As I mentioned in my last blog, I’ve spent a lot of time recently researching how organizations can adopt a coaching and development model of performance management. One of the most-asked questions on this topic is how to implement a coaching and development model while still maintaining a compensation system that differentially rewards employees. In my discussions with members, I have heard some good examples, and so want to share them today.
The Two Models of Performance Management
Our research shows that there are two “schools of thought” in the world of employee performance management. One, the “competitive assessment” model, assumes that organizations improve through a process of “rigid individualism” where employees are ranked and rated against each other, driving performance on a comparative basis. The other model, the “coaching and development” model, assumes that people best perform through careful selection, then coaching, development, and continuous focus on job fit. According to our research, the latter approach is most prevalent today, used by approximately two-thirds of companies.
Companies that use the coaching and development model believe that by identifying the strengths and weaknesses of employees, they can coach and develop employees to increase performance and retain the best talent. The focus is much more on management than assessment, with the underlying belief that ongoing coaching will reveal and enhance the employee’s level of performance. These organizations tend not to use forced ranking or distributions. Instead, they focus on encouraging managers to more actively coach employees throughout the year, with both manager and employee engaged in a dialogue about the employee’s performance. By end of year, the performance assessment is a record of the employee’s performance, and not a surprise to either party. Recognizing that this type of ongoing coaching is not necessarily easy, Archer Daniels Midland (ADM), has created a coaching program specifically designed to help managers understand how to have these coaching conversations. I will be publishing a case study on this program in Q3.
Ratings and Rewards
While many organizations are moving to the coaching and development model, they are challenged with how to link performance to compensation in a system that does not rank and rate employees. My research has shown that one solution is to move to a simpler performance rating scale, typically a 3-point scale of “Exceeds,” “Meets,” or “Does not meet.” This makes it easier for managers to determine performance levels, reducing the need for ranking and calibration.
Let me give you an example of how this works at a global financial services company using the coaching and development model:
“Exceeds” or “Does not Meet”—For employees whom managers want to assign either the “Exceeds,” or “Does not Meet” category, managers must clearly articulate to their peers the reasons for the score, since these categories affect compensation and (for “Exceeds”) potential scores.
"Meets”—Employees who are at “Meets” receive a standard salary increase for the year, and may get individual additional bonuses or other rewards (development opportunities, flex time, etc.) throughout the year for work or a project especially well done.
This method of assessing and rewarding employees enables exceptional performance to be differentially rewarded, allowing the organization to retain those employees who drive exceptional value for the company. At the same time, though, it takes the focus off the end of the year review, and helps managers work on coaching their employees to better performance throughout the year.
Still other organizations using the coaching and development model have entirely avoided linking performance appraisal results to compensation. These organizations typically cite research (such as Alfie Kohn’s work in Harvard Business Review), which shows that financial incentives, especially when linked to performance, do not tend to motivate employees to greater effort over the long run, and actually can be a disincentive to employees. A $4.5 billion global staffing firm abolished performance scores entirely. They believe that since performance scores are usually linked to compensation, the conversation can never totally focus on performance – there will always be a foreign element that moves the conversation (or the employee’s internal thoughts) away from a pure focus on performance improvement. They still plan to differentially reward employees for performance, by embracing a system that follows the spirit of the 3-point rating scale:
Those whom managers deem to be exceptional (a very small percent of the population), will receive an additional compensation increase, as well as additional opportunities and other rewards (e.g., flex time).
Those who are clearly not meeting expectations will be put on a performance improvement plan, where performance is closely documented and there is a path to exiting the organization, if that is appropriate.
Those who are generally meeting expectations will receive a standard COLA increase, plus more if the company is doing well.
I will be discussing this company more during my upcoming webinar on July 28, in addition to publishing a research bulletin that discusses this topic in more detail later this summer.
As always, I would like to hear from you. If your organization is making or has made the transition from a competitive assessment model, where the focus was on performance appraisal and ranking employees against each other, to the coaching and development model, let’s talk about how you have made the transition. If your organization firmly believes that the competitive assessment model is the best one for your company, I would also like to hear more about that perspective. Please contact me at firstname.lastname@example.org.