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Dear Workforce How Are Peer Reviews Used For Compensation

Peer review usually is not a common way of measuring performance. It is more prevalent in organizations where there is a culture of openness, teamwork and cooperation.
March 6, 2002
Related Topics: Compensation Design and Communication, Performance Appraisals, Dear Workforce, Compensation
QDear Workforce:

How common a practice is it for companies to implement peer appraisal forcompensation decisions? How does the peer rating drive the dollar amount bothindirectly and indirectly?

- Seeking best practices, assistant head of HR, government, Singapore.

A Dear Best Practices:

Peer reviews are a method for measuring performance against predeterminedgoals. They are not goals, but a review process.

Peer reviews, or 360 feedback, are not a common way of measuring performancein any significant amount. That is, it is not used in a majority of cases, andwhen it is used, it may or may not affect the compensation decision. When it isused, it is more prevalent in organizations where there is a culture ofopenness, teamwork and cooperation -- for example in nonprofits.

In financial services, 360 feedback is used to a degree -- and it is found incommunity banking and smaller commercial banks. While I do not have empiricalevidence on statistical relationships of use vs. company size, it is myexperience that the larger financial services organizations do not use peerreview widely for compensation decisions.

Functional importance

In addition to certain industries having a broader use of peer review, thereare certain functional areas that use peer review more broadly than others. Inour research, we have found that the technology function makes significant useof peer reviews. Of 62 organizations that responded, 16 (or 26 percent)indicated that they utilize 360 peer review. This, we believe, is the mostprevalent functional use of peer reviews.

Below are a few case examples from our clients:

Small commercial bank. There is a performance management system in place thatapplies to all personnel in the bank. The culture is one of "family,"working together and teamwork. Part of the measurement process includes peerreview, which accounts for approximately 25 percent of the total weighting. Thisdoes affect the compensation decision, but the overall compensation philosophydoes not differentiate significantly between high performers and averageperformers.

Therefore, the performance management system (and the peer review process) isnot viewed as having a meaningful impact on pay. The trend with this institutionis to go more directly to objective pay for performance, while keeping the peerreview. Pay will be more highly differentiated by performance, and peer reviewwill have a lesser impact on total pay.

Major international financial services bank/investment bank. The institutionhas been growing both internally and by acquisition. A major goal is torestructure/consolidate/upgrade back office activities. There are many differentfunctions involved in the change management process -- technology, operations,finance, etc. The company is revising its performance management system for theprimary functional areas so that peer reviews are used to quantify the teamworkgoal, which has about a one-third weighting. These teamwork goals are primarily at the senior (not executive)and middle management levels -- the levels from where the change process has tobe driven. Peer reviews have been used in the past at this organization; howeverit has not generally been accepted as a viable measurement standard.

Comments on the industry. The financial services industry pays very highlyrelative to other industries, and the total pay opportunity is heavily weightedto variable pay at the senior and executive levels. In short-term variable payprograms, the primary drivers are very objective (net income 52.6 percentprevalence; individual performance vs. specific goals, 57.9 percent; divisionperformance 31.6 percent; sales revenue 26.3 percent).

Discretionary only has 26.3 percent prevalence. With the above very specificgoals, it can be assumed that that the measurement criteria also is veryspecific, and not by peer review, for the vast majority of the annual bonusamount. In a balanced scorecard approach to measuring performance, to the degreethat peer review is included, again it generally would have a small weighting.

SOURCE: David Bushley, managing director, compensation practice, UnifiNetworks, a subsidiary of PricewaterhouseCoopers, Westport, Connecticut, Sept.5, 2001.

LEARN MORE: See "Managing Performance the MerrillLynch Way"

The information contained in thisarticle is intended to provide useful information on the topic covered, butshould not be construed as legal advice or a legal opinion. Also remember thatstate laws may differ from the federal law.

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