How to Update Compensation Without Performance Ratings

GE becomes the latest major company to remove ratings from its performance appraisal system.

Earlier this year Goldman Sachs did away with numeric ratings, which are thought to have a negative impact on employee motivation. But for many companies, removing ratings puts compensation into a black box — employees don’t know how their raises and bonuses will be decided, possibly undermining the goal of removing ratings.

Organizations successful with removing ratings reimagined the whole performance management system. Click To Tweet

In NeuroLeadership Institute’s “Future of Performance Management” webinar last week, David Rock and Brian Kropp discussed the current debate on ratings. Organizations that were successful with the transition reimagined the whole performance management system rather than just cutting ratings, Kropp said. Here are some ways you can determine compensation without annual performance ratings.

Self-Driven

Employees who decide their own compensation are more invested in their company and have higher performance, according to Lisa White, CEO of White Andreetto. They also are very unlikely to complain afterwards in such a system.

In a world where commodity roles are increasingly being automated, companies are also then dependent upon employee engagement.

“In a world where commodity roles are increasingly being automated, and employees are required to be highly-skilled, innovative and customer-centric, companies are also then dependent upon employee engagement,” White says.

Companies trying to retain top talent will find this strategy especially applicable. Employees know the easiest way to get a raise is to switch companies. If it’s important to your business to retain talent for more than two years, let employees who know their market rate to self-select themselves for a raise, and both the company and employee will benefit.

Manager Bucket

The biggest trend with compensation is giving managers discretion to manage it with a budget, NeuroLeadership’s David Rock said in his recent webinar.

Managers already use discretion when, for example, there isn’t enough money to give all top-rated employees the top raise. This forces managers to make a case for why one performer deserves a bigger bump than another. In GE’s memo to employees about eliminating ratings, they said “managers told us they were still able to make talent decisions.”

Companies are advised to give best practices to managers on how to divide up compensation among their team. Research shows team performance matches a power law distribution more than a bell cure — managers should be empowered to distribute raises accordingly.

“You need to really understand what each team is contributing to the overall business and drill down to who are they key contributors,” says Corissa Leong, VP of human resources at Fareportal.

Formula Based on Company Metrics

Some companies are shifting to more frequent compensation discussions. The purpose of rewards are to increase performance. Human nature shows that the closer a reward is to a behavior, the greater influence it has on increasing that behavior. So, instead of waiting for an annual review, companies can choose to reward top performers in real time. Performance and development should lead to promotions and increased responsibilities (and, of course, increased pay).

You need to really understand what each team is contributing to the overall business.

Meanwhile, standard raises can be tied to company outcomes. Jen Teague, a staffing and on-boarding coach, suggests a formula for raises that includes salary, years of service and net revenue. This aligns an employee with goals of the organization as a whole.

“Create tangible criteria for justifying the raise. This allows you to reward top performers while protecting the organization from claims of favoritism or discrimination,” says Randy Pennington, president of Pennington Performance Group.

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