Employee Performance Reviews – Are They Effective and How do They Fit in a Company’s Compensation Structure?

May 18, 2010 by Frank Goley, Business Consultant

The Annual Employee Performance Review should be a thing of the past.  Performances should be gauged by comparing the Actual and Targeted Budgets for Company Divisions, and how employees in those business units contributed or hindered the Company’s Budget.

Dr. Samuel Culbert, consultant, author and professor of management at UCLA (Reference: Wall Street Journal, October 20, 2008, The Journal Report, Human Resources Section, “Get Rid of the Performance Review” by Samuel A. Culbert), argues that the traditional Performance Review is detrimental to company performance; a prime cause of low morale; and damages inter-company communications and teamwork.  Dr. Culbert lists the negatives resulting from how traditional Performance Review is typically implemented:

1.     Two Different Mindsets:  The boss is thinking about performance improvements, missed opportunities, skill limitations and team dynamics.  The subordinate is concerned with compensation and job advancement.

2.     Performance doesn’t Determine Pay Levels:  As much as prevailing market forces do along with, employee experience and Company Budget constraints. 

3.     Subjective Objectivity:  It can be argued that a Performance Critique is as much an expression of the evaluator’s self-interests as it is the subordinate’s strengths and weaknesses.  The newest performance review method, 360 Degree Feedback, gives anonymous feedback on an employee without any credibility built into the evaluation method.  It is too easy for self-interests to emerge and axes to be ground with such a subjective, unaccountable performance evaluation method. 

4.     One Size doesn’t Fit All:  Cookie cutter Employee Performance checklists often create a situation of boss pleasing behaviors verses doing a good job.  Different people with different functions and backgrounds shouldn’t be judged on the same rating scale and one size fits all system. 

5.     Personal Development is Impeded:  Subordinates are often intimidated by a Boss’ involvement in job performance as the Performance Review Structure discourages self-honesty about an employee’s short comings and areas which need improvement.  Subordinates feel self-analysis and self honesty could very well come back to haunt them during the evaluation.

6.     Hindrance to Effective Teamwork:  The most important team dynamic, that between boss and his or her subordinates, is undermined by the Performance Review process.  The Boss is preaching teamwork, but the Performance Review process is one-sided, as the boss sees him or herself as the evaluator and doesn’t engage his team of associates.  Dr. Culbert, calls it like it seems to the subordinate:  “… a ubiquitous need for subordinates to spin all facts and viewpoints in directions they believe the boss will find pleasing.  It defeats any chance that the boss will hear what subordinates actually think.”

7.     Immorality of Justifying Corporate Improvement:  At first I thought, as a Business Consultant, this is an awfully “strong” statement by Dr. Culbert, but after reading the first sentence in this section, I think he makes a valid point:  “I believe it’s immoral to maintain the façade that annual pay and performance reviews lead to corporate improvement, when it’s clear they lead to more bogus activities than valid ones.”  Performance Reviews tend to dispirit the employee and create distrust and cynicism.  The amount of inefficiency created by “cover your butt” mentalities is probably much more significant than managers know.   

Dr. Culbert laid out 7 key areas where Performance Reviews do nothing to enhance performance, and in fact, create severe inefficiencies within a company, causing a negative impact on the Company’s bottom-line and poor employee morale.  Dr. Culbert’s solution to the “one-side-accountable, boss administered / subordinate-received performance reviews is simple: “…two-sided, reciprocally accountable, performance previews.”  Let’s break this down into parts:

1.     Two-Sided:  Open communication between the boss and his or her team members on a daily basis.

2.     Reciprocally Accountable:  The boss is accountable to the subordinate as much as the subordinate is accountable to the boss in meeting pre-scribed expectations and goals. 

3.     Performance Preview:  A meeting of the minds between boss and subordinate where they together layout a joint business plan for the month, quarter and year with periodic scheduled “check-ups” along the way not so much to gauge progress as much as discuss difficulties, as well as, successes in meeting the plan’s goals.  This will result in modifying the plan along the way as circumstance dictates.  Everyone under the Boss clearly understands the Company’s goals, the team’s goals and how each team member will contribute to it.

Dr. Culbert’s reasoning behind Performance Previews makes great sense:

1.     Boss’s role is to “…guide, coach, tutor, provide oversight and generally do whatever is required to assist a subordinate to perform successfully.”  I like this system because it is the boss’s job to ensure subordinate success. 

2.     Eradicates self-serving boss behavior and 360 Degree finger pointing, hold-a-grudge fellow employee tactics.

3.     It is a Pro-Active Process, not reactive.  Keeps the focus on the future and the subordinate is viewed as partner who contributes significantly to the Company’s success. 

4.     Replace the one-size fits all Evaluation Check-off List with custom-constructed Inquiries tailored for each employee the boss oversees.  Once the boss has exhausted all his questions about how a subordinate thinks he or she can better and best perform work, the boss should ask the subordinate what else the boss needs to know.  The boss needs to know how the employee will achieve performance goals, and what help the employee requires from the boss.  An individual and team business plan is built so all team members know their roles, the boss’s expectations and company performance goals.  The Business Plan becomes a pro-active tool for the Boss to manage and assist his or her team.

Dr. Culbert argues when the Performance Review is taken away and replaced by the Performance Pre-View, “…people will find more direct ways of accomplishing tasks.  Accountability comes from team work; what the boss-subordinate team accomplish together.”  While job improvement comes from the individual worker, an environment characterized by  “…a trusting relationship where they [subordinates] can ask for feedback and help when they see the need and feel sufficiently valued to take it.” 

As a Business Consultant and Entrepreneur with over 20 years experience working with different corporate cultures, I completely agree with Dr. Culbert’s Performance Preview strategy as it contributes to the company’s bottom-line profits, while the Performance Review framework detracts from company goal achievement and inhibits profitability.  In the end, shouldn’t Performance Systems be about a Company’s Profitability and individual’s growth?  Of course it should be.  Bravo Dr. Culbert.   Performance Pre-Views should replace Performance Reviews in a Company’s Compensation Structure to achieve better subordinate-manager relationships and common-goal-teamwork toward achieving a Company’s Strategic Goals.

Let’s take this a step further to see its real benefit. Doesn’t Performance have a lot to do with a company’s Compensation Strategy, contributing significantly to the bottom line?  Well, I say, everything!  Fostering an atmosphere and structure of bilateral relationships between managers and team members should be built into a Company’s Compensation Plan, as that achieves:

1.     Common goals toward achieving company success.

2.     Higher individual productivity

3.     Accountability between team members and management, as well as, upper management and the executive level.

4.     Happier employees work harder and smarter

5.     Retain highly valuable, well trained, experienced employees as this system fosters trust, improvement, loyalty and advancement.

6.     Achieves the same objectives as do Stock Option Plans.  As people improve and add to a Company’s success, the reward of stock appreciation is the financial payoff, more so than pay raises.

However, the question to be asked is where do Benefits fit into Compensation Planning for new and growing small companies?  Well, I argue that it is more a part of employee morale than it is a part of the compensation package.  Ok, so you maybe scratching your head on this one as Benefits are often viewed as an integral component of a compensation package.

Where most companies dangle the Benefits Package, which in turn can be very expensive to the company, as a carrot to attract and retain talent, the most progressive companies understand its importance in the grand scheme of things.  Young, growing companies have a hard time affording comprehensive Benefits Packages and find them to be a big strain on cash flow.  However, if your Compensation Package includes Stock Options, Tax Preference Compensation, Key Person Protection and a Proactive-based Performance System, then the Benefits Package becomes less the focus, as does pay scale for that matter.  Let’s not, however, diminish the fact that Benefits are critically important to retaining and keeping talent, but if your Compensation Structure is designed as previously indicated, the entrepreneur will find employees who are willing to defray the cost of Benefit Packages with the Company via cost sharing, HSAs, etc.

A Benefits Package should be comprehensive in its offering, i.e. Health, Disability, Life Insurance and a Retirement Investment Vehicle, but if designed as part of a whole, a progressive Compensation Package whose sum of the parts is very competitive in attracting and retaining top talent, then it becomes more a question of structure than importance.  The best advice I can give to companies, as a Business Consultant with a Financial Planning background working with small businesses:  hire a Financial Planning Expert who specializes in designing and implementing Benefits Packages which aren’t seen as the focal point of a Compensation Package but a part of.  If designed and packaged properly, a Benefits Program does not necessarily have to drain cash flow, and for minimum financial contribution on the employee’s end, it can still be an attractive incentivized component of the overall Compensation Package. 

I highly recommend using a Financial Services Company to package the entire Benefits Plan as the bundling will save you significant dollars, and the employee will have a cohesive, very comprehensive plan which offers a singular, un-complicated customer support system.  It is vitally important a Company utilize the expertise of a Benefits Expert to find a Financial Services Company which offers substantial-breath of investment options and benefits to satisfy a wide range of employees, managers and executives.  A well-crafted Benefits Package should pay for itself and not be a burden on Company Cash Flow. 

I also make the contention that Pay Scale is not very important in the overall scheme of things as long as pay is not the focal point but a part of a Progressive, Incentivized, Comprehensive, Competitive, Proactive based Compensation Plan.  Highly talented and experienced people will work for less pay than the market offers if a Company offers a Compensation Package as prescribed in this article. The Performance Preview plays into this fact that a fair employee and executive evaluation and education system considers Compensation Structures and Benefits, and if done properly, will save the company tons on their Compensation Program yet still promoting higher levels of profitability. It is necessary to have a good balance between the two areas to attract and retain talent at a level a company can afford and still have plenty of room to grow.

Posted in Business Compensation Strategies.

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