Employers are increasingly reflecting on the utility of their performance management programs, particularly in light of a growing trend to do away with such systems entirely. While it is without question that many traditional programs — typically involving annual merit and bonus systems — aren’t doing what they were designed to do: drive and reward individual performance, it is neither fair nor appropriate to declare the traditional performance management structure the problem. After all, many shortcomings related to performance management programs may actually result from execution, not design. That said, as with any system or program that has been allowed to exist because it has always existed, it is important to question whether the same ol’ approach to performance management might require updating. Wholesale changes to performance management systems, however, should be undertaken cautiously, particularly because of the need to supplant such systems with another ostensibly better-suited program. Taking time to understand what worked and didn’t work with one’s traditional approach to performance management is critical to understanding how to design a more appropriate program.
Performance Management Options
Many tools are now available that are arguably more effective at differentiating pay based on performance than the traditional annual merit increase performance-based system. In addition to trendy, “ratings-less” systems often popular with entrepreneurial companies, employers may consider making use of recognition awards, spot bonuses, and systems that allow for “step increases” throughout the year based on employee growth, development, or productivity. Annual short-term incentive programs, in which bonus targets of a certain percentage of salary are set, may also be effective in many cultures, particularly since they make it easier to differentiate rewards based on performance in a way that annual merit increases have not.
Rethinking Plan Design
It is critical for employers interested in migrating away from a more traditional model of performance management to assess whether the right metrics are in place to enable objective evaluation of their current program and of any contemplated programs or systems. Ultimately, performance management systems must include a robust “objective-setting” process that is aligned on at least an annual basis with organizational, team, and individual goals. It is also important to honestly evaluate the likelihood that the organization’s front-line management will effectively deliver results that invariably will provide significant upside for those who over-deliver while offering other who under-deliver less favorable news. Beyond the methods and mechanics of a new performance management program, employers must take time to consider how a new system will align with company culture. It’s critical to ensure that the cultural underpinnings of such a plan reflect the ethos of the business, and that the company has effective and transparent communication strategies in place to promote introduction of a new system. Failure to adequately consider what actually motivates your employees (hint: it is not always money), whether the culture promotes meaningful “buy-in” or how to explain and introduce the new system will undoubtedly reduce the effectiveness of the new program.
Smart Tip: To the extent that an employer uses a performance management program, ensure that the success of the system is evaluated on an annual basis using metrics, so as to drive employee engagement.