In the human resources world, we talk all the time about ditching, killing, abolishing, etc. the performance appraisal. And I understand that the concerns about the effectiveness of the performance review are very real. But I ran across this article on the blog Get Rich Slowly that really showcases a facet to the issue that we’re not talking about.
Pay increases.
Many organizations tie pay increases to the annual performance review process. If the annual review goes bye-bye, what happens to the pay increase part?
My guess is that the one thing employees like about the performance review process – besides really good constructive feedback – is the pay conversation. They like it for two reasons: 1) because it’s about their pay but 2) because they don’t have to prompt the conversation. Employees know that once a year, they get to talk about pay.
No one likes asking for a pay increase.
Even when employees know they deserve more money, it’s a hard conversation to have. I remember many years ago, being the director of human resources at a location where I knew I wasn’t being paid competitively. I loved my job, but the pay was low. Finally, our corporate offices issued new compensation pay ranges and we were given the task of making sure that every employee was paid appropriately within their pay range. My boss came to me and asked if anyone was being paid below the range. I said yes, we had one person who was paid below the range. Only one person out of hundreds of people. He asked who. And I struggled to say it was me! Even when I had all the data to back it up. (Side note: I did get my pay adjusted. But the point is…talking about money is hard.)
As organizations start to have conversations about the performance appraisal, they need to remember all the other processes that are tied to the performance review. The annual review is not a stand-alone process. It impacts other things in the organization, like pay increases.
Companies also need to get prepared for more pay-related conversations outside of the annual performance review. For years, managers have been able to postpone pay-related conversations by telling employees, “Let’s address that during the annual performance review.” That’s not necessarily a bad thing. It was an opportunity for a manager to do their homework and possibly request additional monies for an employee. With the elimination of the annual review, the annual money conversation changes.
We’re asking employees to take more ownership in their careers. We want them to be self-managing and accountable for their training and development. Next on the list will be initiating the pay conversations. The question becomes are companies and managers ready?
Image taken by Sharlyn Lauby during a fun afternoon at the Las Vegas Neon Sign Graveyard
1
Adena DeMonte says
Hi Sharlyn. Great post! It’s important to note that removing the annual performance review does not get rid of pay raises at all. There are a lot of problems with the annual performance review’s inaccuracies that usually many people who don’t get pay raises or promotions actually deserved them. In an ongoing feedback system with more frequent check-ins, pay raises can be offered on a more regular basis. This is actually more motivating to employees – for example, instead of getting one $10,000 raise once a year (or nothing at all), what if you could obtain a $2.5k raise each quarter? I work for a modern performance management company called Reflektive and we work with our clients to help them determine the right promotion models for their cultures – whether that be once a year (but more accurate due to ongoing feedback/data) or more frequently. Removing the annual performance review definitely does not mean removing pay raises. If anything, it means helping managers provide more frequent pay raises when they are deserved for great work!
Sharlyn Lauby says
Hi Adena. Thanks for the comment. On one hand, I agree that an ongoing feedback system could create more opportunities for pay increases. Possibly. The cynical side of me wonders though, if employers are stingy with their dollars, will employees have to raise the question multiple times during the year? Will they have to be that “squeaky wheel” just to get the raise they’ve earned? So instead of having one tough conversation a year about compensation, now an employee has 3 or 4.
Hopefully, as companies think about changes to the annual review, they also think about changes to the other systems that are tied to it.
Ann Bares says
Hi Sharlyn. Thanks for raising a good question about the connection between performance reviews and merit increases.
In my experience, at least initially, companies who ditch formal performance ratings/reviews leave their annual merit increase opportunity intact. So – in the short term – there is usually still a “regularly scheduled” chance for a salary increase – often supported by a new “developmental/forward looking” performance conversation. In the long-term, however, I’m not sure this is a combination that works. If you’ll forgive my sharing links, see a few posts I’ve written on exactly this question and challenge:
http://www.compensationforce.com/2014/06/are-trends-converging-to-finally-end-merit-pay.html
http://www.compensationcafe.com/2015/06/pay-differentiation-without-performance-ratings-losing-ticket.html
Sharlyn Lauby says
Thanks for sharing Ann. Your expertise is always welcome!