When You Eliminate Performance Appraisals, What Do You Do About Pay?

by David Creelman | Posted | Total Rewards

When You Eliminate Performance Appraisals, What Do You Do About Pay?

There has been a lot of buzz lately about organizations eliminating employee performance appraisals. What's not easy to understand is what they're going to do about setting pay. The articles that examine the problems with performance appraisals typically don't say.

As a compensation professional, your job in the performance appraisal debate is to be sure that people don't skirt the issue of pay. You don't have to take sides. Simply lay out the alternatives and the relevant pros and cons.

People may not like this, because the alternatives aren't that pretty; still you have to make sure the excitement about eliminating performance reviews and ratings is grounded in the reality that we still have to make decisions about pay.

The alternatives to ratings

There are some alternatives to using formal performance ratings as the basis for pay decisions.

One alternative is to give everyone the same pay increment. After all if you are not appraising performance how can you pay for performance?

This alternative is probably a non-starter. If it is not a real option then don't dwell on it, but do raise the point. Once you've raised it, the organization will face the realization that if they're going to pay for performance then they have to appraise performance one way or another.

Other alternatives to ratings are harder to articulate because they come in many gradations.

This means, whatever the press hype, we are not entirely eliminating performance appraisal.

For any stated alternative, I'd recommend tackling the conversation by addressing each part of the pay issue separately. There are some key questions we compensation professionals need to raise.

What are we going to do about pay for truly low performers?

What should immediately become clear is that if we have low performers the issue isn't really about pay; it's about how to change them or get rid of them.

The pay conclusion is bound to be that poor performers get at best a small pay increment and probably none at all.

Now the discussion becomes what process do we use to identify poor performers and how do we decide what action to take.

Reward professionals can rest easy; their work on this issue is done. And we've just made the rest of the discussion easier because now we are only talking about the middle and top of the performance distribution.

How will we deal with high performers?

Again your company will almost certainly decide that high performers should be paid more.

Then the issue becomes first how to identify them and how much more to pay them. Often it's much easier to imagine picking out the top performers and giving them some special reward than thinking about how to rate everyone's performance.

Now with luck we've got everyone to agree on a mechanism for identifying and paying both low performers and high performers. You now have the minimum appraisal structure necessary to have a pay for performance program - and it may be much simpler than the ratings system you have now.

How do we handle pay for everyone else?

This is where you get into a debate of how intricate and formal you want that part of the performance assessment to be. You may decide that the whole point of "eliminating ratings" was to simplify the process, so maybe you don't have anything elaborate or formal in terms of how pay decisions are made for this middle group.

Organizations that eliminate performance ratings often decide to leave the distribution of pay to the manager's discretion and not bother with a formal scoring system.

The upside is that this is a lot simpler than most appraisal systems. The downside is that you have to tell employees their pay is not based on a system; just their manager's judgement.

Many won't mind, they'll say that's how it works in practice anyway. The judgement will include a mix of factors, such as fear an employee will leave, and that's perfectly reasonable.

When you lay out this alternative, people will often begin suggesting adding a bit of structure here, a form there, an appeal process someplace else. These tweaks are not necessarily bad, but you have to keep asking "Aren't you just re-creating the existing system?"

And if managers or employees do feel they need something more elaborate, then don't be surprised if the organization ends up reinventing the performance appraisal process it set out to destroy.

Be clear about the consequences

I'm a fan of re-inventing performance appraisal. What I'm not a fan of is hiding from the compensation consequences of not having any formal employee appraisal process.

There is no pain-free system and we need to help the company face up to that.

There's more to performance appraisals than pay

Of course there is far more to performance management than pay decisions. Once we get over the difficult discussion about pay, we can discuss how the organization handles things like goal setting, feedback and development. Changes to the existing system as they relate to those topics won't be painless either, but there are some great things you can do and it's an easier conversation than the one about pay.

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