the job is worth without bias for or against the job holder. Robust factor-based job evaluation will become a critical tool.
Does performance related pay pay?
Employees are far more concerned about ‘How they are being managed’ than they are about their actual pay (so long as the latter is sufficient and seen to be fair). Yet organisations appear to have forgotten research by such people as Maslow[1] and Herzberg[2]. As Herzberg concluded, "Viewed within the context of the sequences of events, salary [e.g., money, earnings] as a factor belongs more in the group that defines the job situation and is primarily a dissatisfier."
There is no generically applicable evidence to show that ‘performance related pay’ adds substantial value to an organisation (through enhanced performance, enhanced retention, etc), although its implementation may have a transient positive impact (because of the effect of change and new attention to employees). There is substantial anecdotal evidence of its negative impact (employees and managers alike hating and undermining the processes, wasted money, increases to long term fixed costs, etc).
Can incentive schemes incentivise?
As cost controls bite, many organisations will be horrified and then relieved to find that their so-called incentive schemes did not incentivise. The argument for financial incentives is that they increase:
(a) cognitive exertion;
(b) motivational focus; and
(c) emotional triggers, and thus
(d) performance.
Theoretically, this may be possible but many factors have a bearing on the impact, of such schemes including:
- Personality of the individual and the value that they attach to potential future financial reward (the percentage of people so driven is relatively small).
- Predictability of the size of the reward (if this is low then the incentive is reduced; if this is high, then the effort to gain the reward may be reduced).
- Financial horizon (e.g., if the employee lives from pay-slip to pay-slip, a potential reward on average six months away will have little impact).
- Relationship to employee’s discretionary spend (e.g., a potential award of £100 per month to an employee who has £50 per month to spend on anything they choose will have a much greater effect than to an employee who has £1,000 available).
- Probability of success; each employee will make their own assessment of their likelihood of success.
- Perceived fairness (for themselves and for others; compared to their perception of others’ incentives).
- The ‘Reward:Effort’ ratio; ‘how much harder/smarter will I have to work (change!)’.
- Peer/other pressure; how gaining this reward will impact the employee’s relationships in and out of work.
- Match with other corporate messages e.g., if the incentive focuses on output/productivity yet corporate values stress customer service, there may be mixed messages (a VERY common problem).
The above are enough examples to show why, although financial incentives can theoretically incentivise, the vast majority do not. The list excludes many factors about how the scheme is supposed to operate at a macro level such as:
- How the budget is determined and its correlation, if any, with enhanced performance.
- How the budget is distributed – the correlation between team and individual awards and performance.
- If the scheme works, will the most appropriate people get the rewarded (e.g., in many organisations incentives are created to enhance performance but the lower performers – the ones at which it is aimed – never get the larger awards; they always go to the top performers who were performing anyway i.e., the scheme merely further alienates those it was intended to motivate).
Many organisations will use the recession to remove or change schemes that should probably never have been implemented.
Do appraisals measure performance or the skills of the appraisers?
The recession will also lead to changes in performance management and its child-process, performance appraisal. Performance management has been simplified by many to the point of trivialisation; to where it adds nothing to performance and the appraisals tells more about the appraisers than the appraisees. Overall assessments are produced based on little if any true evidence, using processes that are flawed by design. Processes such as forced ranking, relative rating, or rating calibration are then deployed merely to create an illusion[3] of objectivity. Pressure for enhanced quality (comprehensive, valid, reliable, differentiating, useful, and defensible) assessments will force organisations to fix the underlying flaws in their processes not merely to address the symptoms.
True performance management (the 24/7 process of human interaction between those who perform and those who have an interest in that performance) will also be introduced – we need to improve performance, not merely appraise it. We will see dramatic changes including but limited to:
- equipping managers with the skills to directly influence performance through the normal day to day stream of individual interactions (those hundreds of few sentence conversations, SMS messages and emails);
- tools to enable integration of project and task management with performance management;
- integration of collaboration tools with performance management to support a “spider-planning” methodology;
- technology to enable real-time performance evidence collection and performance assessment; and
- application of statistical tools to create predictive indices of performance and de-biased performance ratings, and to identify behaviours that truly do lead to better outputs, etc.
Yes, ‘It is an ill wind that blows nobody any good’, and the wind of recession is certainly going to blow some organisations crashing onto the rocks. However, others are going to use this wind to set a new course for the substantial changes that are needed. They will learn how really to get the best out of our most important assets, our people.
[1] A.H. Maslow, A Theory of Human Motivation, Psychological Review 50(4) (1943):370-96
[2] Frederick Herzberg, The Motivation to Work, 1959 (Written with research colleagues Bernard Mausner and Barbara Bloch Snyderman)
[3] How can taking apparently objective assessments by the manager (who saw the performance) and then ‘calibrating them’ based on the opinion of a group of peers (who did not see as much of the performance) enhance the quality of the data (rhetorical!)?