Many organizations find that their existing pay-for-performance process doesn't work well. It doesn't improve performance, and demotivates workers. This road map shows how to leverage social computing to breathe new life into these programs.
Overview
Key Findings
- Many organizations do not believe they have a good pay-for-performance process. In fact, many find these programs do not increase performance.
- Many workers find traditional performance reviews unfair and demotivating.
- Many managers and executives are not good at providing workers with high-quality, consistent and timely performance feedback.
- Social recognition programs and solutions can help improve worker motivation and performance, while decreasing reliance solely on manager and executive feedback.
Recommendations
- Test a social recognition program alongside your existing pay-for-performance process.
- Quantify any improvement in performance from social recognition, compared with your existing pay-for-performance process.
- Adjust your investments in social recognition and traditional pay for performance programs based on results.
- Continue to adjust the balance between programs annually, as business needs change.
Future State
Formal performance reviews are not likely to go away anytime soon. They provide a needed checkpoint for making compensation and staffing decisions, and to mitigate risks from litigation (and in some cases, as in the U.S. healthcare industry, are required by regulations). However, leading organizations will start to move toward more bottom-up feedback, recognition and rewards. This will likely manifest itself in the shifting of budgets from traditional, top-down-determined, annual merit increases and incentive compensation to bottom-up, event-specific and more frequent rewards.
In addition, parts of traditional talent management activities effectively become crowdsourced. For example, managers and executives will be able to see the frequency, type and magnitude of feedback for each individual employee. More importantly, senior executives can use this data to see if manager performance decisions align with what coworkers indicate through their actions. Taken even further, if properly designed, the feedback, recognition and rewards can be used to identify high-potential, high-performance individuals for succession planning, and as an input into promotion decisions (for example, Symantec has compared the results from its 9-box grid against data from its recognition program, and found strong alignment).
Current State
Most organizations larger than 100 employees have some sort of performance appraisal process that drives an annual merit increase and/or an incentive compensation reward. In an ideal world, merit increases and incentive compensation would be driven by performance ratings from the performance appraisal. In the U.S., approximately 85% of organizations say they have a pay-for-performance program or culture (see the WorldatWork survey). However, the reality is that the traditional pay-for-performance program is problematic in many ways:
- Organizations that say they do it don't think they do it particularly well. The 2010 Study on the State of Performance Management by Sibson Consulting and WorldatWork (see theWorldatWork survey), a professional association, found that more than half of the respondents (58%) gave their organizations' performance management system a grade of C or below.
- There is evidence that pay for performance does not actually lead to increased performance. In the same Sibson WorldatWork study, only 47% of respondents felt their performance management system helped the organization achieve its strategic objectives.
- Employees do not view the process as fair, and frequently find it demotivating. In the "Psychological Bulletin," Avraham Kluger and Angelo DeNisi published a meta-analysis of 607 studies of performance evaluations (see "Psychological Bulletin") that concluded that at least 30% of performance reviews ended up in decreased employee performance (see"Psychology Today").
- Not every manager is a good manager. In the Sibson WorldatWork study, respondents (63%) felt that managers' lack of courage to have difficult performance discussions was the top challenge in performance management. Managers do not do a good job of providing feedback to employees, frequently don't do it in a timely fashion and are inconsistent in how they reward employees (which has led to other processes like calibration to avoid grade inflation and inconsistent grading).
Gap Analysis and Interdependencies
Blending more frequent co-worker feedback, recognition and rewards with traditional pay-for-performance processes overcomes many of the challenges:
- There is more transparency in social recognition and rewards. The specific reason for the feedback and recognition is tied directly to the reward. Also, everyone can see the cause and effect. This improves the perception of fairness, and allows workers to have more of a voice.
- Initial anecdotal evidence (case examples include organizations such as DHL, Deloitte Canada and Dow Chemical) shows that giving workers more control over recognition and rewards is motivating.
- Recognition and rewards are not as dependent on the quality of the manager. Many other data points are generated through social recognition and rewards that can form a value check and balance with an individual manager's opinion.
Higher Priority
- Test a social recognition program alongside your existing pay-for-performance process. Ensure that you get broad participation (from workers, managers and executives), and look out for workers trying to "game" the system.
- Quantify the impact of the social recognition program on business performance and employee engagement.
Medium Priority
- Adjust the social recognition program based on the results in the test. Expand the program as appropriate.
- Adjust the investment mix between the social recognition program and your existing pay-for-performance program based on comparing the impact on business outcomes and employee engagement.
Lower Priority
- Because business needs and the macroeconomic environment will change, continue to adjust the relative investments in social recognition and traditional pay for performance annually.
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