HR Leaders

Ernst & Young Splits Compensation and Performance Reviews

In the trend towards continuous performance management, many companies are asking how to approach compensation, reward and promotion decisions without a traditional annual review.

The argument for splitting performance management and compensation into separate processes is that it allows performance management to focus on learning and career development for employees. The downside is that if employees aren’t given a clear explanation on how their compensation will be decided, how can they trust they will be rewarded for their contributions?

According to a report in The Australian Financial Review, Ernst & Young is testing a new system to split pay from performance.

People are running away from ratings so fast they’re not appreciating what fills that gap.

The new program is being run with around 250 junior staffers, and allows the firm to grant salary increases independently of performance feedback. Last August, head of human resources McGregor Dixon told the publication he was skeptical of companies that gave up performance reviews completely.

“While I love this new approach everyone is talking about, one of the risks is that it gives people an excuse not to have a discussion at all,” Dixon said.

“People are running away from ratings so fast they’re not appreciating what fills that gap.”

Goldman Sachs opted to keep doing an annual review without ratings, and shifted it up to the summer instead of fall in order to incentivize employees to show improvement before end-of-year bonuses are decided.

A recent study by CEB found that employees distrusted pay increases that were not clearly linked to a performance rating, saying they felt managers would play favorites. (Keep in mind people generally resist change and it may be too early to tell the true results of ditching performance ratings.)

Employees and managers are already thinking beyond annual compensation in this space.

For employees, the benefit of an annual review is that it ensures they’ll be given a shot at a raise at least once each year, although a report from GE indicates that might not continue to be the case. GE’s head of executive development told Bloomberg they are “being flexible and re-thinking how we define rewards, acknowledging that employees and managers are already thinking beyond annual compensation in this space.”

The shift towards real-time feedback and ongoing development is continuing to grow, with many companies looking to these early innovators for results. Already, Deloitte’s pilot of a new performance management program increased employee engagement by 30 percent. Splitting compensation and performance management is a good move, but threatens to demotivate in the short-term unless employees are given transparency into compensation decisions and feel they are being rewarded, whether that’s on an annual schedule or more frequently.

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