The Truth About Pay and Performance Ratings

Performance EvaluationA trend is emerging as businesses eliminate ratings from their performance management processes.  Adobe Systems and Deloitte are among several major companies to drop ratings as they re-engineer their performance management programs while retaining those components that are more productive, most notably one-on-one feedback and coaching with employees. Firms are abandoning numerical ratings of people and forced distributions because study after study has shown those practices to be detrimental to teamwork.

Performance ratings have long been a factor in compensation, promotion, employee development, and termination decisions, and their elimination creates a challenge for HR professionals.  As this trend gains traction, HR will be called upon to ensure employee-related decisions are delivered in a fair and legally defensible way without the use of traditional performance ratings.

Employee performance will continue to play a role in compensation decisions, but that role will be different. In 2014, my company moved to a comprehensive performance process that focuses more on the future development of employees and less on a rear-view look at past performance. The company has now completed a full year without using performance ratings as a factor in compensation decisions.

Not surprisingly, communicating with employees has been the most critical aspect of the change.  Employees rejoiced about the focus on employee development and their release from pressure to negotiate a rating with their manager to get the largest possible salary increase.  But the most frequent question about the new process has been, “How is my performance going to be factored into my raise if we’re not using ratings?”

business man holding us dollar cash. isolated on white

Traditionally, businesses have linked employees’ performance ratings directly to an annual percentage salary increase.  Over time, this practice led employees to believe their rating was the biggest driver of their pay, but that has never really been the case.  Many other business factors can have as much, if not more, influence on annual pay.  The company’s overall performance during a given year or longer time span is probably the most important contributing factor to employee compensation.  Other factors might include the company’s pay philosophy and performance compared to budget; the local, national, and/or industry job market; or the health of the economy.

In reality, individual employee performance is only one factor determining the amount of compensation distributed within a company annually.  The challenge for HR is to understand what drives compensation within the company and to educate employees on how their performance fits into the equation.  And there are many ways to measure an individual’s performance without relying on subjective performance ratings.

I predict that, freed from the many negative associations with administering disputable performance ratings, HR professionals will create more constructive ways to deliver compensation to employees.

At my company, we’re focusing on company performance, industry-specific job market rates of pay, the employee’s performance and mastery of job skills.  We continue to use traditional delivery channels:  base pay, incentive, bonus payments, and recognition. The new process is being carefully monitored to determine its long-term impact on business results. As employees work toward professional development and achievement of company goals without the unnecessary distraction of competition with co-workers, we expect gains in morale and business results.

I look forward to seeing how other HR professionals create new and better pay practices without the use of performance ratings.

Note: A version of this article was originally posted on Blogging4Jobs on May 28, 2015.