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Performance Management Practices in Today’s Organizations

Submitted by  on December 6th, 2010

How are organizations today using their performance management systems to achieve their objectives? Are employee appraisal systems still relevant? A recent survey by Sibson Consulting and WorldatWork provided an up to date glimpse into how HR functions are using their employee performance management processes.

The 750 respondents to the survey comprised of senior human resources professionals spread throughout a number of countries and industries. When asked for the key objectives of their appraisal system, here is how they responded:

  • differentiated distribution of rewards based on individual performance (66%)
  • greater individual accountability (54%)
  • talent development (46%)

The key driver for two thirds of respondents is the desire to motivate employees to higher performance levels using external rewards. This is colloquially known as the carrot approach to employee motivation. Greater ownership of task and role responsibilities also fired up over half of HR people taking the survey. Given the keen interest shown in talent management over the last few years, I am surprised that developing talent figured as an important function of the performance management system for less than half of the respondents.

Most strikingly, the focus on the individual remains as the predominant unit of performance in most organizations. I say strikingly because gaining a competitive advantage today requires employees to not only work cooperatively with their peers, but to also collaborate effectively across department, function and business unit boundaries. Pitting one individual against another to grab a share of scarce resources is an anathema in today’s workplaces. I shall say more on this later.

And what kind of rewards are organizations distributing to their top performers? An overwhelming 80% of organizations linked individual performance ratings to merit increases. Only 11% of respondents indicated that their organization avoided tying performance ratings to salary adjustments.

Short-term incentives, such as annual bonuses, are used by a little over half (51%) of all organizations. Long-term incentives, such as share plans, figured in nearly one third (31%) of organizations. The result in real terms is that in 65 % of organizations, employers with sub-par performance receive either lower or no pay increase compared with higher performers. And in 42% of organizations, top performers receive significantly higher pay than their lower performing counterparts.

Pay for performance systems work on the assumption that visible performance disparities coupled with monetary rewards drive behavior change. They rely on the “I want what they have” syndrome. It appears that managers and human resources departments expend significant amounts of time and resources in ensuring such differences exist. Survey respondents reported the following methods for differentiating employee performance ratings:

  • ratings audited by HR department (37%)
  • specify ratings distribution (30%)
  • managers calibrate ratings (29%)
  • forced rankings (12%)

Almost half of all organizations (46%) compile and disseminate ratings distribution reports to their managers. How do employees perceive the rating system in their organization? According to senior human resources personnel, not one in three (30%) workers trust the system. And despite the considerable effort expended in creating differentiated ratings, only 47% of respondents saw their performance management system as helping their organization achieve its strategic objectives.

How can such a widespread and accepted practice yield so little in results? In my next post on pay for performance, I will explore some of the key reasons why monetary incentive schemes fail to live up to expectations.

Read my full commentary on the Sibson Consulting survey

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Posted in Performance, Processes, Talent | Comments (0)

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