Company Performance Management Systems in Conditions of Uncertainty

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How do systems of employee evaluation and motivation change in unstable market conditions? Ward Howell consultant Svetlana Graiche shares her opinion with the readers of Vedomosti.

Source: Vedomosti

The classic system of annual performance evaluations, first introduced by GE in the 70s and quickly adopted by companies around the world, looks, in short, like this: at the beginning of the year, a manager gives his employee goals for the year, and at the end of the year, evaluates how well those goals were achieved, discusses bonus size and provides new annual goals. In such a system, any meaningful discussion between an employee and manager about results happens once or twice per year. No one likes this approach – not personnel managers, who waste huge amounts of resources preparing for these evaluations; not managers, who have to, in a one-hour meeting, summarize the employee’s entire year of work and provide a precise score; not the employees themselves, who look forward to these mandatory meetings with their boss as much as a trip to the dentist. However, until recently, companies were in no rush to abandon the time-tested system; after all, there was no alternative.

It’s hard to say what was the last straw that prompted the beginning of change: the building internal dissatisfaction within companies, the increasing uncertainty in the external market environment, the entrance of a new generation – generation Y – to the workforce. They don’t honor existing traditions and expect the same from their employers, which is representative of their daily lives: more frequent and regular feedback and the ability to always be online. In 2012, Adobe became the first to get rid of the traditional evaluation cycle. Other leaders from different industries – GAP, Microsoft – followed suit. In 2015, major consulting companies Deloitte and Accenture announced changes to the traditional standard annual evaluation process. Finally, and surprisingly, GE did the same.

The essence of the transformation lies in that the discussion between manager and employee about work results – which had been a yearly event, requiring serious preparation – would become more frequent and informal. Annual goals are replaced with “priorities” for the following month or two. Discussions about the fulfillment of these “priorities” would often happen upon the employee’s request. For such frequent interaction, corresponding corporate web applications for smartphones have been implemented that allow quick and informal agreements on feedback (in person or remotely) and record the results of the discussion in the system.

Accordingly, the annual overview session with managers doesn’t change, but its format does. Instead of evaluating previous results, the focus of the conversation is directed more toward future goals and potential development. In order to do that, data on results and short assessments are put into the system fairly regularly over the course of a year. During these annual sessions, discussions on bonuses and salary reviews take place. The appraisal itself becomes fairly simple and pragmatic. For example, Deloitte’s new performance evaluation system has managers evaluate their employees on a five point scale (from “strongly disagree” to “strongly agree”) on all of two questions: 1) Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus; 2) Given what I know of this person’s performance, I would always want him or her on my team; as well as “yes” or “no” answers to the following two questions: 3) This person is at risk for low performance; 4) This person is ready for promotion today.

Conditions of increasing uncertainty will change motivation systems. So far, companies are in no hurry to shift away from the system of paying for results, in which an employee’s bonus is determined by and linked to the fulfillment of previously-agreed upon key performance indicators (KPIs). At the senior executive level, it may not be worth waiting for things to change – financial goals like revenues, profits and margins will continue to be, as they always have been, priorities for shareholders, and to link them to top-management’s compensation appears logical. However, at the support staff and middle management levels, setting singular, yearly goals in an unstable environment will become more difficult each year, and planning cycles will become shorter and shorter.

So what should be done? Bonuses could be paid out quarterly or monthly, or the dependence of bonuses on KPIs could be done away with. Another option, which is more frequently talked about in companies whose main assets are people: reducing or even getting rid of bonuses as a part of skilled workers’ income. If an employee is required to, on a daily basis, come up with ideas and solution for unconventional problems (and in an unstable market, such tasks become more and more necessary), then tying bonuses to KPIs can have the opposite effect: creativity will decrease, and thinking will become more short-term and rigid. In his book “Drive: The Surprising Truth About What Motivates Us,” Daniel Pink confirms this using the results of various research studies.

We think that in the next year or two the wave of transformation, which started on the other side of the ocean, will engulf Russia. In fact, Russian companies have a distinct advantage: traditional systems of performance management are far from widespread. Therefore, these companies have an opportunity to not waste time on outdated systems and instead immediately master contemporary approaches that respond to the needs of an unstable world.

Author – Ward Howell Director of Operations