Vitality Health Enterprises initially started its business as Vitality by importing small quantities of cosmetics from Japan. Initially it started marketing in its neighbourhood and to local organizations. Slowly it started expanding and in 1989 it changed its business model by establishing its own manufacturing facility in the US. Its business continued to grow into various markets as it leveraged its unique supplier connections and technological superiority. Its venture of acquiring HerbaPure Nutraceuticals helped it expand into a new domain of health care and Vitality became Vitality Health Enterprises. It continued its growth by expanding into new geographies until 2008 when its growth began to stagnate. This led to the formation of its new business strategy where a committee was appointed to review the policies and methods of tracking the performance goals of all non-sales and non-executive employees of the company.
Drawbacks of previous PMS:
PMS scale had 13 different levels of ratings. This scale posed a problem as managers avoided either the pain of evaluating or offending their sub ordinates by giving average rating of ‘B’ or ‘C’ to most of the employees. They avoided giving ‘A’ even to the top performers with a fear of upsetting the spirit of teamwork among others. Therefore the top performers lacked motivation to continue performing better as they received similar kind of merit based incentives and rewards as their less productive co-workers. Also there were flaws in the current methods used to measure performance. The compa-ratio takes into account the number of years an employee has worked with the company. Hence the tenure brings them with high incentives even though their performance wasn’t up to the mark.
For example an employee with larger work experience at Vitality would be paid more when compared to other employee who had joined recently for the same output or sometimes even for a lesser output, which brought discrimination and dissatisfaction among the employees. One advantage was that the compensation provided is 7-8% higher when compared to competitors. But the component of bonuses and variable pay was low in the current structure, which added to the disappointment of the high performers. Therefore even though turnover rate reduced at Vitality due to high compensation, there was turnover among the more productive scientists and product engineers as they moved to companies where their hard work and talents are rewarded better, which was a great loss to the company.
Hence the very purpose of PMS that is identifying performers to reward them and non-performers to train them better or in the worst case steer them out was not achieved through this system. So a large section of the employee community wasn’t satisfied with the existing system. Also in a highly competitive market as personal care products, Vitality can’t afford to lose its top talent to its competitors. Additionally its product managers need continuous motivation to innovate and develop new products to withstand the competition. Hence there was a need for a coherent performance management system that held employees accountable for their actions and incentivized employee performance by offering compensations including salaries, bonuses and equity. So a new performance management system was launched.
Was newly implemented performance management system in ‘Vitality Health Enterprises Inc.’ effective? Pros of Newly implemented PMS:
The revised system is more apt to recognize highly contributing employees by strictly following the distribution model of performance rating. New PMS changed the absolute ranking to relative ranking system which helps to rank the employees based on relative performance basis. This eliminates a key problem of rewarding bulk of employees when their department was failing to meet development and production goals. This plan incorporated a new system of performance-related short and long term cash and equity bonus rather than relying only on salary increases. The newly designed system follows 4 point scale instead of 13 point scale which made the manager task easier in evaluation.
Cons of Newly implemented PMS:
Some employees were reluctant to perform their duties outside the job as those responsibilities were not in the review system. So they preferred only to work in the domains which were taken into consideration for their reward. Some managers felt that the new distribution system to be very rigid. High performing team need to come up with the targeted number of achievers even though they had many of them. On the contrary, the low performing team also had equal number of top achievers. The new PMS uncovered some managerial dissembling.
Because managers allotted ‘Not Rated’ ranking to new members and saved the higher rankings for their veteran employees irrespective of their performance. Hence the new member in team might be de motivated. Some managers were reluctant in differentiating between their employees and allow any unfamiliar person to evaluate them. Because of this true performer might miss his/her rewards and incentives. Some managers rotated the highest ranking between their employees from one year to the next. So the objective of developing new evaluation system was unfulfilled.
The new performance management scored well in the survey which collected response from all the affected employees. Around 54% of the employees were happy with the new system whereas nearly a third (31%) preferred the old system. The employees who were happy with the new system might be high performers whereas the low or mid performers might have not been happy with the new system and were recommending old system. Managers were not happy with the rigid system because it added complexity in grading and might have been forced to give detailed explanation to offended employees. However there were few issues with the new system, which can be addressed with the measures listed below: Modification of the pay structure by incorporating performance benefits tied to the below: Organization Building: Employees need to contribute for the growth of the organization beyond their core responsibility.
This will help in organizational growth and trickle-down effect to the bottom of the organization. So their pay structure will also involve a component that corresponds whether the company as a whole is performing well or not. Team Building: The performance of the team or division will also impact the rewards being distributed. If a division does well, all its members get benefitted and vice versa Individual Efforts: Like before, individual component will also weigh for performance appraisal. This will have a different weight age for different job descriptions, as per the requirement. For example: A marketing employee will have a higher component of organization building than a R&D scientist who will have a higher individual component E.g. Say a R&D scientist has a base salary of ‘x’ and the weights allocated to organization building, team building and individual efforts as w1, w2 and w3 with per component increase of $p, $q and $r. Hence pay policy line= x+ (w1*p) + (w2*q) + (w3*r)
Mixed component of absolute and relative: Employees will be graded against one another only when they are able to fulfil their core responsibilities and perform to a certain benchmark level. As the managers used to assign a Not Rated ranking to any employee who had been in the group for less than a year, regardless of actual performance. Not Rated ranking should be removed and appraisal should be conducted without grading for employees who have not completed a year.
Pay structure of Managers: Managers have secondary responsibility of fulfilling staffing needs, their effectiveness in training, development and employee relations. The weight age of secondary component should be increased in such a manner so that they don’t delegate this responsibility to HR, which will be possible if their pay structure will be linked to it. Differential rating points for different divisions: Different division should have a different weight age system of organization growth, team growth and individual efforts in their pay structure and it should be appropriately distributed to all divisions so that rewards are not concentrated in a particular division. Feasibility of recommendation
The company is growing at a good rate and hence any recommendation should be careful analyzed for its feasibility. Having different weight age for KRA’s of each division is difficult to formulate and can also lead to conflict between divisions which can lead to loss in synergy across the organization. All the divisions should be kept in confidence while formulating KRA’s and their respective weight ages. As the company is growing, the divisions will also increase and hence this plan’s sustainability is questionable. Pay structure modification can be met with resistance from employees who will not be ready to accept too many variables in their salary. However educating employee about the benefits of this modification can solve this issue. Creating a separate process for employees who had completed less than a year in a team can easily eliminate not Rated ranking.