Why you should detach pay from performance

We know many employees despise performance reviews, so why hasn’t the system been revamped? We look at a Fortune 500 company that turned appraisals on their head.

Why you should detach pay from performance
What do HR departments at Microsoft, Adobe and Lear all have in common? They’ve all revamped traditional performance reviews in favour of alternative feedback systems.

The deck is stacked against performance reviews, with study after study showing they’re a serious threat to employee engagement and company efficiency. A 2005 survey by People IQ found 88% of employees agreed performance appraisals gave them a bad opinion of HR. And an Impact/HR Marketer report claims 63% of executives believe the performance review process is focused on delivery and not actual results that impact the bottom line.

According to Professor Samuel Culbert at the UCLA Anderson School of Management, traditional performance reviews facilitate dishonesty between employees and managers. “The employee is stuck trying to hide (mistakes) from the boss because their pay, promotion and assignments depend on it,” he said. “There are engineers who received (perfect) fives at the nuclear facility in Japan that didn’t tell their bosses what was going on.”

Culbert recommends ditching traditional appraisals in favour of what he calls a ‘performance preview’, which constitutes “keeping one another informed … so that people learn what’s going wrong when there’s still time to correct it, not after the fact when disappointments have happened”.

One company that embraced an alternative system is Lear, which disconnected pay increases from performance appraisals in 2010. Chief human resources officer Tim DiDonato also rebuilt their entire appraisal system by slashing paperwork and changing the scope of review meetings to focus on past results, future work, and soft leadership skills. “I’m not saying we sugar-coat discussions; I’m just saying we have them more often and more focused,” said DiDonato. “Real pay-for-performance comes through advancement, not through merit increases.”

Start with a pilot group: Test a new system on a small group within the company, and compare feedback from the pilot group to the rest of the company. It’s a smart way to prove to decision-makers that change is necessary, according to DiDonato. “If I would’ve gotten a lot of resistance I would have done it in a second that way,” he said.

Make assessments more regular: Every organisation will have its own needs, so Culbert is reluctant to prescribe deadlines for feedback talks. His book, Performance Previews, simply recommends that these conversations happen regularly. But if you’re looking for something more structured, take inspiration from Lear’s process, which mandates that employees meet their managers four times a year to have these conversations.

Train managers to give good feedback: DiDonato said it took four to six months to train managers across Lear’s 120,000 employees in 36 countries for the new system. And though it’s a significant investment, Culbert emphasised that many managers don’t know how to have effective feedback conversations. “Bosses should be giving questions instead of directives,” he said. “Managers are not getting the conversations they need to be good managers.”

Design a process that employees can own: At Lear, the process is driven from the bottom up, so employees prompt their managers for the meeting rather than the traditional push from above. “We said ‘nobody cares about your career more than you do’, so people got more comfortable,” said DiDonato. The company averages about 80% compliance without any push from HR, but to increase that rate, DiDonato said they will begin sending reminders to all staff.

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