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Goodbye, pay for performance. Hello, real management.

27 June, 2016

Forgive me for being stuck on this topic, that of companies dropping use of ratings. But I think we are only beginning to uncover the nature of this movement.

You see, I am a lifelong student of management. I have managed as well. I was managing others from age 19, fired someone at age 20, was an assistant manager in retail twice before it dawned on me I should study management. I was Outstanding Management Student my final year at Eastern Michigan University in 1986, and for 30 years I have managed, studied management and taught management. I have trained more than 1,000 HR professionals and over 500 managers in the area of rewards, in recent years.

Here is my opinion on the “trend” of major companies ending use of performance ratings: It depends. it’s a good thing for everyone to drop ratings when managers are ready and willing to manage without them. It’s a bad thing for everyone if managers are not ready.

What’s happening and why

The ground is shaking beneath the corporate world: linking pay allocation to performance ratings—the very foundation beneath most modern reward practices—is unraveling before our eyes. Respected companies such as Microsoft, Adobe, Yahoo, Google, Accenture, Deloitte, Cargill, Juniper and even General Electric are dropping the use of performance ratings. But they are not simply dropping the use of ratings, they are reconstructing the notion of “performance” altogether. But this time, the focus is different: instead of HR coming up with something new, these companies are establishing a new deal with people managers, making them accountable for managing their staff wisely, with HR moving back to an enabling role, versus a policy role.

The new deal with managers: manage your people. The new deal with employees: contribute to business success. The new deal with HR: help managers manage, but don’t do their jobs for them.

How we got here

Management has evolved from pre-HRistoric times where managers were accountable for getting work done. With no HR departments, managers communicated expectations, provided instructions and supervised (observed) their workers to make sure things were getting done and done right. Workers did whatever the boss asked them to do.

With the industrial revolution in the late 1800’s and early 1900’s came assembly lines, and with assembly lines came the notion of a “job”. Instead of trade names such as farmer, miller, smith, cooper and cook (which became surnames, like my own), roles became specialized and job descriptions were invented to clarify duties between worker A and worker B. Silos—or “jobs”—were invented, basically. Jobs were defined by industrial engineers seeking greater efficiency and productivity. Man, working in concert with machine and material, could produce things faster, better and cheaper when each person’s role was well-defined.

In 1911, Frederick Winslow Taylor, an American mechanical engineer and pioneer in management consulting, published Principles of Scientific Management, explaining how management systems could help maximize prosperity for both employer and employee, through maximum productivity. Rather than looking for the “most competent man”, organisations could perform better with ordinary people when using scientific management systems. Hiring practices evolved with role specialization, and personnel administrators were needed to hire and train the right skills. HR was born.

“The most important object of both the workmen and management should be the training and development of each individual…” – Frederick W. Taylor

While acknowledging the existence of “sweatshops” where people are overworked, Taylor addresses the more prevalent problem of people intentionally underworking.  He points the finger at the practice of paying people a standard rate of pay for doing the same work. These “ordinary schemes of management” result in low performance. He shares a story of a golf caddy boy who advised a green caddy to walk slowly behind his golfer since the faster they go, the less they earn, since they are paid by the hour. He further warned the boy that if he went too fast the other boys would give him a beating.

He goes on to identify an even worse productivity killer – workers hiding from one another the knowledge of how to work faster. Taylor conduct time-motion studies showing more motivated workers producing 30-100% more output than non-motivated workers, attributing the lower performance levels to non-differentiated pay for time worked, peer pressure and lack of knowledge sharing.

This was written more than a hundred years ago. Have we changed? Not much. Sure, we have merit matrices that ensure better performers receive an annual pay raise that is 1-3% higher than average workers. But does that differentiation truly unlock the kind of personal and organizational productivity Taylor was talking about? Does an extra 2% compel a worker to bring their ‘A’ game every day, share their productivity secrets with others and risk retaliation from others who appear lazy in comparison?

In early 2015 Deloitte conducted a study finding even today, 44% of workers work just hard enough not to get fired. We may be differentiating rewards, technically, but are we having any real impact on organizational performance? Individual performance?

Managers must manage

Deloitte (Australia), incidentally, decided in June 2015 to drop the “dreaded use of performance ratings” by June 2016. Instead, the new model requires managers to be more hands on, more confrontational. Managers need to be comfortable sitting down with their employees and discussing their strengths, but inevitably also their weaknesses.

Or as Taylor described it, “those in management should also guide and help the workman…each man daily should be taught by and should receive the most friendly help from those who are over him, instead of being, at the one extreme, driven or coerced by his bosses, and at the other left to his own unaided devices… This close, intimate, personal cooperation between manager and the men is of the essence of modern scientific or task management.”

The dropping of performance ratings, and the use of numerical ratings in various pay formulas, is not meant to eliminate differentiation in rewards. Even Taylor argued the need for differentiation. Instead it is intended to remove an overly-automated, calibrated, forced-distributed labeling process, in order to restore real management. Instead of HR inserting itself into the manager-worker relationship, we are stepping back and handing it back to the manager to own and develop.

Can our managers succeed? Can they develop a “close, intimate, personal cooperation?” Can they daily teach and provide friendly help?

My firm’s own research on Ending the Use of Ratings has shown that manager skills are the single most critical enabler of change, among companies dropping use of ratings. I have, in the last two years, trained over 500 line managers how pay works, how to make good pay decisions, and how to communicate with workers about pay, performance and development.

Is pay for performance dead? No! But it is being redefined. The construct of “performance” in most multinationals has consisted of the “what and the how”. The “what” is what people do, their results, generally measured against key performance indicators, or KPIs. The KPI’s are generally set as SMART goals (specific, measurable, attainable, relevant and timebound.) The how refers to behavior, i.e. competencies and living the company values.

Companies still say performance is important, but in place of the word performance, companies are more likely now to refer to “value” or “contribution” or “impact”. These concepts are broader and more inclusive than performance. Companies are more interested in business success than in completion of KPIs. Those individuals in each area who most contribute to (have the most impact on) business success should be paid the best, relative to the market. There is more focus on retention of key performers for the future than on rewarding people for what they did in the past. The concepts overlap a bit, but they are two different ways of looking at people value.

Managers will need to know their people better, the work they do, how they do it, and the results of it. They will need to judge whether a person is bringing value, or taking up space for a steady paycheck, doing just well enough to not get fired. The manager then needs to allocate scarce rewards in a way that retains those having most value. The concept of a normal merit increase will slowly dissolve over the next ten years, for companies whose managers can effectively manage without “ordinary schemes of management.”

Back in my business school days, I was also VP membership for the Society for the Advancement of Management, or SAM. The founder of SAM: Frederick W. Taylor.

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