Tag Archives: Employee Performance Management

Do we really want pay for performance?

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A colleague recently commented that “the best companies have a pay for performance culture”.   While I generally agree with my friend, it did make me think about whether this statement is actually true.  After a good five minutes of intense thought, I’ve come to the conclusion that it is not exactly true.

A pay for performance culture is one where people receive monetary rewards based on the value they provide to the company.  The more value you provide, the more you are paid.   The assumption is people will provide more value if they are financially incented based on their contributions.   Another assumption is the company can accurately measure people’s performance contributions.

Adopting a pay for performance mindset, while generally a good idea, can over-simplify what business leaders truly want and what actually motivates employees.  To illustrate this, consider the following 4 pay for performance cultures in order of best to worst to somewhere in-between.

The best scenario:  performance without pay. Businesses don’t actually want to pay for performance.  What they ideally want is performance without having to pay.   But most employees are not willing to accept this proposition.  We rightfully expect to be paid for what we contribute.  Nevertheless, it is possible to inspire people to achieve high levels of performance without focusing on pay.  Volunteer organizations do this all the time.  There are a lot of things that motivate people.  The motivational value of pay varies depending on the type of job and employee, and business leaders who use pay as the sole tool for motivating employees risk adopting a very expensive and marginally effective leadership approach.

The worst scenario:   pay for poor performance. The worst case scenario for a business occurs when employees are rewarded for doing things that undermine company performance.  This occurs more often than companies would like to admit, particularly in companies whose managers have to comply with restrictive personnel policies, rules, and regulations.    Rewarding poor performance encourages counterproductive behavior and destroys the motivation of high performers.  High performers dislike it when they do not receive any sense of recognition or rewards for their contributions.  But they hate it when they see rewards going to poorer performing colleagues.

A lousy scenario:  performance only for pay. One of the problems with creating a direct link between pay and performance is some people will never feel they are getting paid enough.   No matter how much pay these people receive for doing something, over time they always seem to want more.  Payouts can quickly switch from being a reward to being an expectation.  Today’s financial bonus is tomorrow’s entitlement.  Once this happens, pay ceases to be a motivator and becomes a source of dissatisfaction.

The pragmatic scenario:  performance influences but does not completely determine pay. Research on productivity, fairness, and motivation indicates that there should be a positive relationship between how much people are paid and how much they contribute to the company.  But the relationship between pay and performance does not need to be perfect to be effective.  Many things influence pay levels beyond individual performance (e.g., overall company financials).   Conversely, pay is only one of many things that influence performance.  Companies should create a link between performance and pay, but should not overemphasize pay as the only reason why employees should seek to perform at higher levels.

Establishing links between pay and performance does tend to increase productivity.    But it is not just the promise of pay that drives the productivity.  When you link pay to performance, employees and managers get much more serious around defining what they mean by “performance”.   And clearly defining performance expectations drives all kinds of benefits for increasing workforce productivity, regardless of pay levels.

Is your performance management process about personnel administration or business execution?

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Performance management is like dancing: most people do it occasionally, few people do it well, and very few people use it to drive financial revenue.  But unlike dancing, it is actually relatively easy to use performance management in a way that is both effective and highly impactful for improving the financial performance of an organization.  The problem is many organizations don’t approach performance management as a method for executing on business strategies.  They simply see it as something they have to do in order to adhere to legal policies.  Or as one COO described it to me, “the main purpose of our performance management process is to document ratings that justify compensation and personnel decisions we have already made”.

When done well, performance management creates a shared sense of performance expectations across a company, gives employees meaningful feedback that helps them improve their effectiveness, and provides the organization with insight into the quality and capabilities of the workforce.   When done poorly, performance management has about the same level of strategic value as the process for completing expense reports.  It simply documents what people did in the past (and often does this very poorly), and has very little emphasis on improving what they might do in the future.

Using performance management to drive business execution is largely a matter of focusing on four things:

Accuracy: have you clearly defined the goals and competencies that people are being evaluated against?  Effective performance management starts with accurately defining what you mean by performance.

Relevance: Is performance management data used for anything that is important to the managers who are completing the reviews?  If managers know their performance ratings are going to be examined by senior leaders in the company and used to inform important workforce decisions then they will take them more seriously.  For example, are performance management ratings used to influence succession and promotion decisions?  Are managers expected to discuss their ratings with their peers, or do performance ratings just go into a file cabinet never to be seen again unless they lawyers show up?  Note, pay is probably the most common outcome linked to performance reviews.  While pay decisions are certainly relevant to managers, in terms of impacting the value managers get from performance data, tying performance to the pay of their direct reports is probably relatively low on the list.

Accessibility: Is it easy for managers to provide and use ratings?  Do they have access to the tools, skills and knowledge needed to make accurate ratings and hold productive employee feedback discussions?

Accountability: Do leaders in the company hold managers accountable for making accurate performance ratings?  What happens to a manager if they refuse to complete their performance reviews or provide poor quality data?

Focusing on these four areas will go a long way toward increasing the impact of performance management on business execution.   Conversely, a failure to think through issues of accuracy, relevance, accessibility and accountability is almost certain to lead to a performance management process that solely focuses on tracking the past as opposed to influencing the future.

SuccessConnect 2010 Frankfurt

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Willkommen in Frankfurt (Welcome to Frankfurt)!

SuccessConnect 2010 kicked off today in the beautiful city of Frankfurt, our final SuccessConnect destination for 2010.

The event started with a bang with the ever energetic, Lars Dalgaard taking the stage.  Announcing the acquisition of YouCalc, a Danish company, to a jam packed house, Lars explained how SuccessFactors latest purchase will let business create and share custom reports and analytics from the cloud.

Jay Larson, SuccessFactors Head of Sales, was next up to the podium. Jay discussed HR’s new economic reality – do more with less: more ROI; greater business impact; connect HR with the business; and close the gap between strategy and execution.  He then went on to share success stories from those who have implemented more for less and have “BizX’ed” their organizations.  

Dmitri Krakovsky drilled further into SuccessFactors recent YouCalc acquisition explaining the new Calculator in the Cloud feature that will allow users to perform analytic mash-ups and what-if scenarios from any cloud based application. Dmitri also expressed his excitement over SuccessFactors new partnership with Jobvite, pointing out that the time to hire is not as important as hiring the best.

The final SuccessConnect of the year showcased the best of the best with Norbert Kleinjohann, CIO Siemens AG and Marion Horstmann, Corporate Vice President of HR, Siemens AG sharing their secrets for success.  

Marion Horstmann shared Siemens transformation of the HR function using a global people strategy of which transparency was a key element. Marion expressed her delight that her three requirements for a strong HR strategy were inherently delivered via SuccessFactors solutions: integrated applications for all people processes; a uniform product completely that speaks in a single global language; and recurring efficiency and higher quality.

Norbert Kleinjohann then went on to discuss how Siemens positioned their standard HR system, labeled 4Success, for success. “During the evaluation process, Siemens IT team worked with their HR colleagues to assess 50 possible suppliers, both on premise and in the Cloud. We awarded the contract to SuccessFactors in March 2009, based on functionality and usability and the provisioning of an integrated solution with consistent data models,” says Kleinjohann.  (See article SuccessConnect: The Biggest Cloud in the World) Kleinjohann cites: “We have seven modules in place – target setting, performance management, compensation management, roundtables, career development planning, recruitment management, and employee profiles. We went live within 6 months with the target setting module which we rolled out to 170,000 employees. We now have 400,000 employees information loaded into 4Success and have 40,000 log ins per day.” SuccessFactors had the fastest implementation, best functionality, usability, and integrated capabilities.  Kleinjohann says: “I believe that Cloud Computing will be adopted by IT sooner than we expect.”

The audience enthused over the Siemens presentation stating that it was a pretty impressive story for an impressive first day in Frankfurt!

HCM is good for the Green

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Recently Saugatuck Technologies released a study showing that SaaS (Software-as-a-Service) Human Capital Management software contributes at least 2-3% to top line growth – definitely good news for companies seeking more green. An article in this week’s San Francisco Chronicle made me start to think about another kind of green – the environment. Human capital management is key to driving a number of environmental initiatives. Paperless reviews save paper. Working from home reduces gas-guzzling commutes and slows the need to build new office space, and as the San Francisco Chronicle points out, employees love working from home. As an important part of the individual value proposition to the employee, working from home helps keep your employees engaged.

But, successfully promoting a paperless office and shifting people from the office to the home, requires systems that support these activities. Goal alignment, ensuring that people are working on the right things for the right reasons, is very important. People need to feel like part of the team, even if they aren’t physically present. Traction, not action is the mantra for successful execution. Goal alignment ensures that people are moving in the right direction downfield to score, and not just gaining yardage. In fact, if your players are moving in the wrong direction, they are moving farther away from the goal. Goal alignment helps ensure that this doesn’t happen. It is not a substitute for supervision from a manager, but keeps the team working toward the overall company strategy.

Human Capital Management is a critical to earning green, and going green, enabling people to work from home, in global teams, anywhere, anytime. How green is your organization?

Give the Gift of Great Performance this Year

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Erik’s note: We’re happy to present another guest post by Chris Lozaga a Research Analyst in SuccessFactors Global Research team

The holiday season has different implications for everyone – the sales team is busy trying to close those year-end deals, managers are juggling their priorities around the vacation many workers take this time of year, and the good old folks in HR are preparing for performance review season. The happiest time of the year – or not, depending upon whether or not like Santa Claus, you have kept a careful list of who has been naughty and who has been nice all year long. For those companies who have invested in performance management, review season isn’t so bad.But what about when it is time to hand out gifts? Pay for performance has been proven over and over again to be on average one of the most effective drivers of real results for companies that have implemented it. Many companies have very loose pay for performance systems, a bit like Christmas, where all the kids get something. While that makes for a nice holiday, it can be very bad company policy. SuccessFactors Research decided to look into the matter, using our own customers as a point of reference. How do companies that only use Performance Management compare to those who use Performance Management and Compensation Management?
The results speak for themselves. SuccessFactors Customers who use Performance Management grew profits on average 36 % last year, beating their industry peers by an average of 20 percentage points. However, SuccessFactors Customers who use Performance and Compensation management grew profits on average 46%, beating their peers by an average of 30 percentage points! In this case, it’s Christmas for the investors as well. The bottom line – if you are implementing a great performance management system, you are not realizing the total potential gain unless compensation is closely integrated into the process.In this study we included all publicly traded companies with at least 500 employees that have been using SuccessFactors for at least 3 full quarters and use either the PM or PM and Compensation module.
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Does People Performance Really Matter?

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Imagine you are on the football field – What if 15% of your performance is dependent on the play you select, and 85% of your performance is dependent on your ability to make the play? Where would you invest most of your time, training your team to pass, catch, run, and block, or picking out the right play?

By and large, studies have found execution is the clear driver of company value and financial performance. How much? Well, about 15% of company’s performance is attributable to strategy – the remaining 85% is attributable to execution, as found by Becker and Huselid’s “ High performance Work Systems and Firm Performance.” Joyce, Nohria, Roberson found a similar ratio in “What really works.”

That’s right – Execution of the strategy is 6 times more important than the strategy itself!

How do you execute on a strategy? In a word: People. At the end of the day, it is the employee who makes things happen, who gets results – not machines, strategies, vendor relationships or what have you. People are your real differentiator and now typically make up 70% of a company’s cost (and growing). This is doubly true in today’s knowledge-focused economy. We see today that about 80% of a company’s valuation cannot be explained by the balance sheet, which shows the growing importance of intangibles and people performance to future cash flow. The value of a company is no longer in its factories, IT systems, or physical assets – it is created by the company’s people.

Your company is in fact already on the field, fighting for customers, revenues, and a competitive position. Instead of “picking out the best play”, focus on what will most help you move downfield toward your goals: people performance, 85% of your success depends on it. Goal alignment, individual accountability, and engagement equal strong execution. Build up these strengths and capabilities of your company to help ensure you can make the big plays. So yes, people performance does matter, because their ability to execute is the key factor in creating value and driving results for your company.

A spoonful of sugar

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Dion Hinchcliffe, a well-known blogger and thought leader in the Enterprise 2.0 space wrote a post recently in which he talked about the next generation of business software – social, interactive tools easily delivered over the Web – and how they can make a dramatic impact on the hierarchy and culture of businesses. These new tools, Hinchcliffe said, can tear down traditional knowledge barriers and walls within an organization by making information fluid, collaborative and accessible to everyone who wants it, leaving the power of that knowledge in the hands of everyday workers and not just managers and executives. That’s pretty powerful, and the catalyst for this dramatic transfer of power and virtual flattening of an organization, he said, lies in these simple, lightweight next-generation tools:

“Because they are highly democratic and egalitarian; anyone can deploy (Enterprise 2.0) tools, anyone can quickly learn to use and benefit from them, and they can be used to communicate and collaborate openly with anyone else inside (and often outside) the organization, are inherently viral, they literally tear down the barriers that would normally impede their forward movement and adoption inside the organization. And, anecdotally at least, this seems to be happening.”

This is a great piece of insight. In the past, there was always a barrier between every day workers and the information they worked with. To use a practical, HR-related example, take first-generation performance management tools – they were useful, but in order to get real value out of them in the form of analytics, they had to be sorted out either by hand by HR managers or run through a database by IT folks. Useful, but not efficient or at all egalitarian. Enterprise 2.0 gets rid of that gatekeeper.

As a general philosophy, SuccessFactors has always advocated transparency and the free flow of information – both are core doctrines written into our software and promoted as part of our own workplace culture. With SuccessFactors NEXT Labs, we’re trying to help promote that openness on both the technology and cultural fronts. NEXT Labs is a Trojan horse of sorts, designed to introduce Web 2.0 technologies and concepts – blogging and tagging capabilities, social networking and sharing – that render the adoption and repeated usage of an enterprise application painless for people accustomed to using such tools in their personal lives.  

Rather innately, Performance & Talent Management systems are the ultimate in-house Enterprise 2.0 tools: They help employees easily see their performance by harnessing the power of collaboration, communication and visibility, giving them the knowledge they need to make what they want out of their careers. In a way, NEXT Labs is our ”spoonful of sugar.” It  helps companies and employees eaily swallow what is all too often a bitter dose of medicince – the adoption of a new enterprise-wide software system.

The age old virtues of meritocracy

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The Atlantic Monthly has been running excerpts from old issues as part of their 150th anniversary celebration. Reading over an issue this weekend, I came across an article written by a Colonel R. Williams about a decade after the civil war ended – in 1878. His issue? That the military’s practice of promoting those with the longest tenure was “fostering apathy” rather than bravery or a commitment to excellence.”

Amazing that the same battles we fight today for meritocracies were equally well articulated 150 years ago.

Here’s an excerpt:

Our army presents the only known example of a business or profession, either public or private, in which incompetency and want of zeal bring the same substantial rewards as energy, capacity, and active attention to duty. Such a system of promotion is in violation of all the rules of common sense by which men are governed, as well as of those by which they are incited to strive for superior excellence, and the condition of our army at the outbreak of the rebellion affords an excellent example of its inevitable result. At that time the superior grades of the army were filled by old men, who, having outlived all above them, had been regularly promoted, in accordance with this system, to the positions which they occupied, regardless of the well-known fact that in the majority of instances they were unfitted, both by age and infirmity, to perform any military duty whatever. The spectacle was so pitiable, and the lesson it taught so apparent, that it might be supposed the government would have profited by such crushing experience, and been led by it to the adoption of wiser measures. Such, however, was not the case. Our system of army promotion is the same to-day as before the rebellion, and we are slowly, but surely, approaching the same result, from which the same experience, disastrous as it was to the country, must necessarily follow. At the close of the rebellion, and with the sad experience it had taught still before us, some effort at a change was made. The army was reorganized, and many young officers who had acquired experience, both of the regular and volunteer force, and who had especially distinguished themselves, were deservedly placed in high positions; but this spasmodic effort at reform was deemed sufficient, and we have again fallen back into the system of promotion by seniority, which, unless some dire necessity forces a change, must render the condition of our army equally as deplorable as when the rebellion commenced, by filling its superior grades by worn-out and superannuated old men. It seems needless to describe the effect which this system must produce upon the subordinate and junior officers of the army. In most instances it is deadening to all effort at improvement or professional skill, and suggests the natural conclusion: that, as superior rank is obtained only by longevity, each should strive to avoid all exposure, hardships, or dangers by which health may be impaired or life risked.

Poll: Make salaries public? NO!

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PublicsalariesThe poll we’ve been running here for the last few weeks has been asking “Would you be in favor of an “open salary” policy at your company in which everyone’s salary was published for all to see?”

As you can see from the responses (nearly 200 of them) 60% of respondents said fuhggedaboudit (AKA no). Originally based on this post from the Chief Happiness Officer, the poll was an attempt to see if people agreed with Alex who argues that there are a number of very compelling reasons to do away with the secret salary system.

While I, too, balk at the idea of publishing my salary, in many ways doing so would represent the natural evolution of something we already do at SuccessFactors: make our goals public. The idea behind pay for performance is that those who perform best get paid the most – thereby incentivizing increased performance. But if people don’t know what others are getting paid, there is a disconnect. I know what Joe did or did not accomplish from his public goal plan, but I don’t know if he got paid more or less (and how much more or less) as a result. There is a perception of pay for performance, but no proof-laden pudding to support it.

I guess my question then becomes – can you realize the ultimate promise of pay for performance without open salaries?

Joe Torre on management

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JoetorreI was sent this article written by Joe Torre, the manager of the New York Yankees, that was recently published in BusinessWeek. Now, regardless of what you think of the team, you have to admire Joe. Just being able to remain the manager of the Yankees for this long while working for George Steinbrenner has to give you some insight into the man’s pluck.

The truth is that he’s a very insightful guy with real heart (somehow in my mind, I always envision him crying after winning something), and in the article he shares some of his thoughts on managing talent. In part, he talks about how he uses one of the team’s worst moments (letting the Red Sox take the momentum, and the world series, away in 2004) to motivate his people to always be ready. But he contrasts that motivational technique with a keen understanding of the fine balance between emotionality and competitiveness. A quote:

These days it is so important for a CEO, or any manager, whoever it is, to be aware of his or her personnel. We are in an age of computers, and everything is so damn impersonal. But in the end, it still comes down to people. You have to make people feel necessary. Even if their contributions are minor, it adds to everything else. That’s what makes the machine work. I love players with heart, not necessarily emotion, but those who deep down are driven by something more than mind and body. I don’t play favorites. The 25th member of the squad is just as important as the first guy. And I can’t let my own emotions get in the way of competing. I have had to release guys I loved, and keep players I didn’t necessarily care for.