Without Performance Reviews, How to Handle Pay Equity, Firings

Decouple pay, termination and reduction-in-force decisions from reviews with care

By Allen Smith, J.D. May 9, 2017
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SAN DIEGO—At least 12 percent of Fortune 1000 companies have abandoned performance rankings or dumped performance appraisals altogether, according to a CEB survey. As the trend spreads, employers need to carefully consider how a lack of performance reviews will affect pay equity, terminations and reductions in force (RIFs), recommended William Duda, an attorney with Ogletree Deakins in Columbia, S.C., and Rae Gross, an attorney with Ogletree Deakins in Detroit, at the 2017 Workplace Strategies Conference here.

Reasons for Switching

Some companies—such as Adobe, General Electric (GE) and Netflix—have been public about the steps they have taken since leaving performance reviews behind.

Adobe did away with performance reviews and ratings in favor of ongoing feedback and dialogue—called "check-ins"—with no formal written review or documentation. Under the new system:

  • Managers regularly discuss and adjust priorities.
  • Feedback conversations are expected to occur quarterly, with ongoing feedback becoming the norm.
  • Employee pulse surveys are sent out to see how the process is working.
  • Leadership is supported with training and tools, including one-page templates, guidelines and videos to help managers and employees build skills in giving and getting constructive feedback.

Since it has made the switch, the company estimates it has:

  • Saved 80,000 staff hours that would have been spent completing performance reviews.
  • Increased by 10 percent the number of employees who would recommend Adobe as a place to work.
  • Decreased voluntary turnover by 30 percent.
  • Decreased involuntary turnover by 50 percent.

Leaders and employees dislike performance appraisals and HR typically is blamed for the whole process, Gross said.

Since abandoning performance reviews, GE has been using an interactive mobile app for direct feedback, providing near-term goals and requiring frequent discussions called "touch points." The app can summarize discussion notes and voice recordings. GE focuses on continuous improvement, not grades. Employees can give or request feedback at any time, and feedback is not limited to the immediate manager or division.

Duda said the ongoing conversations particularly focus on what employees should continue to do or stop doing. This approach results in more positive appraisals and forces conversations during the year rather than supervisors unloading on employees at the end of the year, he said.

Compensation

Duda said that without performance reviews, he worries about discrimination disputes.

But Gross said Adobe's approach to pay works for the company. HR informs managers what an employee earns within a salary range. Managers get a budget to award at their discretion based on equity and performance, and Adobe asks managers to consider:

  • How is the employee performing relative to established objectives? What kind of impact is he or she making and how critical is his or her role to the business?
  • Does this employee have unique skills that are difficult to find in the market?
  • Is the employee competitively paid?

Netflix pays above the market rate and encourages managers to ask themselves the following questions when determining pay:

  • What could this person earn elsewhere?
  • What would Netflix pay for a replacement?
  • What would Netflix pay to keep this person if he or she had a more lucrative offer elsewhere?

Gross said this approach might work well in the high-tech industry, where workers are in great demand, but not necessarily in other industries.

"Look out for inequitable pay," she cautioned. If a company has never done a pay equity analysis before, it should think long and hard before doing away with performance evaluations, she said. If an entity is frequently audited by the Equal Employment Opportunity Commission or the Office of Federal Contract Compliance Programs, the agencies' interest may be piqued by a company that lets its managers pay whatever they deem is fair, Gross said. On the other hand, if all employees are close to the pay midpoint, the managers' discretion in setting pay may not be a big deal, she added.

Terminations and RIFs

Regardless of whether performance reviews are in play, there should still be performance improvement plans to document the steps toward discharge, Duda recommended.

[SHRM members-only toolkit: Involuntary Termination of Employment in the United States]

As for selection criteria for RIFs in the absence of performance reviews, he suggested the following:

  • Job skills.
  • Cross-functional experience.
  • Training.
  • The critical nature of the job if it were eliminated.
  • Sales volume or a similar objective performance metric.

Getting rid of performance reviews isn't for everyone, Gross noted. And even when it might make sense, she suggested taking baby steps. That might mean implementing informal conversational feedback but still having an end-of-year, though simpler, written review with or without ratings.

 

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