Appraisals: The Illusion of Performance Management

Posted on February 4, 2011 by William Gould

What if I told you that recent research shows nearly 4 out of 5 employees either agree, or strongly agree that their organizations’ performance appraisal processes were instrumental in supporting their professional development? That the data strongly suggests that employees are satisfied with the frequency of feedback, the honesty of feedback, and the timeliness of feedback? Would you believe me?

Chances are that you would think that I’m full of S**t (Soot that is). If you don’t think so, then thank you, and I am very interested in hearing what has worked well in your experience. Based on a number of recent interactions with other Trench HR professionals, it seems that performance management and the use of performance appraisals is a big challenge for many of our organizations.

Approaches to Performance Management

I will suggest that there are generally two philosophical approaches to the development of performance management systems, although many organizations have created a hybrid of these approaches:

Compliance approach. In this approach, performance management is a HR process specifically designed to document employee performance and behavior for use in supporting employment-related decisions. That is, appraisals and other performance documentation (e.g. corrective actions) are used to cover our backsides when it comes to compliance: Title VII, Affirmative Action, collective bargaining agreements, etc. In other words, compliance is largely about creating written documentation to fend off potential litigation, and to justify the decisions that we have already made.

Organization development approach. In this approach, performance management is a comprehensive leadership system designed to continuously develop the organization’s people.

The Illusion of Performance Management

Performance management is not a performance appraisal process, and a performance appraisal process is not performance management.

We have mistaken the process of completing prescribed performance documentation for it being a key driver for the development of our people. It is not. Developing people is rooted in the abilities of leaders to mentor their employees; this requires coaching, feedback and leadership, and not a form, software template or other standardized tool. A highly effective leader can coach and mentor without a tool or process, but even the best appraisal tool in the world will not turn an ineffective leader into a coach or mentor.

What Would Coach Do?

How many organizations do you know that actually train their leaders to be effective coaches and mentors, and provide them with their own coaching and mentoring about their leadership skills? The HR department teaching new supervisors how to complete performance appraisals so that they avoid rater biases is not the same thing as developing leaders to motivate and develop their people.

There are a number of leadership books by and about great coaches in the world of sports. The books describe how successful coaches motivate and develop athletes, and how they build great athletic programs. To my knowledge, none of those who are recognized as being great coaches did so by completing annual performance appraisals on their athletes, with little or no interaction in between. Great coaches are judged by their wins, and in college sports, their ability to recruit great athletes into their programs. Great coaches are great leaders, not unbiased raters and compliant managers.

Development Has a Future Orientation

The traditional HR approach to performance management is rooted in documenting the past performance and behavior of employees. That is what most HR practitioners train managers to do. I understand that performance needs to be documented to support employment-related decisions, however it has little to do with really developing our people. An annual, retrospective grading of what has already occurred (with varying perceptions about its basis in reality) will in itself do little to promote the future development of people.

Performance management needs to be based on how we coach, mentor and develop our people with a future orientation. Here is the theory: The foundation of an effective performance management system lies in an intentional leadership development process. In other words, if we expect our leaders to be effective coaches and mentors, then we must first invest in the development of those leaders. Without effective leaders, the performance appraisal process is doomed to being little more than a HR record-keeping process, and a poor illusion for a performance management system. One more thing: giving our leaders feedback and development about their leadership and coaching abilities should probably consist of more than an annual performance appraisal.

I’m interested in hearing what you think.

[2600 Phrases for Effective Performance Reviews]

Performance-Based Compensation – Challenging the Status Quo

Posted on January 10, 2011 by William Gould

HR Soot Theory: Many of the “HR” programs in existence today were developed by consultants and attorneys for the benefit of said consultants and attorneys.

We Assume Performance-Based Compensation Works

If you don’t spend a lot (or any) of your working time in the world of compensation, let me suggest to you that designing and administering compensation programs is complex work. There is no shortage of strategies, programs, theories or approaches to performance-based compensation (PBC) plans, and new programs are being developed continuously.

To illustrate the range and complexity of PBC plans, just a few higher-level approaches may include: merit-based increases; gain-sharing plans; short-term incentives; long-term incentives; individual incentives; team incentives; deferred compensation; stock options; and, the list goes on. One thing that I know from HR experience is that many of the compensation consultants and labor attorneys who design and advise companies on these arrangements charge a mint. I also suspect that very few business people ever challenge the effectiveness of PBC strategies – it is largely accepted as relevant and effective, without consideration or debate.

Agency Theory

PBC systems are largely based on Agency Theory. Larkin, Pierce and Gino describe it in the working paper, The Psychological Costs of Pay-for-Performance: Implications for Strategic Compensation:

At its core, agency theory posits that compensation is strategic due to differences between firms and employees in two crucial areas: objectives and information. The differences lead to two sources of potential inefficiency for firms: an employee may not put out maximum effort (or effort may be misdirected in an inefficient manner), and the firm may pay workers more than they are worth (i.e. their expected marginal product) (Larkin, Pierce, & Gino, 2010).

In a simple sense, the theory suggests that the right strategic pay is that amount which motivates people to do their best work (not withholding effort), without paying them more than the organization has to pay them to get it – it goes to profitability. It also assumes that employees will generally withhold their best efforts if the pay does not match the perceived effort necessary to do their jobs well. Larken, et. al opine that “while agency theory provides a useful framework to analyze strategic compensation, it fails to consider a host of psychological factors that affect employee motivation and attraction” (Larken, 2010).

Trench HR Reality

After many organizations spend large amounts of money designing and implementing these compensation systems, they can also require extraordinary resources to administer; the more complex the systems are, the more resources it requires to measure, monitor, calculate, pay and communicate performance and compensation elements. The theory is that companies will pay for the performance measures that are already tracked and reported; the reality is that often times additional tracking and measurement systems are necessary. How much time and money does your company really spend to complete performance appraisals that tie into merit-based increases? How effective is the system for driving better business results? How do you know?

I understand that some organizations have entire departments devoted to managing PBC systems. Inevitably, it is Human Resources who becomes the compliance police for the timely completion of performance appraisals (including those linked to compensation increases). I’ve even heard of some organizations that have “the timely completion of performance appraisals” as short-term incentives for their managers. How’s that for aligning the right behaviors?

I’m not suggesting that setting goals, measuring results and communicating constantly with employees is a waste of time – I think it is critical to the success of any business. In fact, I think most organizations largely fail at doing this well. The problem lies in the fact that it is often the PBC programs that force the setting of goals instead of the right business objectives and outcomes driving the total reward strategies.

The Research

Over many years, I have asked executives, managers and compensation consultants what the key is to a successful PBC plan. Here is what I most frequently hear: Plans must be clearly aligned with the strategic objectives of the organization such that the rewards will drive the right behaviors. If we take it down a couple of levels (beyond competitive executives and well-paid compensation consultants), here is what some of the academic research suggests about PBC.

Alfie Kohn, in his article Why Incentive Plans Cannot Work suggests that there is a six-point framework to examine the true costs of an incentive program: (1) Pay is not a motivator; (2) rewards punish; (3) rewards rupture relationships; (4) rewards ignore reasons; (5) rewards discourage risk-taking; and, (6) rewards undermine interest. He states, “According to numerous studies in laboratories, workplaces, classrooms, and other settings, rewards typically undermine the very process they are intended to enhance. The findings suggest that the failure of any given incentive program is due less to a glitch in that program than to the inadequacy of the psychological assumptions that ground all such plans” (Kohn, 1993).

Like Larken, et. al., Kohn argues that the key missing element in incentive compensation plans is the consideration of other psychological factors. ”Do rewards work? The answer depends on what we mean by ‘work.’ Research suggest that, by and large, rewards succeed at securing one thing only: temporary compliance” (Kohn, 1993).

Daniel Pink, in his book Drive describes an experiment conducted by Edward Deci for his dissertation on the subject of motivation; he hypothesized that scholars and business people misunderstood the subject. Pink says, “Deci revealed that human motivation seemed to operate by laws that ran counter to what most scientists and citizens believed” (Pink, 2009). He goes on to write:

What Deci found, and then confirmed in two additional studies he conducted shortly thereafter, was almost the opposite. ‘When money is used as an external reward for some activity, the subjects lose intrinsic interest for the activity,’ he wrote. Rewards can deliver a short-term boost – just as a jolt of caffeine can keep you cranking for a few more hours. But the effect wears off – and, worse, can reduce a person’s longer-term motivation to continue the project” (Pink, 2009).

Challenging the Status Quo

PBC is only one of many areas where I believe it is time to challenge the status quo. Businesses adopt, and HR administers a number of programs, systems and processes that have not been challenged rigorously, and have not been updated in far too long.

Agency theory and PBC is 20th century thinking. What does it say about your organization to base your total reward structure on the theory that your employees may be inherently lazy, intentionally withholding their talents, and are only willing to give you their best effort when it is tied directly to compensation?
If you want a top performer then hire a top performer, pay her like a top performer, give her the resources required to be a top performer, and get out of her way. Dangling incentives to motivate her to jump over the obstacles that you’ve probably created is not going to make her more productive.
Clearly aligning the goals and objectives of your leaders and employees with the strategic objectives of the organization does not create a successful PBC system, it creates the environment for a well-lead organization.
We have made things far too complicated with fancy compensation schemes, for which there is questionable objective evidence in support. If we cannot explain compensation to a new employee in five minutes or less, then it is too complicated. If employees don’t understand the system, how can we expect it to motivate their performance?

I am very interested in hearing what you think.

References

Larkin, I., Pierce, L., & Gino, F. (2010). The psychological costs of pay for performance: Implications for strategic compensation. Harvard Business School: working paper.

Kohn, A. (1993). Why incentive plans cannot work. Harvard Business Review; Sep/Oct 93, 71(5), p 54-63.

Pink, D. (2009). Drive: The surprising truth about what motivates us. New York: Riverhead Books (Kindle Edition).

[Photo Credit: Maggie Smith at Freedigitalphoto.net]

Lean HR – Seriously?

Posted on December 14, 2010 by William Gould

I’ve had a lot of Lean on my feeble mind recently. This area of contemplation is the result of my health care organization being well into a Lean management transformation – I still have a lot to learn. For those of you who are not familiar with Lean, here is how Wikipedia describes it:

Lean Manufacturing or lean production, often simply, “Lean,” is a production practice that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination. Working from the perspective of the customer who consumes a product or service, “value” is defined as any action or process that a customer would be willing to pay for. Basically, lean is centered on preserving value with less work.

Dwane Lay over at Lean HR Blog has written some great posts about Lean HR principles (and other topics as well). People with whom I speak sometimes look at me cross-eyed when I suggest a Lean HR, or a Lean health care system. What could car manufacturers know about patient care? What does a widget factory know about the complexities of HR? What I’m learning is that the answer to the questions is probably, “nothing.” However, the processes and approaches used to eliminate waste in automobile manufacturing are absolutely relevant to creating value in HR, and health care.

HR is Waste

A question that I am just beginning to ask regarding all HR processes is this: What value does the process/requirement bring to the person I am asking to complete it? Lean, after all is about creating value for the “customer who consumes a product or a service.” So think about it for a minute. Of all of the forms (e.g., requisition forms, evaluation forms, benefit enrollment forms, etc.) and processes that we require of managers, employees and candidates, which of them add value, and which would they be willing to pay us money for the value that the process is designed to create? If you think about it long enough, and you are completely honest, the answer to the question is probably, “NONE.” In Lean terms, HR processes are largely waste.

Time to Eliminate HR?

I’m not confident that operations people would put up much of an argument about HR processes really adding value to the day-to-day work that they do. So why should HR exist?

I’ve been told that good HR practitioners solve real, sticky, ugly and contentious people problems in their organizations. When they are really good, they plan ahead and create systems and processes to avoid the problems to the greatest extent possible (we are still dealing with humans). The things that managers and employees value from HR typically do not need an enrollment form, an executive approval, pre-authorization, or an annual election. So why do we spend so much time creating so many requirements? I did a guest rant on Xpert HR in which I suggest that we have effectively become data whores, and that it is time for HR to start focussing on people.

A Lean Mean HR Machine

At what point will HR begin to get rid of all of the paperwork, barriers, red tape, signatures and other requirements that are not absolutely necessary for regulatory compliance, or great business management (see Compliance Police)? Those things that are absolutely necessary, but still non-value adding need to redesigned to create some value to those required to comply with the demand.

In the HR trenches we often complain about having to deal with all of the ugly people problems that result from bad management practices – if everyone only followed the processes that have been developed… But, perhaps the real value of HR lies directly in our ability to effectively manage the HR soot that we compulsively work to avoid. We are in the business of leading people. So maybe the way we conduct our business should be focussed more on what value they need from us.

What do you think?