An article on Performance Reviews in HRMonthly this week caught my attention as it discussed a major shift in a large company’s approach to performance reviews. I had to respond and have precised as follows:
“We are constantly working with businesses in the performance management field and have developed an approach and philosophy which has also impacted positively on our recruitment outcomes for our clients. I think this company was right to move away from their old process and the big wins for them are focusing on the six monthly conversations and also the twice weekly check ins. Forced distribution doesn’t help a business, and when remuneration reviews or bonuses are attached so directly to ratings because there is only so much money to go around, then the credibility of ratings is unavoidably compromised.
Performance - It's all about results!
In general I think HR often falls short of a CEO’s expectations because it struggles to articulate commercial outcomes. The HR Manager identifies a new way for performance reviews but speaks little about commercial outcomes. If we take a group of, say 1000 employees on average incomes of $75,000 p.a. then we have $75,000,000 of working capital tied up in direct remuneration. As a general ratio (and businesses or industries will have their own) a CEO would expect that that $75m spent annually would be capable of generating at least $225m in gross profit. If we can realise just a 2% improvement in productivity, we will create another $4.5m of EBIT (the assumption is that productivity does not generate increased costs).
The issue for HR from a strategy perspective is working out how. A one size fits all approach to performance reviews is not the answer – but the answer is achievable within a common framework. If you take a balanced scorecard approach and use weightings to “unbalance” the scorecard in favour of business outcomes, then with weightings related to the capacity of the job for value creation; you can evaluate people fairly, pay them fairly and most importantly review their performance against business objectives and priorities. What this means is that some people will be evaluated in much the same way as the writer suggests – especially the support roles and the “value protecting roles.” However, we are not fans of 360s for general performance reviews (which he advocates) – they can be dangerous tools and a business must not emasculate a line manager because he or she is responsible and accountable for the team’s output. However, the value creation roles must be rewarded for results, not effort.
In these roles, if the right person has been recruited in the first place, motivation is not the issue and rewards (salary increases and bonuses) are expected. These are affordable because of the productivity gains identified above. What it also means is that while the performance reviews for these roles still need reality checks around values, core competencies and ability to fulfil responsibilities; the biggest component of the review should be based on a black and white assessment of results. In these roles, the performers must be retained and the non performers must leave.
The only other observation is that separation of the performance discussion from a remuneration discussion is essential. A discussion where one party is thinking about performance and the other party is thinking about dollars won’t achieve anything. Salary reviews on the anniversary of commencement of employment are manageable (and provide a carrot for sustained performance) while performance reviews are just part of managing a business result. All of this sounds complicated but is very manageable in software – we use Peoplestreme, but the outcomes are only as good as the content.”
It’s one more example of HR not quite making it to the strategy arena.
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