Are you getting the most from your talent?

October 2012

Understanding and overcoming the common pitfalls in performance management

At a glance
Lack of organizational alignment around performance management programs often leads to employee dissatisfaction and disengagement with the 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. some programs are achieving quite the opposite To avoid these disappointing pitfalls and to get the value they expect from their performance management programs. organizations will be ready to build performance management programs that are fit for purpose. managers and employees all have different expectations of performance management programs. and managers will be ill prepared to guide their teams. Which performance management strategy best meets our needs? 3. Instead of inspiring stellar performance. however. Instead of inspiring stellar performance. companies need to answer three pivotal questions: 1. senior management must make clear choices regarding the objectives behind performance management and the level of effort spent on these programs. Program participation will be low. HR departments. Once alignment is established and objectives communicated. Why do we want to have a performance management program? 2. these programs are achieving quite the opposite: frustrating employees and wasting managers’ time and budgets. Without that clarity. This lack of alignment means that no one’s needs are being met. organizations are likely wasting precious time and money.  How can we systematically implement each building block of our selected strategy? 2 Are you getting the most from your talent? . Today’s business leaders. employees will be dissatisfied.

from backward-looking evaluation of past performance to driving innovation and team behavior. companies at that point on the curve by order of magnitude. The size of the circles indicates the number of U. Understanding and overcoming the common pitfalls in performance management 3 .Why do we want to have a performance management program? Companies set up performance management programs for a range of reasons. 2012. 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 1 PwC research. The rationale for the performance management program determines where a company falls on the performance management curve in Figure 1.S.1 Figure 1: Performance management curve.

more than half the respondents felt their managers were ineffective at driving performance. Sibson Consulting. October 2010. 2010 Study on the State of Performance Management.3 Underscoring this is the fact that managers devote up to 20% of their time on coaching and performance reviews. In one survey. these programs are reactive. yet there is nothing inherently wrong with their limited scope if the company’s needs are met. 1).Most companies adopt a reactive posture and use annual performance reviews to inform decisions regarding incentive compensation and promotions. coupled with poor coaching and feedback.2 and in another. December 2011. 2012. and accumulate data for potential disciplinary actions (left end of the curve in Fig. 65 percent of senior HR leaders cited “managers’ ability to coach” as their top performance gap. Lofty messaging about transformation and culture. will inevitably lead the workforce to distrust both the program and the organization’s commitment to their progress. Lofty messaging. Less than half (45 percent) of employees in one survey said their manager’s feedback at the annual review was fair and accurate. True. 2 3 4 Are you getting the most from your talent? . 5 Sibson Consulting. October 2010. coupled with a seemingly arbitrary evaluation process and poorly delivered coaching and feedback. 4 PwC research. will inevitably lead the workforce to distrust both the program and the organization’s commitment to their progress Cornerstone OnDemand/Harris “2012 US Employee Report”. 2010 Study on the State of Performance Management. 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.4 but are many times ineffective in this role.5 These results point to the importance of clearly defining and communicating the rationale for the performance management program.

The Driver and Transformer strategies build on the Rater strategy. Take a company that has been successful at raising workforce participation and involvement in a performance rating system. 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).Which performance management strategy best meets our needs? PwC has identified three performance management strategies. Right now. 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 5 . 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. understand workforce motivation and coach employees through ongoing dialogue and feedback—all components of the Driver strategy. 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. as in the Rater strategy. How can it do that? The answer is to agree on the capabilities its people need. Now. each building on the foundation of the previous strategy. Figure 2: Three performance management strategies. 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. that same company is interested in moving up the curve toward a proactive performance management strategy.

None of the strategies is inexpensive. 6 Bill Roberts. talent analytics becomes an essential capability. This raises the importance that companies answer the fundamental question. With the Driver and Transformer strategies. To boost team performance (Transformer) at one high-tech company. It is not HR’s responsibility. all can be expensive and time-consuming. March 2012. 6 Are you getting the most from your talent? . the CEO notes that “we had to embrace… the importance of talent and culture in achieving goals. 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. • Integration. Relatively speaking. and not much more. money and effort worth the outcome?”. Peers. As the focus on boosting individual and team performance intensifies.”6 • Communication.. enhancing the communication and coaching skills of leaders and managers).g. Raters typically integrate performance management and compensation processes. “Is the time. Companies must answer the fundamental question. Raters may have only one or two formal touch points each year. the Driver and Transformer strategies require a larger investment in human capital (e.Before selecting a strategy. more frequent dialogue with their employees that includes both formal and informal elements of coaching and feedback. and other colleagues may be involved along with an employee’s direct manager. companies need to recognize and internalize the significant differences among the three strategies in the following areas: • Ownership. And that is where the CEO has a role to play. “Is the time. In fact. money and effort worth the outcome?”. mentors. the business is increasingly in charge. “Juniper Networks is turning words on the wall into behaviors in action. • Effort and cost.” HR Magazine. HR typically owns the Rater strategy. far more time and greater technological sophistication than the Rater strategy. Drivers and Transformers establish a much richer. but the business leaders’ responsibility.

” measured by meeting financial goals) and qualitative (the “how. some may need revamping. Some of the building blocks may represent brand new initiatives. mid-year review and year-end evaluation. Defining and communicating the purpose of the program is never a “one and done” effort. “The dark side of rewarding high performance” delves into this. The sidebar. team-building activities. meeting financial goals is “table stakes” while meeting a team development goal is a “differentiator”).g. they need to review each building block required for that strategy. Over time. To do that. such as the simple Rater process of objective setting. volunteer activities). and employees are aligned on the rationale of the program and that they are using appropriate tools and processes. Companies need to translate and cascade corporate goals down to individual employees. Process and technology. Further. and finally to the two Transformer blocks. they may define two types of performance objectives for them— quantitative (the “what. it is often missed. how to weight objectives (e. Rater strategy: Assessing past performance The building blocks of the Rater strategy include: Program purpose.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. Companies need to regularly take the pulse of their workforce to ensure that leaders. they must decide how to evaluate employee progress toward these objectives. Though this is a seemingly obvious step. Performance objectives and evaluation.. and what inputs to include in the evaluative process. companies typically increase the standardization of processes across business units and geographies to be able to compare “apples to apples”. Here we will follow the same path as a company interested in the Transformer strategy—starting with the four Rater building blocks.” measured by upward feedback. Many companies have established performance management processes. and to better incorporate feedback and approval steps into the workflow. working our way through the three Driver blocks. managers. Elements such as coaching touch points can be layered on as companies move up the performance development curve. and some may work well as-is. Understanding and overcoming the common pitfalls in performance management 7 .

7 8 Are you getting the most from your talent? . “Should I Rank My Employees?” April 7. According to one recent study. Key features of these systems include the ability to cascade goals. Adapted from “The Wall Street Journal Guide to Management” by Alan Murray. 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. March 2012. so companies have invested a lot of resources in fine-tuning their programs. and integrate with HR software modules such as compensation.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. when Jack Welch introduced the 20/70/10 split at GE (sometimes called the “rank and yank” method of employee evaluations). organizations complete annual performance reviews. and they ponder the percentage of the total compensation package these scales should determine. not on stirring internal competition. 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. If employees and managers fail to see the value in the process—as most do— they simply go through the motions. 2009. Instead of giving employees grades for their past performance. The Wall Street Journal. hamper collaboration and increase voluntary turnover. though that number has been dropping from the high water mark of the 1980s. within guidelines for occupational and geographical groups. 8 Bill Roberts. Most companies have put aside their Excel spreadsheets and adopted specialized software to enable their performance development processes. A simple and intuitive user interface and mobile capabilities are increasingly important in driving positive user experiences and high workforce adoption rates. has implemented informal “conversation days”. Many organizations today use forced rankings. 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. Though most U. the focus is on individual and team development. this has been a compelling argument. managers focus on areas of new growth and aligning goals with the employees’ career path. Historically. For example. as is increasingly common. but with each passing year. performance ratings. to a skew-to-the-left curve for highperforming workforces. dropping the annual performance review process altogether. “Juniper Networks is turning words on the wall into behaviors in action. the goals and capabilities of the workforce and the organization become increasingly out of synch. One Silicon Valley company. They weigh the pros and cons of forcing or “targeting” ratings to a classic bell curve or. Participants may check off the item on the HR compliance list. published by Harper Business. but not great.8 And a large telecommunications company is trying another alternative to ratings—employees either “meet” or “do not meet” expectations. Managers have more leeway regarding merit pay. companies are dropping ratings and.S.7 And highly skilled employees are jumping ship to the competition when they receive good. One reason for the decline of these approaches is the realization that rankings can actually reduce productivity. many struggle to achieve anything close to full participation in that process. up to 35 percent of respondents eased off in their work effort after they received a bonus they felt did not reflect their performance. and succession management. support complex matrix relationships and social networks. for example. To avoid this pattern of dissatisfaction and attrition. learning and development.” HR Magazine. They try to select the “right” rating scale (four or five points?). Participation. in some cases. Again.

2011.Driver strategy: Boosting talent development The Driver performance strategy adds three elements to the Rater foundation: Capabilities and skills.10 Ongoing dialogue. for example. Other companies have started using social performance tools to create platforms for ongoing feedback and learning. The Corporate Executive Board Company. A better plan may be to define a simple. one leading software company rolled out an intensive program to boost the quality and frequency of coaching conversations and encourage a more collegial exchange. such as more autonomy. organizations are exploring other motivational tactics. some companies are experimenting with setting competencies aside and trying to infer development needs from performance objectives. The two key challenges are: • Business alignment–Reaching agreement on which competencies to use • Adaptation–Using the competencies in a consistent way and applying meaningful ratings to them Frustrated with these issues. 9 10 Understanding and overcoming the common pitfalls in performance management 9 . despite the tremendous importance such a dialogue plays in boosting employee performance and retention.” Minneapolis/St Paul Business Journal. Many managers still struggle to effectively communicate with their teams. “Managing for High Performance and Retention” January 2010. The notion of “competency management” as a core element of strategic talent management programs has been around for a long time. Motivation. 11 The Corporate Executive Board Company.11 To boost the quality and frequency of the coaching conversations. and evaluations. many companies struggle to effectively implement them. And a global telecommunications company has increased its managers’ engagement in compensation activities by raising staff awareness about the manager’s responsibilities in the process. And highly quantitative competency ratings can result in pseudoscientific performance ratings that are still subjective. drives 39 percent of employee performance and the quality of internal communications drives 38 percent of employees’ intent to stay. successfully reduced voluntary turnover and increased productivity by eliminating its minimum office hours and physical attendance requirements. according to one study. “U of M study shows Best Buy cuts staff turnover with flex schedule. but one thing is for sure—the answer is often not money. consistent (across geographies and units) set of behavioral and job-specific capabilities and skills and use them to inform objective setting. “Driving a High-Performance Culture. What inspires employees to go “above and beyond. Even so. Fair and accurate feedback.9 Increasingly. development.” June 2011. and several well-established competency libraries exist in the market.” making that discretionary effort that ultimately results in exceptional performance? There is much still to be learned about motivation. developmental support and a sense of value. 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. A large online retailer. Author-Ed Stych. April 6. Two-thirds of employees surveyed recently claimed to be dissatisfied by pay-for-performance.

10 Are you getting the most from your talent? . • In almost half of the business units.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 management—a critical initiative for the future success of the organization. As the practice of continuous dialogue and coaching spreads through an organization. companies can put qualitative targets in place to measure each person’s contribution to the team. • Employee accountability for objectives was enhanced. Certainly HR has a role in disseminating goals throughout an organization. 12 13 PwC research. sometimes at the expense of the larger team. Divisions scattered across more than 70 countries needed help in consistently developing and implementing performance objectives. improvements were made in three critical areas: the cascade of business goals. For example. “Driving a High Performance Culture. The Corporate Executive Board Company. Transformer strategy: Changing team and organizational behavior The Transformer performance strategy adds two elements to the foundation of the previous two strategies. 2012. the focus on safety and operational risk and the quality of longterm objectives.13 and only 15 percent of companies describe their employees’ goals as “very aligned with” business priorities. Another way to drive team performance is to formally hold leaders accountable for team development. the quality of the long-term priorities rose dramatically. • The number of employees who created objectives with a clear timeframe for completion increased. employees have little idea of how they contribute to meeting the corporate business goals. Alignment of employee and line manager objectives also improved. Managers were also coached to cultivate better listening skills and to brainstorm with employees on creative ways to help them reach defined individual goals. • In the most improved business unit. the day-to-day interactions with leadership really set the tone and direction for employees. All too often. For example.” June 2011. however.12 Business led. one leading professional services firm sets specific objectives for their leaders regarding team development and team members’ engagement and commitment to the group. The data are concerning—only 36 percent of employees understand the strategic direction of their organizations. Individual and team-based. goal alignment and leadership effectiveness are bound to increase (see the sidebar “The Journey from Rater to Transformer”). To ensure all team members pull their weight. 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. Companies are increasingly addressing the trade-offs inherent in traditional performance measures that exclusively incentivize individual performance. ultimately resulting in greater revenue than the time-worn “every man for himself” approach. Secondary goals included fostering teamwork and developing individual employee goals aligned with the company’s long-term strategy. • Employee compliance with the objective-setting process significantly increased. moving to teambased sales targets can inspire greater sharing of knowledge and collaborative problem solving. The primary rationale for the new program was to tie safety and risk management to employee rewards. according to one study.

For each building block. Take a look at your business strategy and reassess the role that performance management needs to play in it. Get real Take aim Take stock Adjust Understanding and overcoming the common pitfalls in performance management 11 . assess whether your approach to ranking staff sends the right motivational messages. Determine which performance management strategy (Rater. For example. Driver or Transformer) best supports your business objectives and best fits your organizational culture (or the culture you want to create). 3. 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. determine whether your processes and systems enable sufficient participation and dialogue. determine whether you need to change your approach. Use whatever strategy you have chosen to create greater alignment with business executives and leaders. 4. Assess your current performance management practices against your objectives. Get real. Alignment between business leaders and the chosen strategy is a critical part of this step. or if you need to invest in a more “social” approach. Then prioritize a list of necessary changes. Take aim. Ask questions such as: How are employees and managers perceiving the effort. Make sure to communicate “quick wins” to demonstrate early traction and show business results (e. improvements in productivity) and employee sentiment (how managers and staff feel about the new process).Next steps to enhance your performance management program Ready to build a far more effective performance management system? Then take these steps: 1. Similarly. Take stock.. implement change.g. and how well are they participating? On balance. Adjust. Take a hard look at your current practices and outcomes. Based on your prioritization.

This content is for general information purposes only.com To have a deeper discussion on performance management. © 2012 PricewaterhouseCoopers LLP.sadjady@us.com PwC firms help organizations and individuals create the value they’re looking for.com Sayed Sadjady Principal Advisory Services.r.US People & Change Leader 267 330 2517 marla.h.com.pwc.com Jan Seele Director Advisory Services.graeber@us.US People & Change Leader 703 918 1173 christine.US People & Change Leader 646 471 2377 bhushan.pwc.boswell@us.pwc.sethi@us.pwc.000 people who are committed to delivering quality in assurance.seele@us. please contact: Ed Boswell Principal US People & Change Leader 704 350 8125 edwin.ayers@us.www.pwc. Tell us what matters to you and find out more by visiting us at www. People and Change 646 471 9955 Jan.pwc. Each member firm is a separate legal entity.com Marla Graeber Principal Health Industries .com Christine Ayers Principal Public Sector Practice . PwC refers to the US member firm.com Bhushan Sethi Managing Director Financial Services .com/structure for further details. and should not be used as a substitute for consultation with professional advisors.pwc. All rights reserved.pwc. tax and advisory services. a Delaware limited liability partnership. .a. please contact: To discuss your company’s talent priorities and other issues related to human capital. and may sometimes refer to the PwC network.pwc. Please see www. People and Change 646 471 0774 sayed. We’re a network of firms in 158 countries with close to 169.

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