As I’ve mentioned in previous blogs, though removing scores from the performance assessment process can improve employees’ focus on performance improvement, it also presents a challenge to managers who must still somehow determine employee rewards.  I recently spoke with a billion dollar technology firm that abolished performance scores, but also uses a ranking process to award merit increases and one-time bonuses for high performing employees.  I will explain each of these components below. 

Ranking Process
During the performance review period, the business unit general manager and his/her direct reports rank and distribute all employees based on contribution and criticality to the business.  They divide the employees into three groups: exceptional, satisfactory, and new employees/current employees needing improvement.  Business leaders are given leeway in the ranking process – there is no bell curve into which each business unit’s employees must fit.  A large number of employees can be in the exceptional group if they are all performing really well.  These rankings are not shared with employees.

This ranking serves to help with merit increase decisions, document employee performance (should the organization need it for legal reasons), and provide an additional input into the succession management process.   

Merit Increases
Business unit leaders use the ranking process to help decide merit increases.  This particular organization is fiscally conservative, meaning leaders have limited budget for merit increases.  Therefore, business unit leaders may not spread this budget across a large number of employees.  Instead, they must provide a meaningful increase to only their highest performers.  These high performers are identified through the ranking process; however, just because someone was identified as a high performer does not guarantee a merit increase.  Merit increases are only given out to select high performers, who may be at the very top of the ranking process or have made an especially valued contribution to the business.  The CEO of the company thinks it is so critical to only differentially reward the highest performers that he personally reviews every merit increase in the organization. 

One-time Bonuses
To reward work on specific projects or goals, managers can award one-time bonuses to individual contributors making significant contributions to their projects or to managers whose teams have met their goals.  These rewards do not only go to employees who are in the “exceptional” group.  As long as the employee has made a contribution that really matters to the business, they are eligible to receive the one-time bonus.  Managers consult with leaders prior to giving these bonuses to ensure the accomplishment is sufficiently large.

Implementing this three-part system has produced positive results, including that: 

• Merit increases are not generally expected by employees in the organization, because they are rare.  As a result, performance appraisal conversations do not discuss salary at all.
• Merit increases truly reflect important individual contributions. 
• Strong performance is rewarded sooner through immediate one-time bonuses, creating a stronger tie between accomplishments and rewards.

While this organization reports that this process works well for them, there are a number of things you should consider before implementing a similar process at your organization.

• How will your organization keep employees engaged? 
  Organizations need to recognize the contributions of employees.  This organization uses its one-time bonuses frequently, which helps keep employees motivated.  Other employee benefits (development, flexible work arrangements, etc.) for employees could supplement a reward scheme.  Further, an employee recognition program, with benefits that employees value, could also be used to help keep engagement levels up.  

• How will you keep compensation competitive? 
  While competitive compensation is not sufficient to keep employees engaged, it is necessary.  Some organizations annually benchmark salary levels and adjust them regularly.  Frequently, these organizations will pay above the 50th percentile of the salary band to ensure employees are paid competitively.  An important part of this process, though, is communicating these efforts to employees—there is no sense in paying at the 60th percentile if employees do not appreciate the extra effort the organization is making to ensure salary levels are competitive.

Another option is a standard cost-of-living increase that keeps salary levels commensurate with others in the industry.  Alternatively, additional salary banding within job families – and frequent promotions – could keep employees’ salaries healthy. 

• How would confidential rankings impact your culture?
  Organizations are increasingly becoming more transparent, be it about who is a high-potential employee or the strategic goals the company has for the coming year.  With this move away from confidentiality, how would a confidential ranking process impact your company’s culture?  Will it just leave employees’ wondering what managers “really” think about them? 

An option to overcoming this challenge is to use a performance distribution, instead of a ranking, and to share it with employees.  When employees receive merit increases or other bonuses, explicit reasons for those rewards should be given to make it clear exactly which behaviors are being rewarded.    

What do you think?  Are there are other challenges or benefits you can see with this particular way of abolishing performance scores?  I welcome your comments.

As always, if you know of or are part of an organization doing innovative work in performance management or workforce planning, please let me know.  I will be launching an industry study on performance management in the autumn, and will be looking to interview dozens of companies during that initiative.  All conversations that can add to that research are most welcome.  I may be reached at stacia.garr@bersin.com.