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Lessons From the Front Lines

June 30, 2006
Related Topics: Variable Pay, Compensation Design and Communication, Featured Article, Benefits
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Performance management means different things to different people. It can be a simple system of performance reviews, or a tightly knit process of cascading goals and top-to-bottom workforce alignment. It might involve technology, and some would argue that employee performance can’t be managed in a large organization without it.

    But no amount of automation or technology can help a company realize its performance management objectives unless it begins in the right place. "Creating a performance-driven organization is ultimately about culture," says Mark Stiffler, CEO of Synygy, an incentive management company in Chester, Pennsylvania.

    For any performance management plan to be even mildly successful, employees must first be able to accept it and then understand what is expected of them. It’s an undertaking that is dependent on the corporate culture.

    Workforce Management sat down with a group of human resources leaders and experts in the field of compensation during Synygy’s spring Performance Conference in Los Angeles to gain insight into their experiences with performance management. Much of their discussion focused on the workforce-related challenges of adopting and living with performance management plans that are pushing toward pay-for-performance goals.

    The companies, which are at different points along the performance management continuum, shared lessons that they have learned along the way. The participants represent a variety of corporate cultures and each provided a unique perspective on the subject.

Beyond mechanics
    Fear of the unknown is one of the biggest hurdles for Advo, the nation’s largest direct-mail company. The company has 3,700 employees and is based in Windsor, Connecticut. Employees there know that the organization’s new performance evaluation process may undo notions of who the high performers are within the company.

    Sometimes a department will have a high-performing employee, but his or her work has nothing to do with the overall goals of the organization, says Steve Wohlert, national vice president of sales operations. Rewarding that kind of performance is probably counterproductive.

    Performance management can usher in changes that go against the cultural grain of an organization. Workers at King Pharmaceuticals, a drug manufacturer based in Bristol, Tennessee, had grown accustomed to receiving bonuses whenever the company performed well. So when it came time to transition to a variable pay model last year, it was no surprise that some of its 2,800 workers were confused and resistant.

    "Our employees definitely had a sense of entitlement," says Ardyce Plosser, director of compensation and performance management. "They thought they deserved to be rewarded regardless of their contribution to the overall corporate success."

    What made the transition particularly tricky is the fact that King Pharmaceuticals is built from smaller companies that were acquired throughout the years. Each had its own culture and compensation model. The company has launched an aggressive education campaign to help workers understand what variable pay is all about.

    Friction related to performance management can erupt even within corporate cultures where variable pay already exists, says Robert Worobow, corporate vice president of human resources at Trustmark Insurance of Lake Forest, Illinois. The diverse departments within the company had developed their own ways of figuring out pay for performance and were hesitant to adopt a centralized procedure. Each division had a deep sense of ownership over its own process.

    "Aligning the system was like trying to take away their baby," Worobow says.

Leveling with poor performers
    Most companies have no trouble citing good performance. But getting them to actually say that people are performing badly is another matter.

    "At Schwab, we have three possible ratings for employees. The bottom one is never assigned," says Maureen Hilts, vice president of compensation at Charles Schwab & Co. The San Francisco-based discount broker has about 14,200 workers.

    That creates a disconnect between what managers write in performance reviews and the reality of how well, or poorly, employees do at helping the company achieve its goals, Stiffler says. He warns that not leveling with people about their performance cements an entitlement mentality. That hampers a company’s ability to move forward with a performance management plan, let alone adopt a variable compensation structure in the future.

    True performance management gives workers a very specific index number of where they stand relative to their peers.

    "Employees should be able to say, ‘I am in the 20th percentile and therefore I am considered excellent, but I am at the bottom of the excellent pool, so I need to improve,’ " Stiffler says. The evaluations should be given not once a year, but on a quarterly basis in order to give employees feedback that is timely and useful, he says.

Support from the C-suite
    One of the most important challenges for Wells Fargo is getting a wider cross section of employees in human resources to speak the language of corporate leadership, says Peter Kurlander, vice president of corporate compensation for the San Francisco-based bank.

    Achieving this goal may involve improved leadership skills and the use of metrics because HR quantifies important processes, like employee productivity and level of compensation. "We need to be able to synthesize what happens at the HR level and translate it into information that the CEO can make sense of," Kurlander says.

    Since adopting performance management can have serious implications, strong support from the C-suite is crucial. At King Pharmaceuticals, the switch to a more performance-based system prompted employees to push for higher base compensation. They wanted more predictability when planning out a household budget.


"What we need to work on is helping employees draw a line of sight between their performance and corporate objectives."
--Maureen Hilts, Charles Schwab & Co.

    Meanwhile, there was turnover among claims employees at Trustmark when performance-based pay was introduced, Worobow says.

    But the fact that the CEOs at both companies were fully committed to making the transition enabled the performance management programs to take hold.

    The fact is, performance management could never take off without support from corporate leaders. That’s because it entails making some sacrifices. In many cases, companies need to amass enough money to create pools for a variable pay structure. This could mean cutting employees’ pay or withholding merit increases. Those are difficult decisions that only company leaders can make. It could take four to five years before an organization has the resources to move to a variable compensation model.

Alignment
    Far too often, organizations embark on performance management plans without first having a clear vision of what they want to accomplish, Synygy’s Stiffler says. And in the cases where tangible goals are actually set, leadership often falls prey to the temptation of focusing too narrowly on financial objectives, allowing strategic ones to fall by the wayside.

    The key is to have a balance between the two approaches, Stiffler says. Such financial objectives as revenue, margins and productivity are critical, but companies should not underestimate the importance of strategic changes in the workforce.

    Certain companies design goals that promote modifications in the behavior of employees that will ultimately yield financial rewards. An example of this would be enhancing client services, which could ultimately improve customer satisfaction and loyalty.

    "Financial goals are relatively easy to set and meet," Kurlander says. Strategic goals take more time and commitment, but they have the most potent impact on the bottom line, he says. Strategic goals may entail creating a new way to interact with clients, changing the direction of the business or deciding to create new products.

    At Synygy, which practices the performance management it preaches, none of the established goals are financial ones.

    "Our objective is to create fundamental changes among workers," Stiffler says. The company’s strategic goals, however, are always connected to financial objectives.

    Similarly, Trustmark also blends its strategic and financial goals. Employees are evaluated on the basis of the quantity and quality of their work, Worobow says.

    Regardless of whether corporate objectives are strategic or financial, organizations should always tie the pay structure of employees to them, Stiffler says. All of Synygy’s 500 employees are on a variable pay structure.

Cascading is critical
    Unless an organization can convey its objectives and clearly explain to employees how their performance can help realize its goals, performance management programs will fail.

    "Leadership usually has an understanding of what they need to do in their line of business," Schwab’s Hilts says. "What we need to work on is helping employees draw a line of sight between their performance and corporate objectives."

    There are various ways in which organizations can ensure that their cascading messages are heard. Advo, for example, plans to customize communications materials to the individual departments within the company. Tailoring the language is usually more effective than designing a generic communications campaign, Wohlert says.

    Wells Fargo’s leaders take every opportunity to repeat the corporate objectives during speeches and presentations and at special events. In addition, the company publishes the objectives in Connections, its monthly employee magazine. Consequently, a large number of Wells Fargo employees can recite the company’s goals by heart.

    These include putting the customer first, underscoring the importance of delivering good client services and valuing team members. The last value ties in with teamwork and diversity. It behooves them to know the objectives since their salary is tied to them, Kurlander says. The company spends nearly $2.3 billion, one-third of its compensation budget, on variable pay for its 153,000 employees.

Survival of the fittest
    Critics of performance management warn that pay-for-performance programs can create hyper-competitive organizations in which workers run roughshod over one another to move ahead in performance rankings. Stiffler recommends setting up a performance management plan that goes beyond the rankings that can create a dog-eat-dog culture.

    "There is an inherent flaw in plans where the only way to get higher is by stabbing someone in the back," Stiffler says. A teamwork component for any performance measurement should help. Certain employees at Trustmark, for instance, are evaluated 45 percent on the basis of quality, 45 percent on quantity and 10 percent on teamwork.

    But before blanketing every performance management evaluation with a teamwork component, Kurlander suggests taking a critical look at the nature of a position.

    "Sometimes there are jobs in which people are not really part of a team," he says. Bankers, for example, sometimes form client relationships and close deals largely on their own. An unwarranted teamwork component could actually have a negative effect on employee retention, particularly if weak performers diminish the earning potential of a highly productive employee.

    Organizations may want to consider whether an employee is actually part of a team, whether the team is permanent and whether everybody is an equal contributor to the group effort.

Workforce Management, June 26, 2006, p. 50-52 -- Subscribe Now!

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