Part I: Relevant Performance Models
Two basic categories of performance management theories exist in which this author has been trained during his twenty year career, and they provide a foundational framework to understand the options the company has available: ‘Competitive Assessment’ and ‘Coaching and Development’. These models also have been put forward by Bersin, a division of Deloitte consulting in 2011:
Our research shows that there are two “schools of thought” in the world of employee performance management. One, the “competitive assessment” model, assumes that organizations improve through a process of “rigid individualism” where employees are ranked and rated against each other, driving performance on a comparative basis. The other model, the “coaching and development” model, assumes that people perform best through careful selection, followed by coaching, development, and continuous focus on job fit. (Bersin, 2011)
In addition to these two models, there exists a third that is directly relevant to modern performance management and is critical to business longevity. Before describing this third model, it is important to set context. According to the brief for this project, the average age of employees is 33, and the company will enter a rapid growth and hiring phase in the next year. Without knowing the exact hiring plans and criteria for new hires, one could assume disproportionately more Millennials being hired by the company than other age groups during the company’s growth phase:
Millennials matter because they are not only different from those that have gone before, they are also more numerous than any since the soon-to-retire Baby Boomer generation – millennials already form 25% of the workforce in the US and account for over half of the population in India. By 2020, millennials will form 50% of the global workforce. (PwC, 2011).
According to a research study published in the Journal of Management Psychology in 2008, managers should expect to employees from this generation to have “unrealistically high expectations, a high need for praise, difficulty with criticism,” (Twenge et al., 2008) and that organizations should plan to respond with programs that emphasize praise, nearly continuous feedback, along with a more growth-oriented management style. Furthermore, a whitepaper published through the UNC Kenan-Flagler Business School’s Executive Development program emphasizes that the ‘coaching’ style referenced earlier as key: “Millennials were raised with constant coaching and feedback and expect it to continue in the workplace. Coaching will keep Millennials engaged in their work” (Brack, 2012).
Large companies that have demonstrated longevity, like Facebook, whose employee generational base is heavily weighted towards Millennials, historically have used Topgrading, wherein employees are scored on a bell-curve, which is another way of describing a forced-ranking performance system while also emphasizing cultural fit for employees (Entis, 2014). However, in recent years, other large and enduring companies undergoing generational transformation, like Microsoft, have abandoned the use of scaling and comparative ranking systems in favor of a more growth, potentials, competencies, and learning-oriented approach:
The performance management systems in many companies are misleading, cumbersome, and complex, requiring some HR departments to put aside an entire quarter to manage them. More important, they can be counterproductive. In the context of neuroscience research, most PM practices turn out to damage the performance they are intended to improve….If you want a high-performance organization, you have to reverse the destructive effects of conventional performance management. You need to find ways to evaluate people that recognize the unique role each person has played in moving the organization forward. These evaluations must be based on a growth mind-set: They must recognize that with the right context and conditions, anyone’s abilities can be improved, especially given the expansive, flexible nature of the human brain. (Rock et al., 2014)
Compared to the small, young, global company reviewed for this paper, larger, long-lived companies have the ability to create defined career tracks and promotional opportunities. This option does not exist for smaller companies. Because of this, smaller companies need to offer training, mentoring, and a personalized development model, thereby growing employee competency and autonomy, to encourage higher performance levels. Training benefits the individual employee’s career options, while increasing the overall competency of their organization (EmpXtrack, 2013). But while the ‘coaching’ framework described focuses on the development of the employee rather than the solely comparative measures found in competitive assessment, it does not presuppose that anything change with respect employee ratings as part of a performance appraisal – ratings and a focus on performance may exist or not exist in the context of coaching and development. Based on work conducted by researchers in the field of neuroscience and psychology referred to in this citation from Rock et al., there exists a third theory, which advocates for doing away with ratings, ranking, and performance-oriented systems altogether. Part II of this paper will describe the design of this different kind of performance management system, which is based on Dr. Edward Deming’s theory of “Profound Knowledge.”
Part II: Design of a Performance Management System
Philosophy of Employee Assessment
Dr. Edward Deming is widely quoted, incorrectly, as having said “You can’t manage what you can’t measure.” He actually stated the opposite: “it is wrong to suppose that if you can’t measure it, you can’t manage it – a costly myth,” and went a step further with regard to the management of human resources: “the ranking of people indicates abdication of management” (Deming, 1994). In one of his early works, Out of the Crisis, Deming stated, “…management by numerical goal is an attempt to manage without knowledge of what to do, and in fact is usually management by fear” (Deming, 1982).
While extreme, Deming’s position underpins the basis of the approach to performance management put forward in this paper. To clarify: performance must be managed and assessed for a business to endure, and every system, including the one recommended in this paper, has its limits. But the goal of performance management should ultimately be on improving the performance of the organization, and it need not focus on the performance of the individual employee. Deming advanced what was in 1994 a new model, and is even more relevant with today’s Millennial generation mentioned earlier:
The prevailing style of management must undergo transformation. A system cannot understand itself. The transformation requires…an outside view, a lens that I call a system of profound knowledge. It provides a map of theory by which to understand the organizations that we work in. The first step is transformation of the individual. This transformation is discontinuous. It comes from understanding of the system of profound knowledge. The individual, transformed, will perceive new meaning to his life, to events, to numbers, to interactions between people. Once the individual understands the system of profound knowledge, he will apply its principles in every kind of relationship with other people. He will have a basis for judgment of his own decisions and for transformation of the organizations that he belongs to. (Deming, 1994)
Deming describes how his system improves the results of the employee and the organization because he or she intrinsically wants to be exemplary, wants to teach coworkers a better way, and wants the entire organization and everyone in it to succeed. Given the growth path of the firm and demographics of the global employee base likely shifting to include more Millennials, a performance management system based on traditional models described in the preceding section likely would be a path to failure. Mathis and Jackson (2012) outline risks and limitations present in these traditional systems including: varying standards, recency and primacy effects, central tendency, leniency, strictness errors, rater bias, halo and horns effects, and contrast errors. At the core, these systems drive competition between employees, undermining teamwork, rather than more constructive behaviors. While not limited to quantitative assessment alone, these issues all have at their foundation the function of ‘rating’ the person.
Perhaps most important to the analysis put forward by Mathis and Jackson, and echoed by Deming, is that performance management is most effective when used to develop employees and least effective when used as a form of punishment, especially with respect to the performance appraisal (Mathis et al., 2012) According to a 2004 paper on performance management published by the Society for Human Resources Management:
Managers are reluctant to provide candid feedback and have honest discussions with employees for fear of reprisal or damaging relationships with the very individuals they count on to get work done. Employees feel that their managers are unskilled at discussing their performance and ineffective at coaching them on how to develop their skills. Many complain that performance management systems are cumbersome, bureaucratic and too time consuming for the value added. This leads both managers and employees to treat performance management as a necessary evil of work life that should be minimized rather than an important process that achieves key individual and organizational outcomes (Pulakos, 2004).
These difficulties arise because performance management ultimately becomes a highly personal and sometimes threatening process to the employee and even the manager. Performance management should be one of the top priorities for the organization if not the top priority, “helping to align employee behavior with the culture and business needs of the organization. With senior executive buy-in, the system can increase productivity and bring visible, value-added benefits” (SHRM, n.d.). And in more pedestrian terms, if an employee is dismissed and takes legal action against the organization, the performance management system provides documentation of the organization’s attempts to work with the employee to improve (Mathis et al., 2004). But issues of legality aren’t a core benefit or goal of the performance management system; the key is how the organization uses the system to execute its strategy.
Performance Management Process Outline and Who Is Involved in the Process
When considering traditional systems, performance management can frequently be confused with performance appraisal. Performance management is a series of activities designed to ensure the organization gets the performance required from the organization. Appraisal and assessment is determining how well employees do their jobs relative to a ‘standard’ communicated with the employee (Mathis et al., 2012). Mathis et al. outline the steps necessary for managing the performance management process:
- Developing and Understanding Corporate Strategy
- Identifying Performance Expectations
- Providing Performance Direction
- Encouraging Employee Participation
- Assessing Job Performance
- Conducting Performance Appraisals (Mathis et al., 2012)
While the steps proceed linearly, the authors emphasize that the process is circular, returning to ‘Identifying Performance Expectations’ after managers have conducted the performance appraisals.
In contrast to the traditional, linear steps put forward by Mathis, Deming’s system argues for a series of ‘14 points’ that define a philosophy and model of working:
- Create constancy of purpose for improving the business
- Adopt the new philosophy
- Cease dependence on inspection to achieve quality
- Focus on minimizing total costs
- Improve constantly and forever every process for planning, production and service
- Institute training on the job
- Adopt and institute leadership
- Drive out fear
- Break down barriers between staff areas
- Eliminate slogans, exhortations and targets for the workforce
- Eliminate numerical quotas for the workforce and numerical goals for management
- Eliminate barriers that rob people of pride in work, including the merit/rating system
- Institute a vigorous program of education and self-improvement for everyone
- Put everybody in the company to work accomplishing the model (Deming, 1994)
The obvious challenge in applying a model such as Deming’s is the difficulty in practicability. The next section describes the opportunity in greater detail, but ultimately the application lies in transforming the performance management system from one of appraisal to one of development.
Because the company currently has no HR strategy or HR senior leadership in place and the estimate for employee growth is a doubling of the base in 18 months, it is imperative that the CEO work immediately with the outsourced HR provider on the development and understanding of the corporate strategy, whether based on a traditional model or Deming’s which is focused nearly exclusively on quality and cost minimization. This must happen even if the strategy ultimately will be determined and communicated solely by the CEO and the board. It is imperative to include the HR provider because that resource will be able to provide the framework and tools as well as give feedback on the strategy from the perspective of employees. The HR provider can also function as a project manager, keeping this CEO on a fast track of no more than a few weeks to formalize strategy and get on to the business of communicating with employees.
For the steps of identifying performance expectations through assessing job performance, traditional methodologies the HR advisor and CEO would consider for a small business like this include Management by Objectives, Competency Based, and Graphic Rating Scales (Mathis et al., 2012). Overall, none of these would be recommended by this author, for reasons described in the preceding sections and as will be further explained in the next section. Instead, the company should consider utilizing regular ‘check-in’ conversations between employees and managers, which aligns to Deming’s “Profound Knowledge” model.
For conducting the performance appraisal, or just holding conversations in following Deming’s model, the first meetings should be conducted informally between the supervisor and employee and timed to occur within the first 30 to 60 days of setting the strategy. While providing assessment within 30 to 60 days is typically done with new hires, this author believes that it is imperative to begin the feedback loop with employees soon after the strategy has been set. This allows management the opportunity to educate employees and employees the opportunity to give feedback on how clearly management has communicated the goals. In addition, research indicates that Millennials strongly value, if not require near constant coaching and feedback (PwC, 2011). This is also coupled with the fact that many employees are also in India, and would value regular feedback, being far from the head office. The reviews should be informal to reduce the anxiety for the employees while creating an opportunity have an open dialog about the new process and goals. After this first 30/60 day period, management should plan another meeting at least at the six month mark and again six months after that for the foreseeable future. Following Deming, these meetings should occur with even more frequency. All new employees hired after the process starts should be engaged within the first 30 to 60 days of employment and then on the same frequency as all other employees.
Lastly, in parallel to the aforementioned process work the CEO and HR provider must undertake, there must be a joint effort with the IT or Operations team in securing the necessary HRMS to support the process. Because this is a small company going through rapid growth, records of the performance management process should be automated and stored in electronic form as much as possible. It is also critical to keep the system very basic at the outset, given the company is new to this level of rigor and as both managers and employees will need to be trained on how to use the system (Pulakos, 2004).
Addressing the Issue of Employee Development
Following Deming’s theory of ‘Profound Knowledge’, the creation of development plans as part of the performance management system could take two paths: focus on ‘extrinsic’ motivators or ‘intrinsic’. When focused on ‘extrinsic’ motivators, the company focuses on pay, recognition, and material rewards. ‘Intrinsic’ motivators are those that include developing a feeling of autonomy in the employee, not feeling controlled, which comes with competency (Gohari et al., 2013). Research suggests that by developing this sense of competency in the employee, which can frequently be accessed through training and similar programs focused on the employee’s development and not just his or her performance, the company benefits from employees excelling in performance because of the work itself (Gohari et al, 2013). The importance of this approach is discussed in the next section, as it has significant implications for reducing compensation expense downside for the company while increasing employee engagement.
Beyond these general approaches to employee development, the aforementioned 2007 performance management research study conducted by Bersin demonstrated that high-performance companies (by growth or profitability) focus on developing to ‘organizational capabilities’ and not just ‘individual capabilities’. (Bersin, 2007). Moreover, these high-performance companies tended to focus on competencies, which drive leadership, management skills and personal growth. Lower-performing companies tended to value tactical, job-specific competencies like technical prowess. This approach further reinforces Deming’s emphasis on doing away with traditional performance management systems to those in which the employee and manager discuss ways to improve the overall organization, quality of production, and relationship with the customer. One of Deming’s proteges, Peter Scholtes states:
Improvement efforts should focus on systems, processes, and methods, not on individual workers. Those efforts that focus on improving the attentiveness, carefulness, speed, etc., of individual workers — without changing the systems, processes, and methods — constitute a low-yield strategy with negligible short-term results… Conventional problem-solving would ask such questions as: Whose area is this? Who is supposed to replace worn gaskets? We don’t ask “why,” we ask “who.” We don’t look for causes in the system, we look for culprits in the workforce. (Scholtes, 1997).
Scholtes, like Deming, takes the view that in fact performance appraisals should be done away with altogether, and the organization should put all of its emphasis on employee development. The emphasis, they argue, should be on goal setting with regular feedback loops that utilize the employee’s insights on improving quality and solving problems the business faces in serving its stakeholders, especially customers. (Scholtes, 1997). This process would follow at least the same schedule described in the preceding section on performance appraisal, if not moving to a near-continuous basis. The result of this approach is that the appraisal is replaced with a development framework in which the employee is actually learning and growing his or her competencies. The manager, in turn becomes a mentor to and partner with the employee in solving the performance problems facing the organization, which tend to be deeper-seated than the performance of any individual employee.
How the System Handles Performance and Non-compensation Rewards as well as Performance and Compensation
As mentioned in the preceding sections, modern theory frequently emphasizes the framework of ‘total rewards’ – not just compensation but training & development, recognition & growth, and addressing the work experience overall. And again, this is especially relevant considering the average age of current and future employees falls into the age range of Millennials who value non-monetary rewards nearly as much as monetary (Raphelson, 2014).
…the top three career priorities for Millennials were compensation (most Millennials graduate from college with an average of $20,000 in debt), flexible work schedules and the opportunity to make a difference (Brack, 2012).
More importantly, a performance management and compensation system that tightly and ‘transparently’ links performance reviews to employee compensation is likely to backfire on the management team with this employee base. If pay is linked to performance, this results in a large percentage of the employees in the performance curve and rankings as getting comparatively ‘less’ than their peers, thereby undermining any sense teamwork. And if a majority of the company workforce are going to be Millennials, research indicates that pay for competencies/what the employee brings to and exhibits while at the company results in less resentment between high performers and low but also increases employee engagement. In his book, Fuse: Making Sense of the New Cogenerational Workplace, Jim Finkelstein argues:
“Pay for potential” is a compensation philosophy that tries to level the playing field based on what each employee brings to the job and how well he leverages those competencies. It’s a new concept that gets rid of “the more years you work, the more money you should make” mentality, and recognizes individual talent and potential. While it is challenging for the Boomers to accept a new way of thinking about compensation, pay for potential is far and away the best plan to connect and engage with Millennials. (Finkelstein, 2011).
Finkelstein argues that the use of a ‘pay for potential’ system addresses the historical needs of HR and the ‘new’ needs of a multigenerational workplace. And in keeping with Deming, by paying for potential rather than performance, the company keeps its focus on the long-term development of the organization rather than only short-term results. Finkelstein further argues that compensation, especially in the case of Millennials need not be a hard-money drain on the organization. As referenced earlier in this paper, the desire of work-life balance for Millennials, including benefits such as flexible hours, extra vacation time, company investment in personal projects including professional development, are critical factors to be offered as part of the total rewards strategy. And as part of a transformed total rewards strategy, the company should fully utilize Deming’s theory of “Profound Knowledge” as foundationial to its total rewards strategy so that it can also grow each employee’s competency and potential, thereby encouraging ever higher performance levels for the organization.
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