About two years ago I started writing about the insurgency that was occurring in performance management. Companies had begun abandoning irrelevant, formal employee appraisal systems in favor ongoing coaching and mentoring “conversations.” The focus was on looking ahead, not backwards. The revolution started with large companies like G.E., Accenture and Google but quickly spread to companies of all sizes and industries. This trend continues and is expanding.
So as this employee appraisal metamorphosis has evolved over the past couple of years, what has it wrought? What have companies learned and how has this shift impacted the way they are approaching the development of their pay strategies?
I have observed a multitude of things businesses have learned from the shift in how employee performance is being managed. However, here I've narrowed it down to five key take aways.
Learning #1: Companies have discovered that employees are one of their customers.
Businesses are experiencing hyper competition within the talent market. In addition, rating sites such as Glassdoor.com—along with the evolution of social media –have brought the employment experience completely out in the open. As a result, business leaders are devoting significant resources to employer brand strategy development; all in an attempt to gain control over how their companies are perceived by both existing and potential employees. They are making a study of what makes premier talent join their organizations and then stay there, while also performing at a high level.
Central to creating a superior employee experience is the company’s ability to draw a clear connection between the company vision, its business model and strategy, individual roles within that model and strategy, what’s expected of those performing those roles and how they will be rewarded for fulfilling those expectations. That kind of line of sight clarity requires that there be a systematic and ongoing dialogue with employees that constantly reinforces the factors that will help them succeed and build a unified vision for growing the company. The change from rigid appraisal systems to a more fluid performance management approach has created a healthier relationship between managers and employees and brought greater alignment between owners and the workforce.
Pay Implications: The trends towards building and promoting an employer brand have caused growth-oriented businesses to rethink their pay offerings. They are now creating more complete and compelling strategies within a Total Rewards Framework. They are managing those plans within a Total Compensation Structure that allows them to build compensation plans that are both agile and enduring. Once they feel like they have developed a superior compensation offering, they tie it to a broader employee value proposition and link it all to their overall employer branding effort.
Learning #2: Employees respond well to being treated like growth partners.
High performers are entering established businesses with the intent of impacting the growth trajectory of those companies. As a result, they want to apply their unique abilities as strategically as possible so they can leverage their ability to effect change. Because of this expectation, this kind of talent doesn’t see itself as employee filling a position in an organization. They want to be viewed as a growth partner without whom the future company that owners have envisioned could not be realized.
This mindset lends itself to the mentoring and coaching relationship spoken of earlier. These kinds of employees want to know the outcomes the company wants them to fulfill, what resources they can draw upon to achieve those results and how their superiors will facilitate that happening.
Pay Implications: Employees want earnings opportunities that mirror those of owners. This does not necessarily mean they expect to receive a share of equity in the company. But it does mean they expect to participate in the value they help create. If value-sharing opportunities don’t exist, they will leave.
Learning #3: Businesses want employees to assume a stewardship approach in their roles.
CEOs and company leaders can no longer afford to have employees in key positions that need to be overly managed. What is required now is that employees look at their role in the organization as a stewardship in which they take complete ownership of the results for which they are responsible. This outcome-based orientation lends itself to a conversational approach to performance management. The dialogue goes something like this:
Here is where our company is headed. This is our business model and strategy to achieve it. This is your role within that model and strategy and the outcomes for which you will have responsibility. These are the resources that are available to help you achieve those results. I will be meeting with you every month to determine what needs to happen to ensure you are able to succeed in this role.
Pay Implications: In a stewardship environment, incentive plans are no longer relevant. Instead, the shift is to value-sharing. Successful companies are getting very good at defining what it means to create value in the business. They then draft a pay philosophy statement that articulates how and with whom that value will be shared. They ensure there is a proper balance between rewarding short-term (12 months or less) and long-term (12 months plus) performance. This ties compensation to performance outcomes instead of behaviors. So...incentives are out and value-sharing is in.
Learning #4: It’s all about teams.
One of the reasons companies have abandoned archaic appraisal systems is because they don’t lend themselves to the development of unique teams within the business. The focus of today’s companies is to build teams of leaders and then synchronize efforts between organizational units and encourage cooperation. Unique teams emerge when the right people are brought together to apply their distinct abilities within a group environment that multiplies the likelihood of success.
In this kind of environment, a fluid approach to performance management allows business leaders to develop a customer-supplier relationship within the company. Teams are managed to anticipate that some days they will be a supplier needing to service the needs of another team, who at that moment is an internal customer. At other times, the team roles will be reversed. Only a flexible approach to managing employee performance will work in this framework—because the needs are constantly shifting as are the internal team roles between supplier and customer.
Pay Implications: In an environment that is reliant on team cooperation and synergies, variable earnings are being tied to more broad-based company metrics. Company profits or degree of profitability are becoming the primary factors driving the degree of value-sharing that will occur in the business. This helps eliminate “silos” within the business or other approaches to work that are self-serving or short-sighted.
Learning #5: Agility trumps...pretty much everything.
The evolution of employee performance management is just a byproduct of the need companies have to move at a different pace—and to have all of their systems accommodate the kind of accelerated change they are experiencing. Long-term planning is considered the next 120 days, not the next six years. People need to know what their priorities now, not dwell on stale data intended to measure their performance over the past 12 months. All of this requires companies to have agile thinking and agile systems at all levels. It also creates a need to attract people that can thrive in that kind of environment and who will respond well to change, not resist it.
Pay Implications: An agile environment increases the need for a strategic approach when it comes to compensation design. Organizational leaders need to think through their performance expectations and define what their pay philosophy will be accordingly. All of this needs to be converted to a full complement of rewards plans that give the organization broad latitude in how to compensate for both short and sustained performance. This is accomplished by treating your pay offering as you would an investment portfolio—where each pay component is like an asset class. As things change and evolve, you don’t need to remove current pay plans and insert others. You just need to “rebalance” your rewards “portfolio,” just as you would your investments.
The overall performance management assessment is that there’s no going back. Business at all levels is evolving and nowhere is that happening more than in the recruiting, retaining and management of talent. Companies that can get all of the performance stars aligned are the ones that will succeed and these five learnings go a long way towards defining how that alignment will take shape.