Motivation without measurement – The future of performance appraisals and implications for performance related pay

The traditional performance appraisal is a once- or twice-yearly conversation between manager and employee, reviewing performance against goals which are set at the start of the period. A managerial process; it is part of a wider performance management system. The aim here is to motivate employees towards common company goals.

The issues with traditional performance appraisals are well documented. In response, a small, but growing proportion of organisations are re-envisioning this management tool.

Issues with the traditional performance appraisal

What are these issues with the traditional performance appraisal?

They can fail to identify and assess performance and as a result they can fail to identify remedies to performance gaps. With a focus on individual performance, they can ignore more complex group and systemic issues. They can be resource hungry and cumbersome to administer.

For the people involved, both manager and employee, the traditional performance appraisal can be a negative experience. Rather than actually improving performance output, team work and motivation can be negatively impacted.

Cutting edge performance management

For the above reasons, and others, some organisations are moving away from the traditional performance appraisal.

They are replacing the traditional performance appraisal with what WorldatWork has referred to as “cutting edge performance management”.  Cutting edge performance management refers to three themes. The first is replacing one or twice yearly assessment with more regular guided or structured conversations on development and growth related topics.. The second is movement away from ratings altogether.  The third trend is toward “crowd sourcing feedback” rather than sole reliance on manager feedback.

Does “cutting edge performance management” actually improve performance? It is too early to say as these changes are in their infancy. What is being reported though is that the experience for the people involved, both managers and staff, is viewed more favourably.

We consider that such changes are about improving upon, rather than abandoning, the traditional performance appraisal.

No panacea

Adopting these “cutting edge” practices alone is not a guarantee of organisation success. The success of a performance appraisal is contingent upon the wider system in which it sits. There is potential for success where the right organisational performance management practices exist.  Furthermore, a performance appraisal system can only be successful in an organisation where there is the clarity and force of will of knowing what matters and acting upon it.

Success is also dependent upon the quality of the conversations held. This means investment in the development of these skills. Managers and staff alike need to be skilled in giving and receiving feedback.

What are the implications for performance related pay?

Those adopting cutting edge performance management seem, for the most part, to have retained some form of overall performance ranking or shadow ratings (at least for the time being) as performance related pay is otherwise too problematic to administer.

Where the making of pay decisions without ratings has been trialled or adopted, support and training for managers has required substantial investment. Where some form of ranking is retained, consideration has to be given to transparency to if rating is done covertly and conflict with any communication regarding movement away from ratings if it is done overtly.

Other moving away from traditional performance appraisals are advocating abandoning performance related increases to base salary. In a climate of low wage movement and low salary budgets, they challenge the view that small performance related adjustments are a good motivator of performance. Instead, they are in favour of market value increases to base salary only and rewarding performance over and above expectations by way of small regular payments, preferably linked to the achievement of group or organisation goals.
 It is our view that performance related pay can be a very successful motivator of performance. In any case, there are few alternatives to performance related pay that can be universally applied that would not resurrect past issues seen with flat or stepped pay.

We agree that removing ratings altogether can be problematic for performance related pay. The issue here is how to ensure equity. For all its problems, the traditional appraisal is a mechanism for ensuring consistency, transparency and objectivity.  If  ratings are no longer to be used, care needs to be taken not to introduce inconsistency, ambiguity and subjectivity.  Rather than leaving managers to decide how to distribute their own budget, we suggest that a moderation meeting is held with the managers to help with distributing pay based on performance outcomes and development needs.

The future

We don’t yet know if these innovations improve organisation performance. We do know that they are not the panacea for the failure of traditional performance appraisals meeting expectations. However, it seems likely that these innovations are an improvement, at least for managers and staff working with them.  Implications for performance related pay are even more uncertain. At least for the immediate future,  some form of performance appraisal ranking or rating needs to be retained to administer pay for performance fairly. This would need to be the case whether performance related increases are expressed as increases to base salary or as lump sum payments.