Tying Performance Ratings to Compensation, And Other Poor Practices

Smuruthi Kesavan
Published on 
Apr 27, 2023
Performance reviews are critical to performance management, but traditional approaches can have several drawbacks. Tying performance reviews to benefits can create a culture of competition and demotivate employees, while annual reviews often fail to provide timely and actionable feedback. What's the alternative?

In 2018, Atlassian said it would phase out yearly performance evaluations in favor of continual dialogue between employees and supervisors. According to the organization, the old performance evaluation method was time-consuming and needed to offer timely feedback.

Employees have regular check-ins with their bosses under the new approach, often every six weeks, to review their work, receive comments, and create goals. The check-ins are organized around questions covering objective progress, recent work comments, and development prospects. 

Atlassian has detached performance evaluations from remuneration negotiations and abolished traditional performance reviews. This implies that a performance evaluation does not affect an employee's compensation or bonuses. Instead, pay choices are influenced by various criteria, such as market standards, internal equity, and individual success.

Atlassian's approach to performance management has influenced the company's culture and productivity. According to Deloitte research, Atlassian workers reported improved levels of engagement and performance following the implementation of the new performance management system.

People at Atlassian reported feeling more encouraged in their professional growth and having more regular and meaningful talks with their superiors.

Atlassian's approach to performance management exemplifies how firms may foster a more agile and feedback-driven culture by abandoning traditional performance assessments in favor of continuous development and improvement.

But why did Atlassian do away with its traditional performance review method?

The problem with annual performance reviews

One of the primary issues with yearly performance evaluations is that they frequently fail to offer employees timely and valuable feedback. Managers miss out on providing comments that may help individuals grow in real-time instead of waiting a year to review their performance.

Moreover, negative comments or a lower-than-expected grade in yearly performance evaluations can demotivate staff. This is especially true when the performance assessment is linked to remuneration since it might give the impression of injustice or a lack of openness.

As Ethan Bernstein and John Bunch, researchers at Harvard Business School, note -

"Annual reviews can be an inaccurate representation of an employee's contributions, and they fail to provide the timely, specific feedback employees need to improve."

The connection between performance assessments and rewards emphasizes short-term success rather than long-term growth and development. Teams may feel pressured to meet specific objectives or targets to obtain a higher grade or bonus, even if these goals do not correspond with the organization's overall strategy or principles.

Additionally, the relationship between performance assessments and perks might foster a competitive rather than collaborative culture. Competing against one another for higher ratings or incentives can lead to distrust and an emphasis on individual accomplishment rather than team success.

"When people are incentivized in a way that rewards individual performance and punishes underperformance, they're more likely to compete with their colleagues than collaborate with them."
- A study by McKinsey & Company

The issue with yearly performance assessments connecting them to benefits is that they can foster a culture prioritizing short-term outcomes, competitiveness, and individual achievement above long-term growth, cooperation, and organizational success.

What should companies be looking for?

The traditional performance reviews stemmed from the way organizations worked previously. It was hierarchical, the rate of change was negligible compared to the changes organizations face today, and companies once prioritized rigor over innovation and creativity. 

The scenario we encounter now is entirely different from what it was earlier. Companies still struggle to break away from traditional methods as everything must change. Let’s see what type of performance we should focus on as opposed to the one we’re concentrating on today. 

There are two different types of performance—tactical and adaptive. Tactical performance refers to an individual’s ability to complete their responsibilities. These talents are examples of following established protocols, meeting deadlines, and creating high-quality work. Tactical performance guarantees the smooth and effective execution of an organization's day-to-day activities.

In contrast, adaptive performance refers to an employee's capacity to adjust to changing conditions and take on new responsibilities. This involves problem-solving, creativity, and collaborative abilities. 

Adaptive performance is critical for firms operating in rapidly changing settings because it helps people to adjust swiftly to new conditions and opportunities.

Both tactical and adaptive performance are critical for organizational success, and they necessitate different skills and competencies. Yet, because tactical performance is simpler to assess and control, many firms prioritize it.

Adaptive performance is becoming increasingly vital today as technological developments and worldwide rivalry drive rapid change. Companies want people who can adapt to new technology and working methods and successfully interact with others to solve complicated issues.

Furthermore, COVID-19 has emphasized the significance of adaptable performance, as many firms have been forced to swiftly adjust to remote work, new safety rules, and changing consumer expectations.

This entails investing in training and development programs that assist individuals in developing skills like problem-solving, creativity, and cooperation and fostering a culture that values and promotes adaptable performance.

Transforming performance-based compensation: The benefits of a simplified and objective approach

Lear Corporation, a global provider of automotive seating and electrical systems, had difficulty managing its complicated performance-based compensation system based on a matrix of individual and team performance measures. Employees believed their compensation was frequently unjust and arbitrary, and the system was difficult to understand and administer.

To address these concerns, Lear created a new pay structure based on a single, objective metric: the company's financial success. Under the new approach, regardless of individual success, all employees are eligible for a bonus based on the company's earnings.

There are various advantages to the new compensation scheme. For starters, it is simpler and more transparent, making it easier for employees to comprehend and managers to manage. 

Second, it fosters a sense of shared ownership and responsibility for the company's success, which aids in aligning workers' interests with the company's aims. Third, it removes the possibility of prejudice and subjectivity in performance evaluations, which can produce an unjust feeling and lead to demotivation.

“Forms aren’t the problem. What turns reviews into a blame game is the link to compensation. Sever that link, and you’re on the way to creating a review system to open up the channels for real feedback throughout the organization.”
- Tom DiDonato, CHRO, Lear Corporation

Lear's choice to ditch its old performance-based compensation structure in favor of a simpler, more transparent approach was a success. The new method has boosted staff morale, promoted cooperation and teamwork, and contributed to the company's financial performance.

Untangling the role of compensation in performance management

Pay may motivate employees, but it must be tied to fair and transparent performance. 

Companies should examine market standards and internal equity when creating pay systems to ensure that remuneration is connected to performance fairly and transparently. According to a Willis Towers Watson poll, 82% of businesses use market data to establish pay levels, while 74% utilize internal job assessments to assure fairness.

Moreover, businesses should be open about compensation choices and the factors used to set pay levels. 

"If you want to establish a high-performance company, you have to pay employees fairly and have a clear and open process for setting compensation." 
- Patty McCord, former Chief Talent Officer at Netflix

It is crucial to highlight that employees have motivations other than pay. If you want to create a high-performing team, you need to decouple compensation from it. Though pay might be one of the factors, it is not the only factor. Research has demonstrated that the key motivators are autonomy, mastery, and purpose. 

According to Deloitte research, "those who are intrinsically driven are more engaged, productive, and inventive than extrinsically motivated."

Additionally, pay structures should be determined by crafting an organizational structure, creating pay bands, looking at the trends, and ensuring that it closes market gaps. You need to craft a progression module for every individual in the organization, the next step they can grow into. 

While pay may be a powerful motivation, it shouldn’t be tied to only performance. Businesses should design compensation systems with market standards and internal equality in mind and be clear about how to make pay choices. 

Moving to a feedback focussed system

One of the most important advantages of a feedback-focused review system is that it creates avenues for genuine input throughout the business. Companies may foster a culture of continuous growth and learning by delivering timely and honest employee feedback. 

According to Harvard Management School professors Ethan Bernstein and John Bunch -

"Getting criticism on an ongoing basis can be more helpful and less frightening than a one-time annual assessment."

When performance assessments are linked to pay, employees may believe that their income and position are at stake, which can lead to a defensive or competitive mentality. Companies may develop a more open and collaborative review process by separating criticism from reward. 

A feedback-focused review system can alleviate money and status worries, allowing for a more constructive review process. 

"When there's no relationship to salary, feedback may be more relevant and focused on growth." 
Cathy Benko, Vice Chairman and Chief Talent Officer at Deloitte

Another advantage of a feedback-focused review system is that it may aid in developing a culture of trust and openness. People who believe they may share feedback with their bosses and coworkers without fear of reprisal may engage in more open communication and collaboration. 

Groove, is a small software company based in Baltimore, Maryland. Groove moved away from traditional performance reviews and instead implemented a system of weekly one-on-one meetings between employees and their managers, focused on providing feedback and setting goals.

As Groove CEO Alex Turnbull noted in a blog post - 

"We realized there were better ways to motivate and guide our team than with annual reviews that looked at the past. By having regular conversations focused on what's happening now and what's coming up next, we can ensure everyone is on the same page and moving in the right direction."

The review system at Groove has had several benefits, including improving communication and collaboration, increasing employee engagement and motivation, and promoting a culture of continuous learning and improvement.

Turnbull says, "We've seen a huge boost in employee satisfaction and motivation since implementing the feedback-focused system. By giving employees more control over their own development and encouraging them to take ownership of their goals, we've created a more empowered and engaged team."

A feedback-focused review system may provide various advantages to businesses, such as opening channels for simple input throughout the company, alleviating worries about money and status, and fostering a culture of trust and openness.

Companies can foster a culture of continuous improvement and learn by concentrating on offering timely and honest feedback, which can lead to increased employee engagement, productivity, and creativity.

Feedback-focused review system is the way to go

Performance reviews are critical to performance management, but traditional approaches can have several drawbacks. Tying performance reviews to benefits can create a culture of competition and demotivate employees, while annual reviews often fail to provide timely and actionable feedback. 

However, by adopting alternative approaches such as ongoing feedback and check-ins, peer feedback and assessment, continuous learning and development, and skills-based reviews, companies can provide more timely and effective feedback, focus on development and growth, and emphasize skills and competencies over job titles and tenure. 

By implementing a feedback-focused review system, companies can promote a culture of trust and transparency, improve communication and collaboration, increase employee engagement and motivation, and promote continuous learning and improvement. 

About the Author

Smuruthi is a dedicated Senior Content Strategist with a focus on performance management within the B2B SaaS landscape. Specializing in crafting informative content, she delves deep into the dynamics of enhancing organizational performance. When not immersed in content strategy, she enjoys reading, writing, travelling and gardening.
Smuruthi Kesavan
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