The Death of Performance Management: Confronting the Challenges

This article is a sequel to my post earlier this week entitled: Pay and the Abandonment of Performance Management.

Ever increasing numbers of businesses are learning and adopting better ways of managing the performance of their people. The momentum is rapidly moving away from traditional annual appraisals and other performance management systems in favor of more regular and informal feedback sessions.  As indicated in my previous post, organizations are finding a more fluid approach better suits the rapid change environment in which businesses operate in the 21st century.  However, all is not nirvana as this disruption occurs.  Many challenges have to be anticipated and effectively addressed as companies make the transition to a new way of performance monitoring and assessment—especially as it relates to pay for performance issues.

The demise of performance management is creating new challenges for businesses.

The same Harvard Business Review article quoted in my last post identifies what some of those challenges include:

Aligning Individual and Company Goals

… how do you coordinate individual priorities with the goals for the whole enterprise, especially when the business objectives are short-term and must rapidly adapt to market shifts?  It’s a new kind of problem to solve, and the jury is still out on how to respond.

Rewarding Performance

Appraisals gave managers a clear-cut way of tying rewards to individual contributions. Companies changing their systems are trying to figure out how their new practices will affect the pay-for-performance model, which none of them have explicitly abandoned.

…it will be interesting to see whether most supervisors end up reviewing the feedback they’ve given each employee over the year before determining merit increases…If so, might they produce something like an annual appraisal score—even though it’s more carefully considered? And could that subtly undermine development by shifting managers’ focus back to accountability?

Identifying Poor Performers

…given how reluctant most managers are to single out failing employees, we can’t assume that getting rid of appraisals will make those tough calls any easier.  And all the companies we’ve observed still have “performance improvement plans” for employees identified as needing support.  Such plans remain universally problematic, too, partly because many issues that cause poor performance can’t be solved by management intervention.  (“The Performance Management Revolution,” HBR, October 2016, Peter Cappelli and Anna Tavis)

PerformanceManagementReportCTA (3).pngThe article discusses other “hurdles”—such as avoiding legal troubles and managing the feedback firehouse—but you get the picture.  Change inevitably carries challenges in its wake.  They are progress companions; you can’t have one without the other.  But they are inescapable, these challenges are forcing companies to look at how to better engender a performance culture that attracts, develops and retains premier talent that in turn drive sustained success. 

A Performance Framework

The most effective way to address the fallout associated with the demise of performance management is to construct a performance framework.  An organization’s performance framework has three dimensions: The Business Framework, The Compensation Framework and the Talent Framework.  These three parts are separate but interdependent—like connective tissue in your body.  Any organization expecting to adopt a more fluid approach to performance management while still improving results must ensure that each element of the overall framework is working properly and is linked with its reliant partners.

Let’s examine what’s required in each of these three areas.

Business Framework

In this first category, enterprise leaders must envision the future company, define its revenue engine and standards and then identify the roles needed to execute its strategy and business model.  That analysis should include the following:

1. Define the company’s growth expectations (vision).  Here company leadership wants to clearly express key outcomes that need to be achieved in the future in quantifiable terms.  A financial model that looks at a three to ten-year horizon in terms of base, target (or budget) and superior levels of growth is recommended.

2. Define the business model and strategy.  This step involves a clear articulation of two separate but related issues.  The business model is how the company drives revenue and makes money.  Its strategy is how it competes in the marketplace with that model.  Business leaders need to identify where the leverage points are in each and how they can be maximized. This should help determine the growth opportunities that will lead to fulfillment of the vision defined in step one.

3. Identify roles and expectations.  With the first two elements established, the company should think about the specific skill sets that will be needed to drive the business model and strategy.  Those skill sets define the kinds of roles and expectations that are associated with the outcomes the company must achieve if the “future company” is to be realized.  Expectations should be articulated in the form “success” criteria as they relate to the fulfillment of each role.

Compensation Framework

With the business framework in place, the compensation framework is more naturally constructed.  The pay structure should help align roles and expectations with the business vision, model and strategy by framing the financial partnership that will exist between ownership and the workforce.  It should include the following:

1. Identify a Pay Philosophy.  This is a written statement that acts as a kind of compensation “constitution” for the business.  It should define what the company is willing to “pay for”—and presupposes the organization has defined what value creation means in that business, so it can also articulate its belief about  how and with whom it should be shared.  The pay philosophy is also where a company addresses whether it’s going to adopt an expansive or selective approach to structuring rewards for key producers.

2. Engineer Pay Strategies that Reflect the Philosophy.  This means a company will pay attention to both salary structures and value sharing—and strive to achieve an effective balance between the two.  Likewise, it will build both short-term and long-term incentive plans (value-sharing arrangements) that properly manifest the organization’s belief about the kind of financial partnership it wants to have with its people.  To do so, it must pay attention to both the structural and the mindset impact of their plans.  Structure addresses who should be in the plan, what kind of plan it should be, how much it should pay out and so forth.  Mindset has to do with whether or not a plan will build a greater sense of stewardship about ownership priorities and whether there will be a higher level of commitment and engagement on the part of employees.

3. Adopt a Total Rewards Approach.  This simply means that an organization recognizes that there must be more to its value proposition than financial rewards.  First, there must be a clear and compelling future—one that invigorates key producers about where the business is headed.  They need to be able to see themselves in that future and believe that their unique abilities are necessary for its fulfillment.  Second, employees seek a positive work environment.  This suggests premier talent in particular is working within the sphere of its distinct abilities, it likes the nature of the work in which it is engaged and the team of people with which it associates.  Third, there must be opportunities for personal and professional development.  This doesn’t necessarily mean training—although that can be a component.  Rather, it means people feel as though their abilities will be magnified as a result of their association with the organization and its resources.  And finally, fourth, there must be financial rewards.  And those financial rewards need to relate to the value a producer helps create in the business.  Key people want to have an appropriate salary and bonus plan, but beyond that they want to know there is a mechanism for building wealth in a similar way ownership experiences.  (This does not necessarily mean sharing stock, however.)

Talent Framework

The final piece in our performance framework is talent.  This level of planning has to do with identifying key producers and defining where potential talent gaps might exist.  With both existing talent and that being recruited, it includes communicating expectations and the rewards associated with their fulfillment.

1. Identify Key Producers.  These are individuals who are most responsible for helping the company consistently achieve the “success” standards it has identified (see business framework).  A business needs to be able to recognize the difference between this kind of contributor and the rest of its workforce. It should also be able to identify the skill sets of those in this category and how they compare with the expertise needed to achieve the growth goals the company has set.

2. Identify Talent “Gaps.” Step one should make it easier to identify where the company falls short in the skills needed to reach organizational performance standards and goals.  That gap should then drive the recruiting strategy the business adopts for seeking new talent.

3. Communicate Expectations.  Individuals that are capable of driving the performance of the company want there to be high expectations that are well defined.  Expectations are—or at least should be—reinforced in the way people are paid.  When there is clarity in the link between company vision, business model and strategy, roles and expectations and rewards, “line of sight” exists within the organization.  This means each of those elements are working together to create a unified vision of what the target is, who is responsible for its completion and how he or she will be rewarded when expectations have been fulfilled.

4. Communicate Rewards.  In the context just described, pay strategies form the capstone that defines the financial partnership with the company’s key people.  As a result, compensation must be both effectively engineered and clearly communicated.  That communication should include a statement of the company’s pay philosophy, an articulation of the specific program(s) being introduced and a projection of the total rewards value a producer can receive from the business over an extended period of time.  When all of this occurs, it provides a magnified view of the value proposition being offered individuals coming into the organization.  The new employee is no longer being recruited to a $175,000 salaried position.  She is being offered a financial “partnership” that is worth, for example, $1.7 million over the next five years (or whatever the numbers play out to be for a given company).

Any company that is serious about transitioning away from traditional performance management systems and practices will want to build a framework such as the one just described.  That way, the performance intent and focus of the business, its pay systems and its talent will be aligned.  The result is a more unified financial vision for growing the business in which employees are encouraged and trained to adopt a stewardship mindset.  They take ownership of their performance and progress because there is line of sight between the company vision, its business model and strategy, employee roles and expectations and how that talent is rewarded for fulfilling those expectations.  

Ready To Get Started?

If you would like to speak with one of VisionLink’s pay strategy experts, click on the “Request a Consultation” button below, or call us at (888) 703 0080.

Request a Consultation