When There's No Pay for Performance

Organizations that operate under a pay-for-performance system might receive push-back from managers about doing performance appraisals when a decision is made to delay pay increases. But experts say performance discussions are more important than ever.

As one Society for Human Resource Management (SHRM) member said in a recent HR Talk bulletin board posting: “We are a manufacturing business that has been hit by the economy, therefore we will not be giving any increases tied to reviews this year as there had been in the past. Does anyone have any recommendations on how to have this conversation with employees and still motivate supervisors to do reviews?”

Many HR professionals are facing similar quandaries, according to SHRM’s Knowledge Center.

As SHRM has reported, a Watson Wyatt survey of 245 large U.S. employers conducted in mid-February 2009 revealed that 56 percent have a hiring freeze in effect, an increase from 47 percent in the December 2008 survey.

And 60 percent of the 308 Human Capital Institute (HCI) members surveyed by HCI and Workscape in February 2009 have frozen or reduced base salaries in response to the economic downturn.

But experts say the lack of a pay increase is no reason to abandon performance appraisals.

There’s an assumption that the reason we do performance appraisals is for compensation purposes, says Dick Grote, founder of Grote Consulting and author of Forced Ranking: Making Performance Management Work (Harvard Business School Press, 2005) and several other books on performance management. “That’s a bad assumption.”

“The real reason we do performance appraisals is because it’s an ethical obligation of leadership,” Grote told SHRM Online. “Every person who works for an organization wants the answer to two questions: “What is it you expect of me, and how am I doing at meeting your expectations? That’s why we do performance appraisals.”

“The fact that there are no merit increases has no bearing on that obligation,” he says.

The Perfect Opportunity

“Performance and solid execution are probably more important now than ever,” says Greg Szymanski, SPHR, a SHRM member and director of human resources for Geonerco Management, Inc., a real estate development and construction company in Seattle. “Appraisals provide a way to define performance, and a path to success, and are one way to keep people focused on what they can control—the execution of their job—instead of what they can’t control—the constant stream of bad news being blathered all over the media.”

“The performance appraisal is a perfect opportunity to provide feedback to employees on where they stand and their expectations for the near future,” says Lane Transou, SPHR, manager of benefits and compensation for Parker Drilling Co. and a member of SHRM’s Total Rewards Special Expertise Panel. “Doing performance appraisals now in this economy may be the best opportunity to have honest conversations with employees where they will really listen.It may in the long run build a higher level of commitment from your employees.”

“Many companies have developed more effective performance management processes that serve several objectives, in addition to supporting pay decisions,” says David Insler, senior vice president of Sibson Consulting. “Accordingly, they will continue with the appraisal regardless of whether there is a normal budget, a reduced budget, or no pay action at all.”

The discussion of what is expected going forward is most critical in difficult economic times, according to Insler. “In these situations, companies must provide focus and reset priorities from the top to the bottom of the house.”

But there are other benefits to accurate, up-to-date documentation.

“In difficult economic times, it will be critical for companies to have supporting information for making hard employee decisions,” Insler says, such as layoffs and restructurings.

Such information can also be used to defend claims of discrimination.

“You know with any kind of reduction in force you are likely to get some challenges,” Grote adds. “One of the best ways to address challenges is to use the performance appraisal process.”

Knowing What to Expect

One possible downside to conducting appraisals during a business downturn is that employees might not be listening to the feedback or want to focus on performance expectations if they believe the company is in financial difficulty or that they may be losing their job, Insler says. “While that may be the case, it is just such a challenge that makes the performance management process an important tool.”

That’s why a shaky economic climate offers an ideal opportunity for managers to encourage employees, Grote adds. “Unlike a year ago when the economic skies were blue, right now everybody is nervous about his or her job.”

“We hold managers accountable for conducting 360-degree feedback and for writing and delivering performance reviews and development plans regardless of whether merit pay increases are available,” says Terri Allender, CCP, GPHR, director, sales compensation programs for Autodesk, Inc. and a member of SHRM’s Total Rewards Special Expertise Panel.

“We believe there is high value in this process through managers acknowledging and reinforcing the behaviors of high performers and addressing performance issues in low performers,” Allender told SHRM Online. “It’s a great opportunity to re-recruit and re-engage employees especially in challenging economic times.”

Such efforts might also pay off when times improve, Grote says. “Right now your best talent—your ‘A players’—really need to be told that the company values them,” he says, because no matter what the unemployment rate looks like, they will always have options. “The performance appraisal is the ideal time to deliver that message.”

‘B players’ should be given as much peace of mind as possible, he says, and ‘C players’ should be given a wake-up call, such as “You really do need to change because you can’t just go someplace else right now.”

“The conversation is almost always an effective tool for looking forward and setting expectations. It is also a tool to give the employee an opportunity to suggest opportunities for improvement,” Insler adds.

Reframing the Dreaded Appraisal

According to research conducted by OnPoint Consulting, only 44 percent of 441 line managers and 45 percent of 115 HR professionals surveyed believe that their companies’ performance management systems deliver value to the business. Moreover, only 43 percent of line managers and a surprising 46 percent of HR professionals believe the time spent on their performance management systems is worth the investment.

Grote says the performance management process in many organizations lack sophistication. “It’s an annual fill-out-the-form, sit down with Charlie, give him his 2 percent increase and say ‘see you next year’ sort of process.

“One reason managers don’t like performance appraisals is that nobody has ever told them in simple terms what the objectives for a performance appraisal conversation are,” Grote says. “It’s very simple. For those people that are doing well, and that’s the great majority, the object of the performance appraisal discussion is for the manager to say ‘thank you.’”

For the small group of people who are failing to meet expectations, either in terms of behavior or results, Grote says the key message is not “I need to thank you,” but “I need to warn you.”

However, managers can increase the likelihood that the performance appraisal conversation will be a good one by communicating expectations at the beginning of the year—and repeating them often—rather than waiting until performance appraisal time to do so.

According to OnPoint, some of the factors needed to ensure successful performance reviews include:

• A focus on the quality of the dialogue between the manager and employee, not on the form or the process.
• Managers who are skilled at setting clear and measurable performance goals and providing coaching and feedback.
• A scale that includes behavioral descriptions of what good performance looks like at the competency level.
• Qualitative comments that support the ratings given.

Above all, the focus of the conversation should be performance—not pay.

To that end, Grote says, he always recommends keeping the discussion about pay and the discussion about performance separate—ideally by weeks or months.

But if an organization prefers to marry the two conversations, Grote says the manager should announce the pay increase first so the rest of the conversation can be focused on the employee’s performance.

“No matter how good of a job we do, performance appraisal will always be difficult because it requires managers to do something they’ve been told all their lives not to do— to be judgmental,” Grote says. “The good news is that the judgment in the great majority of cases is going to be good news.”