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Should performance be linked to pay?

It is that dreadful time of the year when the boss’s secretary sends you an email, informing you of when your performance review slot is. And there’s no way of escaping that uncomfortable meeting.  

In most South African companies, there is a direct link between how well employees perform and the pay or increases they receive.  

Traditionally, money was seen as the main incentive to motivate employees – it was used as a tool to attract, retain and engage talent. However, the key to motivation is far more complex than simply dangling money in front of people’s faces.  

Internationally there has been a move by some “courageous companies” to remove ratings from their performance management systems. Even bolder companies have severed the link between performance and pay, and found innovative ways to motivate and reward performance.  

Tom DiDonato, chief human resources officer at Lear Corporation, says in an article published by Harvard Business Review that it is a “terrible system” to drive high performance by “dangling” money in front of people’s noses. 

“Performance reviews that are tied to compensation create a blame-orientated culture. […] They are self-defeating and demoralising for all concerned.”  

He says in the article that the performance review culture is, however, deeply entrenched. Companies hang on to the tradition because of their anxiety about high performance. There is the belief that if a company ditches pay-driven reviews, the world might think its senior managers are not serious about running a “high-performance” business. 

DiDonato says if a company actually acknowledges the shortcomings of these reviews, something can be done about it. 

“The evaluation forms are not the problem. What turns reviews into a blame game is the link to compensation. Sever that link and you are on your way to creating a review system that can open up the channels for real feedback throughout the organisation.” 

David Rock, co-founder of the Neuroleadership Institute, a global research organisation, says the idea of removing ratings drives many human resource executives a little crazy. 

“Companies love to quantify and analyse almost everything,” he said in an article co-authored by Beth Jones, a senior consultant at the Neuroleadership Institute.  

In mid-2015 there was an uptick in the number of companies that stopped giving people one-to-five ratings. He mentions consulting firms Deloitte and Accenture, as well as GE.  

Lear Corporation – a Fortune 500 company – was one of the first companies to break the cycle and try something different. The annual reviews were replaced with quarterly sessions where the focus was on gaining new skills and mitigating weaknesses, says DiDonato.  

“The quarterly review sessions have no connection to decisions on pay. None. Employees might have been sceptical at first, so to drive the point home, we dropped annual individual raises. Instead we adjust pay only according to changing local markets,” he explains. 

According to the Neuroleadership Institute there are four clear reasons why the trend gained momentum:

1. The changing nature of work

More than ever, employees are working in teams. People may be part of multiple teams that are often spread around the world. Rock says it is very difficult for managers to pinpoint accurately how a specific employee is performing when they are constantly engaged in teamwork. They are often doing work the manager does not see, or even understand.

2. The need for better collaboration

Top ratings are supposed to lead to promotions and raises. However, it is not like at school where everyone who works really hard can get an A. “A manager with a hardworking team of 10 people may only be allowed to give one or two of them the top rating,” says Rock. The result is that people compete directly with one another for rewards, which has a negative impact on collaboration.

3. The need to attract and keep talent

One of the institute’s main findings regarding the companies who removed the rating system was that managers talked to their teams more often about performance. More frequent communication helps to improve employee engagement and development, while also resulting in a fairer pay structure.

4. The need to develop people faster

According early indications from the institute’s  research, companies are developing people faster across the board by removing ratings. It happens because of more frequent dialogue. Such sessions tend to be “more honest and open” when neither party has to worry about justifying a rating at the end of the year. 

Steffen Maier of Impraise, whose product comprises real-time performance review software, says many companies are moving to “continuous, peer-based and ratingless systems”.  

The key question, however, is how they can continue to make compensation decisions without inhibiting the feedback process.  

It should actually not be an “either there are ratings or there are not” situation. There are ways of assisting companies with compensation decisions. Maier says some companies are rejecting bonuses based on individual performance altogether in favour of complete transparency. 

He refers to Buffer, the company which created the software to manage accounts in social networks by providing the means for a user to post to Twitter, Facebook and LinkedIn. The company has come up with its own salary formula based on the person’s role, experience level and years with the company. 

“This essentially eliminates the compensation question altogether. In this type of system everyone knows exactly where they stand and feedback can truly by focused solely on growth and development,” says Maier.  

He adds, however, that it is important for each company to find the best system that suits its culture and its objectives. 

“No matter what you choose, the most important thing is that you clearly communicate to your managers and employees how this new system will work and how it will impact them,” Maier stresses.  

DiDonato says that when concerns about money and status are removed from the equation, employees are “freed”, and can relax and hear what their managers have to say – and vice versa.

This article originally appeared in the 1 June edition of finweekBuy and download the magazine here.

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