Vitality Health Enterprises, Inc., a manufacturer and distributor of beauty products, is at risk of losing market share in this highly competitive industry. James Hoffman, the newly appointed Vice President of HR, has been tasked with the evaluation of Vitality’s performance management system, to ensure that it is generating the outcomes Beth Williams, the CEO, is expecting.
After a period of strong revenue growth, Hoffman is concerned that the workforce is becoming complacent. The research and development department is not producing quickly enough, resulting in a growing number of missed product launches.
The company has realized a slow but significant turnover of highly talented research scientists, leading Williams and Hoffman to suspect that the performance management system is ineffective.
Prior to 2009, Vitality was operating an old performance management system that failed to properly incentivize and recognize top performers and did not emphasize employee accountability. As a result, there was a lack of differentiation between top talent, average performers, and poor performers, which frustrated some of the company’s most valuable scientists and engineers.
In an effort to keep the peace, managers categorized almost everyone as average performers, and because performance ratings were tied to merit-based wage increases, top talent felt slighted. Vitality used a flawed comparative ratio system to determine wage increases, which often resulted in giving low performers a greater raise percentage. Because high performers were not adequately recognized or compensated for their efforts, the performance management system failed to keep them engaged.
In 2009, Vitality implemented a new performance management system based on forced distribution, which saw an increase in employee buy-in, but a decrease in manager buy-in. Many managers disliked ranking their employees as it has the potential to cause conflict and animosity; however, top performers saw the new system as fair. Despite significant modification to the performance management system, problems still existed including a continuation of uniform ranking, and the mentality that the system was too rigid. Managers and employees had difficulty comprehending the new system, particularly considering there was little to no training. Thus, many of the issues share a similar cause – poor implementation and thus poor understanding of the system.
ACTION PLAN AND SOLUTIONS
There are four interrelated issues that the following action plan addresses. These issues include the following: compensation related to performance, managers who give uniform rankings and do not rank new hires, a lack of training on the new performance management system, and managers who lie to employees about rankings. Each section of the action plan is designed to work in coordination with the other three sections in order to resolve these issues. To improve issues with compensation related to performance within the performance management system, we recommend eliminating all target percentages as well as constraints on the low achiever and unacceptable categories, and eliminating the use of the compa-ratio. By eliminating the target percentages and some of the constraints on the ranking, the flexibility of the performance management system will be increased. No manager will be forced to rank employees as top achievers, low performers, or under performers if there are none. However, the constraint for top achievers not exceeding 14% will stay in place to prevent managers from ranking all their employees as top achievers. To supplement this, we also eliminated the compa-ratio.
Instead, top achievers will have the option of receiving a 3% raise plus stock options, or a 5% raise with no stock options, and average employees will receive a 2% raise with no stock options. No raises will be given to low performers or under performers. Thus, raises will be based only on performance and not on current salary. This will ensure that top performers are rewarded and properly incentivized. Since there will be no targets and no constraints to ranking everyone as average, managers may be tempted to take advantage of this and uniformly rank their employees. In order to prevent this, managers must be held accountable for their appraisals of employee performance. According to Roberts (2002), accountability is one of five barriers to an effective performance appraisal, and he recommends that performance appraisal management be a component in manager ratings. Based on this research, we recommend that managers who uniformly rank their employees will get an unacceptable ranking. As a result, managers will be accountable for differentiating between their team members and will not rank all employees as average.
We also recommend changing the Not Rated ranking to New Hire to ensure that new hire performance is discussed and assessed. In this system, new hires with tenure of 6 months or less would have a ranking system that only includes new hires. This ranking system would be based on objectives that assess how well the employee is gaining knowledge of the company and his or her overall cultural fit. Therefore, the new employee would receive feedback on his or her performance as well as an initial understanding of the performance management process. Beyond compensation and rating issues, many managers and employees expressed confusion about how the new performance management system worked. Initially, when the transition was made to forced distribution, HR sent out a companywide email informing employees of the new system and later sent directors and managers a link to an online guidebook.
However, no formal training was ever conducted. According to Elaine D. Pulakos (2004), an organizational psychologist specializing in performance management, training is essential when implementing a new performance management system because it not only teaches employees how to use the system but also motivates them to utilize it to its fullest capability. In order to remedy this lack of understanding, training for all employees at all levels must be administered within the next month. Specifically, it should consist of classroom training that emphasizes role-playing for providing constructive feedback during performance appraisal meetings. This role-playing will offer managers an opportunity to become more comfortable with delivering undesirable appraisals, which was identified as a barrier to proper system implementation. Moreover, providing classroom training indicates the importance of the performance management system because it demonstrates that the company is committed to the new system and values proper implementation of the system (Pulakos, 2004).
Simply emailing an online guidebook does not emphasize this importance. The final step in the action plan is to directly combat the issue of managers lying to employees about their performance ranking in order to avoid difficult conversations. Clearly, this practice not only jeopardizes the integrity of the system but it also diminishes its transparency. In order to remedy this, once HR has received and approved the performance rankings, they will send out an email to each employee with his or her ranking along with a brief summary explaining why he or she received that specific ranking. This email will be sent two days prior to an employee’s performance appraisal meeting with his or her manager.
Consequently, managers will be discouraged from lying about rankings, and employees will be more prepared to enter these appraisals. This notification also serves as a way to begin the performance conversation and holds managers more accountable for delivering constructive feedback. By implementing this action plan, we believe many of the current issues will be resolved. However, in order to evaluate the effectiveness of these new practices, HR will collect survey data in two years. The collection of this data will use the same method as the performance management data collected in 2011.
The proposed solutions address many issues of the new system; however, there are still some limitations. Specifically, managers could still manipulate the system by rotating their subordinates from year to year between the Top Achiever and Achiever rankings. Moreover, changing the percentage constraint of employees who are listed as Low Achiever (from the minimum of 7% to no minimum) and maintaining no constraint of the Unacceptable category could potentially allow managers to distribute no one in those ranks. The company, consequently, will have trouble identifying those who are actually low performers and those who are truly high performers. Secondly, the system still requires all managers to complete the evaluations during a specific time of year.
Some managers complained that this practice was resource consuming when they should be utilizing this time and effort to complete more important and productive tasks. As a result, issues concerning divisional productivity and low quality evaluations are potential problems. Finally, the sheer nature of comparative performance management systems creates the potential of conflicts among employees and managers or among employees themselves. Even with the adjustments to the new system, these conflicts may still arise. According to Aguinis (2013), collaboration and organizational goals are potentially in jeopardy when there is employee conflict. As a result, this further emphasizes the importance of carefully implementing the performance management system as well as ensuring that all managers and employees understand the system’s purpose and how it works.
Aguinis, H. (2013). Performance Management. Prentice Hall: Upper Saddle, NJ. Roberts, G. E. (2002). Employee Performance Appraisal System Participation: A Technique that Works. Public Personnel Management, 31(3), 333. Pulakos, E. D. (2004). Performance Management: A roadmap for developing, implementing and evaluating performance management systems. Alexandria, VA: SHRM Foundation.