Are you getting the most from your talent?

October 2012

Understanding and overcoming the common pitfalls in performancemanagement

At a glance
Lack of organizational alignment around performance management programs often leads to employee dissatisfaction and disengagement withthe 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 management programs.

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 forpurpose.

Todays business leaders, HR departments, managers and employees all have different expectations of performance management programs. This lack of alignment means that no ones needs are being met. Instead of inspiring stellar performance, these programs are achieving quite the opposite: frustrating employees and wasting managers time and budgets.

Instead of inspiring stellar performance, some programs are achieving quite theopposite

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

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Why do we want to have a performance management program?

Companies set up performance management programs for a range of reasons, from backward-looking evaluation of past performance to driving innovation and team behavior.

The rationale for the performance management program determines where a company falls on the performance management curve inFigure 1.1

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.

Serve as transformational agent for organization Drive long term talent development Determine compensation awards and incentives Identify and engage top talent

Proactive

Manage disciplinary and low performance issues

Few organizations Serves as change catalyst for the organization that helps drive implementation of organization initiatives Few organizations Goals are aligned to corporate strategy and cascade to rest of the organization

Reactive
Many organizations Inconsistently administered across the organization

Some organizations Yield varying results based on strength of participating leaders and consistency of Many organizations established competencies Seldom based on a robust competency framework

PwC research, 2012.

Understanding and overcoming the common pitfalls in performance management

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 companys 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

of this problem. Less than half (45 percent) of employees in one survey said their managers 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 organizations commitment to their progress.

Lofty messaging, coupled with poor coaching and feedback, will inevitably lead the workforce to distrust both the program and the organizations commitment to theirprogress

Cornerstone OnDemand/Harris 2012 US Employee Report, December 2011. Sibson Consulting, 2010 Study on the State of Performance Management, October 2010. 4 PwC research, 2012. 5 Sibson Consulting, 2010 Study on the State of Performance Management, October 2010.
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Which performance management strategy best meets our needs?

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.

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 feedbackall components of the Driver strategy.

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

Focus
Transformer
Individual & Team-based Business Lead

Transformer: To boost team perf ormance. Used as a catalyst f or broad organizational change initiatives Driver: To improve individual employee perf ormance and retention, and to accelerate development of employee capabilities Rater: To def ine objective measures of employee perf ormance and ef f iciently assign basic perf ormance ratings, of ten linked to compensation

Driver

Capabilities & Skills

Motivation & Rewards

Ongoing Dialog

Rater

Program Rationale

Performance Objectives & Evaluation

Process & Technology

Participation

Understanding and overcoming the common pitfalls in performance management

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 HRs 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 employees direct manager.

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 essentialcapability. 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 theoutcome?.

Companies must answer the fundamental question, Is the time, money and effort worth the outcome?.

Bill Roberts, Juniper Networks is turning words on the wall into behaviors in action, HR Magazine, March 2012.

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How can we systematically implement each building block of our selected strategy?

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 strategystarting 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 oftenmissed.

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.

Understanding and overcoming the common pitfalls in performance management

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 highperforming 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 processaltogether. 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 ratingsemployees either meet or do not meet expectations. Again, the focus is on individual and team development, not on stirring internal competition.

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 successionmanagement. 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 processas 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 become increasingly out of synch.

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.
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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 alignmentReaching agreement on which competencies to use AdaptationUsing 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, andevaluations.

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 surethe 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

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 managers responsibilities in the process. Other companies have started using social performance tools to create platforms for ongoing feedback and learning.

The Corporate Executive Board Company, Driving a High-Performance Culture, June 2011. U of M study shows Best Buy cuts staff turnover with flex schedule, Minneapolis/St Paul Business Journal, Author-Ed Stych, April 6, 2011. 11 The Corporate Executive Board Company, Managing for High Performance and Retention January 2010.
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Understanding and overcoming the common pitfalls in performance management

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 managementa 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 companys 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 performanceobjectives. 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 completionincreased.  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 longtermobjectives.

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 teambased 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 persons 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 concerningonly 36 percent of employees understand the strategic direction of their organizations,

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

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).

12 13

PwC research, 2012. The Corporate Executive Board Company, Driving a High Performance Culture, June 2011.

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Next steps to enhance your performance management program

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.

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.

Get real

Take aim

Take stock

Adjust

Understanding and overcoming the common pitfalls in performance management

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www.pwc.com

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

To discuss your companys talent priorities and other issues related to human capital, please contact: 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 christine.ayers@us.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

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