Constant transformation is the new normal, when it comes to the performance management systems of today's organizations. We can see three specific changes which organizations are aiming for - First, they are discarding the "ranking" and the forced bell curve distribution of employees. Second, annual reviews are being replaced with more frequent ones-quarterly, or even weekly. Third, compensation reviews and performance reviews are being done separately.
As the trend suggests, most of the organizations are advancing on this path. However, a word of caution for all - every new road will pose challenges of its own and the upcoming PMS processes are no exception. Before adopting this, organizations need to understand the challenges they are currently facing and then take a call whether they too want to tread this path or not. The new version of PMS will have its unique set of hurdles. Highlighted below are the key challenges, organizations would need to think about during their transition to the new system.
Selecting high performing talent
A vital part of annual performance management (and its biggest criticism) has been to rank team members against their peers and categorize them into Poor - Average - Top Performer buckets. The top performing employees would then be considered for leadership development, potential assessment, succession planning and other top talent initiatives. All such initiatives select its target audience on the basis of their relative performance scores. However, in the absence of a dedicated ranking system, organizations would face a challenge in identifying talent wherever relative performance data is required. Most of the organizations that have moved on to the new system, have not explicitly abandoned the usage of relative performance scores. They are still trying to find alternate ways to determine what proxies of relative performance scores should be considered for shortlisting team members for such initiatives. This will be the biggest challenge the new process will face and credible solutions are still to be arrived at.
Perceived fairness in rewards
Primarily two attributes along with other market factors have been used to determine functional compensation budgets - function's business impact and function head's performance. Budgets, thus determined, are then cascaded down to all managers based on their team and individual performance. However, determining the budgets in the absence of relative performance scores will be a challenge. In times of limited rewards budget, there needs to be a common yardstick across the function to determine and allocate the rewards on. If budgets are determined based only on absolute performance, there would be a perceived sense of unfairness in the process. Employees with similar ratings from different teams might have different budgets owing to their managers' perception of the absolute performance. While most of the new age organizations are moving away from categorization of employees for the purpose of rewards provisional ratings are still in vogue. To address this challenge, the new appraisal systems should effectively aim to delink performance appraisal from rewards appraisal. At the same time, they should establish a fair process for distribution of rewards aligning to pay for performance model. Communicating reward principles effectively and having a well-articulated compensation philosophy could also help in ensuring organizations move forward on this path.
- In my experience, I have seen managers trying to avoid having difficult conversations with low performing employees till the time such an action is mandated. A system where there are no relative ratings, might actually encourage such evasive behaviours in managers as they might carry the burden of low performers in their team till it is bearable and in the process actually shield them against any corrective action. To correct this, managers should be encouraged to identify low performing employees on the fly and then coach them so that corrective action can be taken at an early stage.
- Moving to 'regular check-ins' requires a culture that will encourage the managers to take deep interest in a team member's development and keep providing regular feedback to them. They should be able to regularly observe behaviours exhibited by their team members and have developmental conversations with them. Just adding another scheduled meeting to a calendar, without the supporting culture and active participation from leadership will be a perfect recipe for failure. Organizations will have to ensure that their people, processes and systems are aligned to support this periodicity and the same is ingrained in culture.
Re-invent HR Practices
Lastly, most HR initiatives - succession planning, top talent identification and retention etc. consider relative performance ratings as the eligibility criteria. They weren't designed to accommodate continuous feedback with absolute performance scores. To keep up with the new performance measures, the traditional practices will have to evolve. Organizations would need to find alternatives to relative performance measures, while being true to the no-bell-curve philosophy.
It will be interesting to see how well the organizations try to find answers to these challenges while adapting to the new performance management practices. Most early movers are yet to figure these out. Some fundamental questions need to be answered first in order to address these: 1. How do we ensure that every employee feels the process is fair and transparent to them? 2. How does the role of Compensation & Benefit team changes so that they add value to the process 3. How do we build managers' capability in the times of byte sized learning? 4. How does organizations keep track of these 'check-ins' and derive adequate value from them?
It is a long way to go, beforeyou call it a "system" which has closed the loop.