Performance Management for Agile People

[article]

Compensation

Trust me, your employees care about their annual appraisals mostly to the degree that the appraisal leads to raises. This obsession is the result of years of using appraisals to drive compensation decisions. The entire constellation of dysfunctional behavior that clusters around annual compensation decisions stems from a few cherished and incorrect beliefs:

  • Small variances in compensation will drive large changes in behavior.
  • Job satisfaction is largely due to compensation satisfaction.
  • Bonuses will make people smarter.
  • Rewarding one person does not demean another.
  • The ability of an employee to deliver results for the company is largely under the employee's control.
  • Raises keep the right people at the company.
  • Individual behavior is the prime driver of organizational success.

It would take another article the size of this one or larger to properly discuss the foregoing assertions, so I won't attempt to do so here. Suffice it to say that none of the assertions above is true.

Minimize Compensation Differentials

Everybody wants to know how to accurately judge individual performance so appropriate compensation adjustments can be made. Does this actually make sense? Say I make a nominal $100,000 per year. Raises in most companies in most good years tend to be in the 3-5 percent range, so a really good raise for me would be 6 percent, or $6,000. That translates to $500 per month before taxes, which in the US might be around 30 percent, giving me a net improvement of $350 per month.

Would you say that $350 per month on top of a salary of around $8,000 per month really makes a big difference? Given that a bonus can't make you any smarter, what is the real incremental improvement that we expect to see after investing all of the time and effort into figuring out how to parcel out the available raise pool?

Now, let's put that raise in context. Most people want desperately to get a raise that is bigger than the one that their colleagues got. It turns out that most people feel they deserve it, because most of us think we're better performers than our colleagues. So, if I get my net $350-per-month raise and my colleague gets $250, what is the effect? I will feel a little bit good for a short time after the raise is given. My colleagues who got less than me will feel bad for longer than I will feel good.

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