The emergent need for a new approach to performance management
Performance management as a system is typically formed by two phases, to wit: an initial phase when managers communicate to their direct reports the objectives they are expected these to meet, and a final phase when individual performance is assessed and appraised. Whether employees attain the objectives set by their managers, they receive the payment of a lump sum. To implement such schemes organizations clearly incur huge costs; nonetheless, employers are sorely keen and eager to introduce these programmes in a bid to attract and retain talented individuals, and hopefully motivate employees to go the extra mile and exercise discretionary efforts.
Managed in this fashion, nonetheless, these systems have more often than not failed to fulfil their promise. Individuals started soon to develop and express an increasing interest in the amount of money they were expected to receive by virtue of such programmes rather than in the reasons behind the payment of these sums, and the promise they had essentially to honour so as to be entitled to their payment. Yet, these types of financial incentives were soon taken by individuals for granted instead of being perceived as additional amounts of money paid by their employer for a well-founded reason.
Reward professionals have ever since felt the urge to come up with new, innovative approaches to reward management aiming at enabling managers to focus on individual performance, learning needs, and potential rather than on the financial implications associated with these. The efforts are typically concentrated on developing programmes which lay emphasis on individual behaviour, approach to work, results obtained, the way these are achieved and career prospects so as to keep these aspects clearly separate from any discussion concerned with the expectations, in terms of financial reward, individuals may establish in relation to these. As such, performance management started to be regarded as a process, constantly underway, enabling managers and individuals to create and maintain a continuous two-way communication channel by means of which managers can coach, support and demand improvements to their reports. The adoption of such an approach does neither imply the completion of any form nor any specific pattern to conform to, but rather the manager capability and willingness to genuinely contribute to their reports growth and development.
In a separate occasion, managers and employees meet to talk about bonuses and financial incentives at large. This is the meeting, broadly referred to as performance appraisal or performance review, managers typically dislike the most by reason of the role of judge they are essentially called to play. These types of meetings prove to be pleasant and straightforward when managers can give their reports good news, whereas managers feel sorely uncomfortable and ill at ease whether, during meetings, they have to inform their reports that they will not receive the expected amount of money, if any. The fact managers overrate their reports’ performance, to avert being awkward or anxious in these circumstances, does not clearly represent by any means the most appropriate and righteous remedy for these problems.
Whether managers establish and maintain an open constant two-way communication process with their reports, the discussion about the financial reward aspect should actually represents somewhat of a formality. In those instances in which employees do not show the improvements agreed with their managers, do not yield the results managers are expected from these and do not exhibit the desired behaviour, these should not be indeed surprised whether they do not receive the payment of any lump sum or the partial payment of the pre-set amount. In such cases, the discussion should eventually be confined to the individuals’ learning needs, provided that the employees’ unsatisfactory performance is actually due to their incapacity to properly perform their tasks.
Employee performance unquestionably represents one of the trickiest duties manager are prompted to perform in their role. Notwithstanding, averting to properly managing individual performance or considering as a bad practice paying individuals, at the end of each financial or calendar year, a sum of money contingent upon their performance does not definitely represent the best approach to manage employee performance, but rather a way to deliberately overlook this particularly significant management task. The payment of a lump sum, to the individuals who really deserve and merit it, is intended to thank employees for their contribution to organizational success and to make them understand that they can greatly benefit from their organization fortune, and not only suffer the pains of their employer misfortune.
Bonuses and contingent pay at large have been lately considered somewhat of the evil of the financial and business world. Nonetheless, the actual problem with bonuses is not represented by the payment of a sum, albeit at times very large, of money, but rather by the circumstances under which these are paid, to wit: how and why employers pay bonuses to their employees.
The problem with bankers bonuses and the alleged global financial crisis it triggered, for instance, a subject which aroused a lot of media and public interest in the late 2000s, was by no means caused by the huge amounts of money financial institutions were paying to their bankers, but rather by the mechanism through which these bonuses were granted. Payments were in fact made before the final outcome of the bankers’ transactions was actually known (Balancing base and variable pay - Banking Vs other industries
First and foremost, performance management should support the organizational culture and invariably foster integrity within a business. Clearly communicating from the outset why performance management is introduced and operated within an organization and what it aims at encouraging and promoting is hence of paramount importance. Inasmuch as money talks, it might be argued that when money is offered to individuals as a form of contingent pay, money even screams. Clarity, equity and consistency should be hence invariably regarded as mandatory prerequisites of every performance management process.
The reason why performance management programmes do not invariably fulfil their promise is habitually due to the circumstance that these are more often than not designed and developed as over-complex and abstruse schemes or systems, which make at times it even impossible for employees to get through the maze of bureaucracy they entail.
Performance management as a process
The paramount prerequisite of performance management is that it should not be regarded as a system, but rather as a process and its mechanism, in adherence to the tenet “keep it simple,” should be as straightforward and manageable as possible. Reward managers should resist the temptation to develop elaborate flow charts and diagrams, and to adopt complex formulae for the calculation of financial incentives.
Performance management should be considered as a process incessantly unfolding and flowing over time rather than as a once-a-year administrative burden; an activity constantly underway based on establishing and maintaining an open communication channel between employees and managers.
Managers should establish a direct, open communication channel with their direct reports from the very first. The term communication has to be interpreted extensively; it in fact encompasses the establishment of a close relationship between managers and employees, which implies in turn managers tutoring and coaching individuals.
An effective and continuous communication between managers and employees enables managers to be constantly aware of the approaches adopted by their reports to attain their objectives, influence individual behaviour and eventually suggest employees the most suitable approach to perform their activities and achieve their objectives. This constant contact between managers and employees would also enable the former to relatively easily identify the learning needs of the latter and pinpoint the potential these have to grow, work without supervision and assume power.
This approach does not place any administrative burden upon managers, but these should take this undertaking very seriously. The success of the overall process in fact sorely depends on this activity, which should be permanently underway.
The directors of each organizational function clearly need to be aware of the level of performance attained and of the potential shown by the individuals forming their teams. According to the functional composition and size, directors may not necessarily need to receive a constant update about their reports staff, at least not about all of them. Managers may hence provide them a report, or talk to them, about their staff periodically, with the frequency which best suits the function needs. Also this activity is indeed particularly significant in that it enables the company managers and directors to identify the individuals who have the features, traits, expertise, skills and knowledge to grow and play an increasing significant role in the organization; never mind the propaedeutic significance it acquires for the annual meeting during which managers and directors make the final decisions about the managers’ reports bonuses.
The benefits of involving the company directors in this important decision-making process are twofold and by no means exclusively associated with their grade in the organizational hierarchy. Since directors hold meetings to talk about their staff bonuses with all of the managers of their function, these are able to establish a norm within the function and avert that the different managers may propose sensibly different amounts of money for people having essentially equally contributed to the organizational success. To avert the implementation of performance management miserably failing, it is crucially important to ensure that pay decisions are exclusively equity-driven and firmly prevent that these might be affected by bias or other non-merit-related considerations. The risk being to convey an utterly wrong message whose detrimental consequences may prove to be irreversible.
The other reason why each functional director should assume complete control over the decisions made about individual incentives is budget-related. This aspect is in many important respects linked to the previous one; directors must clearly respect the guidelines provided by the employer and, for difficult it might prove to be, remain within their budget. To ensure and secure internal equity within each function, the budget constraint should be considered from the outset. It is likely that at the end of the meetings held with managers, directors may be obliged to further review their financial incentives proposal to remain within budget.
Once the company directors put forward their proposals to HR, these should be submitted to an internal committee to be finally validated. Reward committees may be composed of reward managers, experts, external consultants and some of the organization non-director executives. It is preferable to not appoint any company executive-director as member of these committees in that these may be prone to ruthlessly sustain their initial proposals, irrespective of the inconsistencies these might generate at organizational level.
Whereas the role played by the company directors in the decisions of bonuses at functional level is essentially aimed at ensuring equity and consistency within their function, their exclusion from these committees is aimed at securing consistency and equity within the overall business. These committees’ most significant objective is in fact that to assure that bonuses reflect organizational culture, are granted to individuals who unquestionably deserve them and are distributed equitably and fairly according to the guidelines provided for by the employer.
To ease managers and directors task, HR should prepare and issue guidelines briefly outlining the attributes, qualities and aspects managers and directors should consider the most when making their decisions and providing some indications of how to rate these. Some bonus bands may also be created in order to establish a minimum and maximum incentive amount, for instance, in connection with each grade, role or jobs within the same level of a career-family or job-family structure.
One of the most detrimental practical implications of the concept of performance management as a system is the payment of incentives according to a specific and more often than not over-complex calculation method. HR typically formulates a document outlining in great detail the overall system and gives it as much visibility as it can.
The description of the mechanism regulating a performance management system typically also contains the indication, for each employee, of the basic amount of money offered by the employee and of the formula to be used for the calculation of the incentive. This may depend on the role or grade but this amount is habitually openly disclosed. The basic amount used to calculate the incentives of the employees filling management and key role positions is more often than not individually negotiated with the employees concerned and usually agreed in writing. On the basis of the performance appraisal meeting outcome, each individual is thus able to calculate the amount of the bonus that this will receive.
In many countries this approach might represent a serious problem and pose a significant threat to employers. The basic amount set for the calculation of financial incentives in fact with the passing of the years may legally bind employers to the payment of broadly equal sums of money in the future, albeit employees do no longer perform as these used to in the past. An individual might perform at an average level but, according to the changed circumstances, the amount of money this would receive by virtue of the basic sum previously used to calculate his/her incentive may prove to be disproportionate to award his/her current real level of performance and contribution.
The introduction of a structured and detailed system clearly accounts for employees establishing expectations, which with the passing of time employers may find it particularly difficult to disregard and not fulfil (Legal risks emerging when introducing and varying a bonus schemeBy reason of the legal constraints existing in many countries, Notwithstanding, the attempt may be well-worth the efforts.
Performance management as a process should be intended as an approach exclusively focused on the individual work experience and the results, by means of the close support provided by managers also in terms of coaching, learning and development, an individual can potentially obtain. The financial aspect, nonetheless, does not indeed represent a negligible part of the process. Employers should care for their employees’ growth and development, but should on no account neglect to recognize employees for their contribution and effort so that the establishment of a relationship between managers and employees should inform the manager decisions not only as to what concerns career prospects, promotions and learning needs, but also in terms of financial incentives, and pay and grade increases.
Before the payment of an incentive, managers should individually meet employees. In this occasion, which is essentially part itself of the performance management process, managers inform employees that to recognize their efforts and contribution the employer will shortly pay them a given sum of money. Despite no mechanism and no formula have been unveiled for the calculation of these incentives, it is glaringly obvious that employees communicate amongst themselves so that it is likely that they will soon learn about the amount of cash received by the others. This occurrence should not cause any employers’ concern, provided that these have made their bonus payment decisions according to the tenets of equity (as opposed to equality), fairness and individual merit. In contrast, the circumstance that individuals have received a bonus for their actual contribution and value serves the employer cause in that it helps this to get across the message that individuals are rewarded and recognized for their real value and contribution, or for having exhibited the behaviour and gained the skills desired by the employer.
Over the years, also this approach may indeed cause individuals to establish expectations about the payment of an annual incentive; nonetheless, do not existing a calculation formula, an outline of the system mechanism and let alone a formal written document, the reason why employees establish expectations might be harder to explain; especially whether the amount of money paid to individuals varies from year to year and employees may at times receive no incentive at all.
The benefits of performance management as a process, nonetheless, are not clearly exclusively legally-related. The real benefit of performance management as a process is that it enables managers and employees to focus on the job activities and the skills required to effectually perform these. The circumstance an employee may not receive any bonus or a small amount of money will not be clearly positively perceived by individuals. Nonetheless, the relationship established between managers and employees should enable managers to confidently and openly discuss the topic. Yet, differently from what it happens with a formal performance management system, the adoption of this approach enables managers to eventually recognize individual effort and determination to succeed and obtain the expected results, albeit these are not indeed yielded in practice.
A traditional approach to incentives calculation can be still considered applicable and appropriate in all of those cases in which results can be objectively quantitatively assessed and measured, as for instance is the case of sales staff. In these cases the calculation of bonuses by means of a simple formula would be fairly straightforward. Nonetheless, this does not entail that performance management has not to be managed as a process rather than as a system also in these cases.
Managers need to be close to their direct reports and closely support them in the attainment of their objectives so that these can gain the experience and capability necessary to be accomplished in all the activities these are called and may be potentially called to perform in the future. This has clearly to be done with discretion; without limiting individual creativity and inventiveness, encouraging individuals to come up with new, innovative approaches and methodologies to perform their tasks and attain dramatic results.
The constructive establishment of a good relationship between managers and employees will help the latter to focus on the way the activities are performed and on the identification of new, effectual approaches to work enabling them to increasingly yield positive results. The financial aspect is clearly also important, but cannot be considered per se and in isolation; in contrast, it needs to be invariably linked to the reason why organizations pay financial incentives to their employees. Employers should invariably establish a clear line of sight between incentives and objectives, regardless of which these are, and never miss the opportunity to emphasize the significance of this link and to foster the pillars underpinning their organization’s corporate culture, which is in turn of paramount importance for the pursuance of the overall business strategy.