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Jul 10, 2014

Ann Bares recently wrote a predictive article here on TLNT about the potential end of merit pay (How Will We Pay With Open Salaries and No Performance Reviews?).

In her post, Ann argues that because “open salaries” and “blowing up performance appraisals” are becoming more popular, merit pay cannot be long for the world. She ends by asking:

What will we do instead? Strictly market-based wages with “hot skill” premiums as appropriate? More emphasis on variable pay plans designed to reward specific, pre-determined individual or group metrics? Will recognition and non-cash rewards step into the void to provide the necessary differentiation for key talent?”

Is “Meets Expectations” good enough?

I sincerely hope she’s right. Any of those outcomes are better than many of the constructs at play today, and certainly far better than the most egregious pay for performance models.

I’m looking at you, stack ranking. Consider this Fistful of Talent article on a major government contractor taking this to the extreme:

A major government contractor in Washington, DC is doubling down on the bell curve. But wait a minute; this is not just your typical bell curve, but a new extreme level for assigning managers’ performance quotas.

The new rating system looks like this:

  1. Exceeds expectations: 15 percent;
  2. Meets expectations: 45 percent;
  3. Partially meets expectations: 30 percent;
  4. Does not meet expectations: 10 percent.”

The article goes on to describe why this is so bad. Don’t we want all employees striving to perform better? The natural (and observed) outcome of this, however, is the rapid egress of truly top talent who failed to make the 15 percent Level 1 cut.

The common argument is that “Meets expectations” is perfectly fine and a truly desirable state for such a large chunk of employees — but not when you know you perform well and deliver the goods on a regular basis. In that case, “Meets expectations” is a slap in the face and a clear signal that it’s time to take your talents elsewhere.

What does forced ranking look like in reality?

A member of my team related this story to me last week of her husband’s performance review (I’ll call him Jim). Jim filled out the self appraisal form, only to have his words returned to him verbatim in his manager’s “appraisal” of his performance.

But that’s not the real story here. This Fortune 100 firm conducted several rounds of layoffs in the last year, resulting in Jim’s team being diminished by about half, with only the true stars remaining.

Jim was informed by his manager that, since the team was so much smaller now, there could only be one (1) “exceeds expectations” employee on the team. All the rest would be marked “meets expectations” because senior management was also not allowing any “needs improvement” out of fear even more employees would walk out. Even worse, the lack of managerial skills on this team results in each employee simply keeping his or her same ranking designation year after year.

So, despite the fact that every member of the remaining team is a true star in the organization, each pulling double the work after the rounds of layoffs, only one could be marked as exceeding expectations for the year.

Stack Ranking drives fear, reduces productivity

Another fall-out of such a strict system can lead a significant proportion of employees to believe their jobs might be at risk. Research reported in Quartz shows the fear induced by this scenario leads to even more unintended consequences:

Studies find that workers who fear being laid off are less safety-conscious, more likely to get injured, and less likely to report injuries … Recent research underlines the other flaw with forced ranking: its basic assumption that pressure will boost productivity. Making people insecure may make them work harder to try to be on the right side of the bell curve, but that will come at the cost of health, happiness, and future performance. Unless companies are confident that they can constantly replace the people who burn out with new employees that are just as good, it looks like a losing formula.”

I certainly don’t need to tell readers of the high costs associated this amount of turnover, much less the costs of lost productivity and safety challenges. But stack ranking hangs on.

My theory as to why is because it’s the easy way out. Managers operating under this system can more easily allocate limited merit pay budgets and blame “the system” for the outcome.

How does your organization measure performance? Do you see the end of merit pay on the horizon? What do you think is the best long-term solution?

This was originally published at the Compensation Café blog, where you can find a daily dose of caffeinated conversation on everything compensation.

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