Are you getting the most from your talent?

(1)

Are you getting the

most from your talent?

Understanding and overcoming

the common pitfalls in

performance management

October 2012

At a glance

Lack of organizational alignment around performance management programs often leads to employee dissatisfaction and disengagement

with the program.

Companies should decide on a clear performance management strategy and not “mix and match”

approaches.

By answering pivotal questions around program goals and strategy, company culture and necessary change, organizations can build far more effective performance

(2)

Today’s business leaders, HR departments, managers and employees all have

different expectations of performance management programs. This lack of alignment means that no one’s needs are being met. Instead of inspiring stellar

performance, these programs are achieving quite the opposite: frustrating

employees and wasting managers’ time and budgets.

To avoid these disappointing pitfalls and to get the value they expect from their performance management programs, companies need to answer three

pivotal questions:

1. Why do we want to have a performance management program? 2. Which performance management strategy best meets our needs? 3. How can we systematically implement each building block of our

selected strategy?

Instead of inspiring

stellar performance,

some programs

are achieving quite

the opposite

Introduction

For performance management to be effective, senior management

must make clear choices regarding the objectives behind performance

management and the level of effort spent on these programs. Without

that clarity, organizations are likely wasting precious time and money.

Program participation will be low, employees will be dissatisfied, and

managers will be ill prepared to guide their teams. Once alignment

is established and objectives communicated, however, organizations

will be ready to build performance management programs that are fit

for purpose.

(3)

Companies set up performance management programs for a range of reasons, from backward-looking evaluation of past performance to

driving innovation and team behavior.

Why do we want to have a performance

management program?

1_{PwC research, 2012.}

Figure 1: Performance management curve. The size of the circles indicates the number of U.S. companies at that point on the curve by order of magnitude.

The rationale for the performance management program determines where a company falls on the performance management curve

in Figure 1.1 Manage disciplinary and low performance issues Determine compensation awards and incentives

Identify and engage top talent

Drive long term talent development

Serve as transformational agent for organization

• Many organizations • Inconsistently administered

across the organization

• Many organizations • Seldom based on a robust

competency framework

• Some organizations • Yield varying results based

on strength of participating leaders and consistency of established competencies

• Few organizations

• Goals are aligned to corporate strategy and cascade to rest of the organization

• Few organizations • Serves as change catalyst

for the organization that helps drive implementation of organization initiatives

Reactive

(4)

of this problem. Less than half (45

percent) of employees in one survey said their manager’s feedback at the annual review was fair and accurate,2 and in another, more than half the respondents felt their managers were

ineffective at driving performance.3 Underscoring this is the fact that managers devote up to 20% of their time on coaching and performance reviews,4_{but are many times}

ineffective in this role. In one survey, 65 percent of senior HR leaders cited

“managers’ ability to coach” as their

top performance gap.5

These results point to the importance

of clearly defining and communicating

the rationale for the performance

management program. Lofty messaging

about transformation and culture, coupled with a seemingly arbitrary evaluation process and poorly delivered coaching and feedback, will inevitably lead the workforce to distrust both the program and the organization’s

commitment to their progress.

Most companies adopt a reactive posture and use annual performance reviews to inform decisions regarding incentive compensation and

promotions, and accumulate data for potential disciplinary actions

(left end of the curve in Fig. 1). True,

these programs are reactive, yet there is nothing inherently wrong with their limited scope if the company’s

needs are met. Frustration and loss of

alignment across stakeholders often occur because organizations: • Inconsistently communicate or

apply the program principles

• Claim to be higher on the curve than they really are

• Fail to build the capabilities required

in their leaders and managers Recent studies highlight the magnitude

2_{Cornerstone OnDemand/Harris “2012 US Employee Report”, December 2011.}

3_{Sibson Consulting, 2010 Study on the State of Performance Management, October 2010.}

5_{Sibson Consulting, 2010 Study on the State of Performance Management, October 2010.}

Lofty messaging,

coupled with poor

coaching and

feedback, will

inevitably lead the

workforce to distrust

both the program and

the organization’s

commitment to

(5)

Take a company that has been successful at raising workforce participation and involvement in a performance rating system, as in

the Rater strategy. Now, that same

company is interested in moving up the curve toward a proactive performance

management strategy. How can it do that? The answer is to agree on

the capabilities its people need, understand workforce motivation and coach employees through ongoing dialogue and feedback—all

components of the Driver strategy. PwC has identified three performance

management strategies, each building on the foundation of the previous

strategy. Companies can use the

building blocks to identify gaps in their

current programs as well as to figure

out how to systematically move up the performance management curve

(see Figure 1). Right now, a primary

reason behind the frustration with these programs is that companies mix and match building blocks from different levels without setting a solid

foundation first.

Which performance management strategy

best meets our needs?

Individual &

Team-based Business Lead

Motivation &

Rewards Ongoing Dialog

Process & Technology Participation Program Rationale Performance Objectives & Evaluation Capabilities & Skills Transformer Driver Rater

• Transformer: To boost team performance. Used as a catalyst for broad organizational change initiatives

• Driver: To improve individual employee performance and retention, and to accelerate development of employee capabilities • Rater: To define objective measures of

employee performance and efficiently assign basic performance ratings, often linked to compensation

Focus

Figure 2: Three performance management strategies. The Driver and Transformer strategies build on the Rater strategy.

(6)

• Integration. Raters typically integrate performance management and compensation processes,

and not much more. Drivers and Transformers require a firm grasp

of employees’ capabilities and skills and solid integration with learning

and development processes (at a

minimum) as well as with recruiting

and succession management. As

the focus on boosting individual

and team performance intensifies,

talent analytics becomes an

essential capability.

• Effort and cost. Relatively

speaking, the Driver and Transformer strategies require a larger investment in human capital

(e.g., enhancing the communication

and coaching skills of leaders and managers), far more time and greater technological sophistication

than the Rater strategy. None of the strategies is inexpensive. In fact, all can be expensive and time-consuming. This raises the

importance that companies answer

the fundamental question, “Is

the time, money and effort worth

the outcome?”.

Before selecting a strategy, companies need to recognize and internalize the

significant differences among the three

strategies in the following areas:

• Ownership. HR typically owns the

Rater strategy. With the Driver and

Transformer strategies, the business

is increasingly in charge. To boost team performance (Transformer)

at one high-tech company, the CEO notes that “we had to embrace… the importance of talent and culture

in achieving goals. It is not HR’s

responsibility, but the business

leaders’ responsibility. And that is where the CEO has a role to play.”6

• Communication. Raters may

have only one or two formal touch

points each year. Drivers and

Transformers establish a much richer, more frequent dialogue with their employees that includes both formal and informal elements

of coaching and feedback. Peers,

mentors, and other colleagues may be involved along with an

employee’s direct manager.

6_{Bill Roberts, “Juniper Networks is turning words on the wall into behaviors in action,” HR Magazine, March 2012.}

Companies

must answer the

fundamental

question, “Is the time,

money and effort

(7)

After companies select the strategy that fits their rationale for a performance

management program, they need to review each building block required

for that strategy. Some of the building

blocks may represent brand new initiatives, some may need revamping,

and some may work well as-is. Here

we will follow the same path as a company interested in the Transformer strategy—starting with the four Rater building blocks, working our way through the three Driver blocks, and

finally to the two Transformer blocks.

Rater strategy: Assessing

past performance

The building blocks of the Rater strategy include:

Program purpose. Defining and

communicating the purpose of the program is never a “one and done”

effort. Companies need to regularly

take the pulse of their workforce to ensure that leaders, managers, and employees are aligned on the rationale of the program and that they are

using appropriate tools and processes.

Though this is a seemingly obvious

step, it is often missed.

Performance objectives and

evaluation. Companies need to

translate and cascade corporate goals

down to individual employees. To do that, they may define two types of

performance objectives for them—

quantitative (the “what,” measured by meeting financial goals) and qualitative (the “how,” measured

by upward feedback, team-building

activities, volunteer activities). Further, they must decide how to

evaluate employee progress toward these objectives, how to weight

objectives (e.g., meeting financial goals

is “table stakes” while meeting a team development goal is a “differentiator”), and what inputs to include in the

evaluative process. The sidebar,

“The dark side of rewarding high

performance” delves into this.

Process and technology.

Many companies have established performance management processes, such as the simple Rater process of objective setting, mid-year review

and year-end evaluation. Elements

such as coaching touch points can be layered on as companies move up the

performance development curve. Over

time, companies typically increase the standardization of processes across business units and geographies to be able to compare “apples to apples”, and to better incorporate feedback and

approval steps into the workflow.

How can we systematically implement each

building block of our selected strategy?

(8)

The Dark Side of Rewarding High Performance

To rate or not to rate? Companies are increasingly asking this

question once they see the dark side of rewarding high performance. The idea behind ratings is that top performers will be motivated to put on their “game faces” in order to score better than their colleagues. Historically, this has been a

compelling argument, so companies have invested a lot of resources in

fine-tuning their programs. They

try to select the “right” rating scale

(four or five points?), and they

ponder the percentage of the total compensation package these scales should determine. They weigh the pros and cons of forcing or “targeting” ratings to a classic bell curve or, as is increasingly common,

to a skew-to-the-left curve for

high-performing workforces. Many organizations today use forced rankings, though that number has been dropping from the high water mark of the 1980s, when Jack Welch introduced the 20/70/10 split at GE (sometimes called the “rank and yank” method

of employee evaluations). One

reason for the decline of these approaches is the realization that rankings can actually reduce productivity, hamper collaboration and increase voluntary turnover. According to one recent study, up to 35 percent of respondents eased off in their work effort after

they received a bonus they felt

did not reflect their performance.7

And highly skilled employees are jumping ship to the competition when they receive good, but not great, performance ratings. This type of response is particularly common in highly competitive environments chock full of strong performers where differentiation between high and low performers is small.

To avoid this pattern of dissatisfaction and attrition, companies are dropping ratings and, in some cases, dropping the annual performance review

process altogether.

One Silicon Valley company, for

example, has implemented informal “conversation days”. Instead of giving employees grades for their past performance, managers focus on areas of new growth and aligning goals with the employees’ career path. Managers have more leeway regarding merit pay, within guidelines for occupational and geographical groups.8

And a large telecommunications company is trying another alternative to ratings—employees either “meet” or “do not meet” expectations. Again, the focus is on individual and team development, not on stirring internal competition.

7_{The Wall Street Journal, “Should I Rank My Employees?” April 7, 2009. Adapted from “The Wall Street Journal}

Guide to Management” by Alan Murray, published by Harper Business.

8_{Bill Roberts, “Juniper Networks is turning words on the wall into behaviors in action,” HR Magazine, March 2012.}

Most companies have put aside their Excel spreadsheets and adopted specialized software to enable their performance development

processes. Key features of these

systems include the ability to cascade goals, support complex matrix relationships and social networks, and integrate with HR software modules such as compensation, learning and development, and

succession management.

A simple and intuitive user interface

and mobile capabilities are increasingly important in driving positive user experiences and high

workforce adoption rates. For example,

giving a supervisor the ability to provide feedback from her smartphone increases the likelihood that she will provide real-time coaching to her

direct reports.

Participation. Though most U.S.

organizations complete annual performance reviews, many struggle to achieve anything close to full

participation in that process. If

employees and managers fail to see the value in the process—as most do—

they simply go through the motions.

Participants may check off the item on the HR compliance list; but with each passing year, the goals and capabilities of the workforce and the organization

(9)

Rating systems that are too granular or incorporate more than a handful of competencies seldom succeed as they

are difficult to maintain and explain to the business. And highly quantitative

competency ratings can result in

pseudoscientific performance ratings that are still subjective.

Motivation. What inspires

employees to go “above and beyond,” making that discretionary effort that ultimately results in exceptional

performance? There is much still to

be learned about motivation, but one thing is for sure—the answer is often

not money. Two-thirds of employees

surveyed recently claimed to be

dissatisfied by pay-for-performance.9

Increasingly, organizations are

exploring other motivational tactics, such as more autonomy, developmental support and a sense

of value. A large online retailer,

for example, successfully reduced voluntary turnover and increased productivity by eliminating its

minimum office hours and physical attendance requirements.10

Driver strategy: Boosting

talent development

The Driver performance strategy adds three elements to the Rater foundation:

Capabilities and skills. The

notion of “competency management” as a core element of strategic talent management programs has been around for a long time, and several well-established competency libraries

exist in the market. Even so, many

companies struggle to effectively

implement them. The two key

challenges are:

• Business alignment–Reaching agreement on which competencies to use

• Adaptation–Using the competencies in a consistent way and applying meaningful ratings to them

Frustrated with these issues, some

companies are experimenting with setting competencies aside and trying to infer development needs from

performance objectives. A better plan may be to define a simple, consistent (across geographies and units) set of behavioral and job-specific capabilities

and skills and use them to inform objective setting, development,

and evaluations.

9_{The Corporate Executive Board Company, “Driving a High-Performance Culture,” June 2011.}

10_{“U of M study shows Best Buy cuts staff turnover with flex schedule,” Minneapolis/St Paul Business Journal,}

Author-Ed Stych, April 6, 2011.

The Corporate Executive Board Company, “Managing for High Performance and Retention” January 2010.

Ongoing dialogue. Many

managers still struggle to effectively communicate with their teams, despite the tremendous importance such a dialogue plays in boosting employee

performance and retention. Fair and

accurate feedback, according to one study, drives 39 percent of employee performance and the quality of internal communications drives 38

percent of employees’ intent to stay.11 To boost the quality and frequency of the coaching conversations, one leading software company rolled out an intensive program to boost the quality and frequency of coaching conversations and encourage a more

collegial exchange. And a global

telecommunications company has increased its managers’ engagement in compensation activities by raising staff awareness about the manager’s

responsibilities in the process. Other

companies have started using social performance tools to create platforms

(10)

according to one study,13_{and only 15} percent of companies describe their employees’ goals as “very aligned with”

business priorities.

Certainly HR has a role in

disseminating goals throughout an organization; however, the day-to-day

Transformer strategy:

Changing team and

organizational behavior

The Transformer performance strategy adds two elements to the foundation of

the previous two strategies.

Individual and team-based.

Companies are increasingly addressing the trade-offs inherent in traditional performance measures that exclusively incentivize individual performance, sometimes at the expense of the larger

team. For example, moving to

team-based sales targets can inspire greater sharing of knowledge and collaborative problem solving, ultimately resulting in greater revenue than the time-worn

“every man for himself” approach. To

ensure all team members pull their weight, companies can put qualitative targets in place to measure each

person’s contribution to the team. Another way to drive team performance

is to formally hold leaders accountable

for team development. For example,

one leading professional services

firm sets specific objectives for their

leaders regarding team development and team members’ engagement and

commitment to the group.12

Business led. All too often,

employees have little idea of how they contribute to meeting the

corporate business goals. The data

are concerning—only 36 percent of employees understand the strategic direction of their organizations,

13_{The Corporate Executive Board Company, “Driving a High Performance Culture,” June 2011.}

The Journey from Rater to Transformer: A Case Study

A leading global oil and gas company decided to turn its lackluster performance management program from a check-the-box routine to a core business process with a laser focus on safety and risk management—a critical initiative for the future success of the organization. The primary rationale for the new program was to tie safety and risk management to employee rewards. Secondary goals included fostering teamwork and developing individual employee goals aligned with the company’s long-term strategy. Managers were also coached to cultivate better listening skills and to brainstorm with employees on creative

ways to help them reach defined

individual goals. Divisions scattered across more than 70 countries needed help in consistently developing and implementing

performance objectives.

Early results of the new program are highly promising:

• Approximately 25 percent

more employees identified a

development action to address one of their development needs. • The number of employees

who created objectives

with a clear timeframe for

completion increased.

• Employee compliance with

the objective-setting process significantly increased.

• Employee accountability for

objectives was enhanced.

• In the most improved business unit, the quality of the long-term priorities rose dramatically. Alignment of employee and

line manager objectives also

improved.

• In almost half of the business units, improvements were made in three critical areas: the cascade of business goals, the focus on safety and operational risk and the quality of

long-term objectives.

interactions with leadership really set

the tone and direction for employees. As the practice of continuous dialogue

and coaching spreads through an organization, goal alignment and leadership effectiveness are bound to

increase (see the sidebar “The Journey from Rater to Transformer”).

(11)

3. Take stock. Assess your current

performance management practices

against your objectives. For each

building block, determine whether

you need to change your approach. For example, determine whether

your processes and systems

enable sufficient participation

and dialogue, or if you need to

invest in a more “social” approach. Similarly, assess whether your

approach to ranking staff sends the

right motivational messages. Then prioritize a list of necessary changes.

4. Adjust. Based on your

prioritization, implement change.

Make sure to communicate “quick wins” to demonstrate early traction

and show business results (e.g.,

improvements in productivity) and

employee sentiment (how managers

and staff feel about the new

process). Use whatever strategy

you have chosen to create greater alignment with business executives

and leaders.

Ready to build a far more effective

performance management system?

Then take these steps:

1. Get real. Take a hard look at your

current practices and outcomes. Ask questions such as: How are

employees and managers perceiving the effort, and how well are they

participating? On balance, is

our current approach to rating employees helping or hurting our

efforts to motivate and retain talent?

Do our incentive schemes have any

unintended consequences? What behaviors are we driving? How good

are our managers and staff at setting

goals and giving feedback?

2. Take aim. Take a look at your

business strategy and reassess the role that performance management

needs to play in it. Determine which

performance management strategy

(Rater, Driver or Transformer) best

supports your business objectives

and best fits your organizational culture (or the culture you want to create). Alignment between business

leaders and the chosen strategy is a

critical part of this step.

Next steps to enhance your performance

management program

Get real

Take aim

Take stock

(12)

To have a deeper discussion on performance management, please contact:

To discuss your company’s talent priorities and other issues related to human capital, please contact:

www.pwc.com

PwC firms help organizations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

Sayed Sadjady

Principal

Advisory Services, People and Change 646 471 0774

sayed.r.sadjady@us.pwc.com Jan Seele

Director

Advisory Services, People and Change 646 471 9955

Jan.seele@us.pwc.com

Ed Boswell Principal

US People & Change Leader 704 350 8125

edwin.h.boswell@us.pwc.com Bhushan Sethi

Managing Director

Financial Services - US People &

Change Leader

646 471 2377

bhushan.sethi@us.pwc.com

Marla Graeber Principal

Health Industries - US People &

Change Leader

267 330 2517

marla.a.graeber@us.pwc.com Christine Ayers

Principal

Public Sector Practice - US People &

Change Leader

703 918 1173