Nothing can kill employee morale more than a corporate performance review. Nothing can kill leadership morale then having to give them. It doesn’t have to be this way and I have a very simple solution.
The critical mistake that most mid to large sized companies make is that they confuse dollars with performance. Dollars are an economic scarcity – there are only a limited amount of them available and they must me applied judiciously when it comes time to offer raises.
Performance is not. In great companies performance is in abundance – it has no limits. It is absolutely possible that everyone on your team has done an outstanding job this past year yet due to the economic of the situation you may be forced to declare 10% of them “underperformers.” Sound familiar?
The key problem with most corporate review systems is that they link the two together with the seemingly innocuous phrase “we pay for performance.” So in order to determine how much money to deliver for raises we must first determine how well everyone performed. This is done in a number of ways but ultimately ends up with putting people into segments and assigning the group a label like “does not meet expectations”, “meets expectations” or “exceeds expectations.” If you are going to pay for performance having groups like this is a necessary element. However the labels are not.
Keep in mind that we are dealing with a scarce resource, dollars, so we must find a way to equitably assign dollars to the various groups. That’s when the accountants and HR folks huddle and decide we are going to pay 7% for the top category, 4% for the middle and 1% for the bottom. In order to make that work they have to assume some distribution of employees to the various categories. If everyone was fantastic the company couldn’t afford to pay everyone 7%. That’s when companies impose the dreaded bell curve to the problem. As a result we now have decided that 10% of the population is in the top and bottom categories and that 80% of everyone else is in the middle.
There is absolutely nothing wrong with deciding you are going to pay the top 10% of the population different from the middle 80% or the bottom 10%. Every company has a top 10% – how they determine that might be in question but they still have a top 10%. What is absolutely wrong is putting performance labels like “does not meet expectations” to these forced distributions.
How do you design a system where 10% of your population every year will not meet expectations or better yet 90% of your company doesn’t exceed expectations? Yes I know all about the Law of Large Numbers and I get population distributions but these distributions happen naturally, they are not forced.
The biggest problem that managers have in giving salary reviews is not ranking their employees nor is it in dividing money up based on these rankings, it is simply having to discuss an employees performance and giving them a label that does not fit the employee’s true contribution.
To that end, if I were King (it’s good to be the King), I would do things a bit differently during review time. It’s all based on a very simple premise:
Recognizing that a total overhaul of the system would be a lot harder than modifications to the existing processes, I propose the following five steps as a practical alternative to the current flawed systems employed by most organizations.
- Spread the peanut butter. Separate the salary from the review – make these two separate processes. One is numbers based the other is not. I recommend having rankings done internally with the leadership teams at end of the year as the budgets for next year are set and the size of the peanut butter jar is known. Determine how to spread the peanut butter then throw away the knife, it has served its purpose.
- Talk money. Give each employee their raise information. This is just the amount of the raise and nothing else. When this is done is typically tied to when the fiscal year starts. I strongly recommend that raises be done at least a month in advance of the employee performance review. No mention is given to where they ranked as this is an economics issue and serves no benefit other than curiosity. It is just as dangerous to know a ranking as it is to know someone else’s salary.
- Companies: Throw away the categories! Now that the economic equation has been satisfied there is no need to continue the charade of forcing a label on to people. Educate and then trust that your leaders will get the necessary messages across. You don’t need categories, ranks, bins or statistics. This is about people, damn it! No employee should ever get a numerical Gong Show rating
- Write what you need to write. At this stage throw away the numbers, they are irrelevant. Write the words that you want the employee to hear to help her understand their contributions and your expectations. Stay focused on what to say, the language they respond to, what they need to hear and what you want them to take away. No longer fear having to match your words to some contrived category.
- Give the review in confidence. When you are not given statistical boundaries it is amazing how much more heartfelt your review will be. You are taking ownership for your words. You can defend your thoughts and not have to rely on saying, “That’s the formula the company uses.”
I truly believe that these simple changes would have made every single review process I have endured over my past 20 years as a leader much more effective for everyone involved.
What do you think about your company’s review process?