The State of Performance Management. research. A Survey Brief by WorldatWork and Sibson Consulting July 2007

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1 The State of Performance Management research A Survey Brief by WorldatWork and Sibson Consulting July 2007

2 Media Contact: Marcia Rhodes N. Northsight Blvd. Scottsdale, Arizona / Toll free: 877/ Fax: 480/ About Sibson Consulting Sibson Consulting ( a Division of Segal, provides strategic HR solutions related to the planning, implementation and operation of total rewards, compensation, retirement and health benefit programs. Sibson's services encompass talent management, benefits, organization design, sales effectiveness and change management WorldatWork Any laws, regulations or other legal requirements noted in this publication are, to the best of the publisher s knowledge, accurate and current as of this report s publishing date. WorldatWork is providing this information with the understanding that WorldatWork is not engaged, directly or by implication, in rendering legal, accounting or other related professional services. You are urged to consult with an attorney, accountant or other qualified professional concerning your own specific situation and any questions that you may have related to that. No portion of this publication may be reproduced in any form without express written permission from WorldatWork.

3 The State of Performance Management A Survey Brief by WorldatWork and Sibson Consulting Overwhelmingly, the top challenge faced by organizations was that managers are unable to have difficult performance discussions. Performance management is an essential aspect of business and people management, but making it effective is a seemingly constant challenge. It includes, but is not limited to, the annual performance rating. It affects most other people-management processes, including base pay, promotions, transfers, goal setting, and training and development. To gather information about performance management practices and outcomes, WorldatWork and Sibson Consulting invited a sample of WorldatWork members to participate in a confidential online survey. More than 550 individuals, primarily senior-level HR professionals, responded. The demographic profile of the respondents is similar to that of the WorldatWork membership. The organizations represented in the study range in size, from fewer than 100 employees to more than 100,000 employees. The following industries are represented: finance and insurance, health care, higher education, manufacturing, professional services, public sector and utilities. KEY FINDINGS This report presents the results of the WorldatWork/Sibson State of Performance Management Study as answers to questions that HR professionals often ask about performance management, including its effectiveness, top goals and challenges, linkage to rewards, methods and measures used, roles and intended outcomes. How Effective Are Performance Management Systems? Just over half of the respondents view their organization s performance management system as effective (with an overall grade of A or B ). (See Graph 1.) Forty-eight percent rated their organization s performance management at a C, D or E level. One of the important findings of the study is that the performance management techniques of the effective and less effective organizations are not very different. The greatest difference is the level of leadership support. Graph 1 Respondents Rating of Their Performance Management System by Letter Grade* What Are the Top Goals and Challenges of Performance The State of Performance Management Study found that the top three goals of performance management are fairly consistent across respondents, with distribution of rewards, increasing individual accountability and improved financial and operational results topping the list. Overwhelmingly, the top challenge faced by organizations was that managers are unable to have difficult performance discussions. Employee perception of performance as an HR process and poor goal setting surfaced as the second and third greatest challenges, respectively. (See Graph 2.) How Are Rewards Tied to Performance As noted above, the number one goal of performance management is distribution of rewards. The study found that at least half of respondents use information from performance management to determine the following aspects of rewards: merit increases (76 percent), promotions (68 percent), and annual incentive distributions (58 percent). Equity awards, however, are only tied to performance management in 37 percent of respondents organizations. What Methods and Measures Are Used in Performance The study also collected data on methods and measures used in The State of Performance Management WorldatWork, July

4 performance management. Results regarding ratings and technology were consistent across respondents, with 54 percent reporting use of a five-point rating scale, and 73 percent reporting use of an electronic performance management system. Organizations that use specified ratings distributions (28 percent) and forced-ranking distributions (10 percent), a preset distribution that managers must follow when assigning ratings, are in the minority. To assess performance, almost three-quarters (73 percent) of responding organizations use written objectives and 73 percent use job accountabilities, which identify the specific outputs an incumbent is expected to achieve. However, 58 percent use behavioral competencies, and 47 percent use quantifiable metrics. Just under one-third (31 percent) of organizations use some form of cross-manager calibration to ensure that managers are rating and distributing related rewards consistently. The means of ensuring consistency cited by the largest percentage of respondents (43 percent) was the post-audit by human resources. Timing of pay actions resulting from performance management varied, with the most frequent timing (reported by 29 percent) being within two to three months of the end of the fiscal year. What Roles do Managers Play in Performance Although 64 percent of respondents report that managers complete their assessments on time, a smaller number (44 percent) report employee participation in the assessment. Coupled with the fact that 37 percent report ongoing coaching and feedback on performance, employees are not getting clear, ongoing messages and performance feedback. Who Are the Biggest Champions of Performance The study shows that the biggest champion of performance management is the top HR executive (46-percent agreement) followed by line leadership (the president, CEO or COO) at 32 percent. However, line-leadership support is most closely linked to employee perception of the fairness of the system and several other important positive outcomes. What Are the Outcomes of Performance Employee trust in the process is an essential outcome of a strong performance management system. In this study, 30 percent of Graph 2 Top Three Goals and Challenges, by Percentage of Respondents Selecting Each Option* The State of Performance Management WorldatWork, July

5 respondents report trusting their performance management system. However, 54 percent of respondents believe their performance management system has helped the organization achieve strategic goals. Distribution of ratings generally does not change when organizational performance changes, further decreasing the linkage between individual and corporate results. That is, only 20 percent of organizations report that the percentage of employees with the highest rating goes down when organizational performance is poor. This indicates that managers, in a good number of organizations, give as many high performance ratings as they can, regardless of organizational performance. One key outcome of performance management is alignment between individual and organizational goals. While alignment between individual and corporate goals is strong at the senior management level, perceived linkage decreases significantly at lower levels of the organization. (See Graph 3.) How Does Performance Management Affect Organizational Performance? The study results demonstrate that there is a clear linkage between successful performance management and superior organizational performance. Higher performing companies tend to have better rated performance management systems. (See Graph 4 on page 4.) Top-performing companies also show greater differentiation between performance ratings and resulting compensation actions. Finally, in top-performing companies, the performance management system is perceived by respondents as a key lever for achieving organizational strategic objectives, as shown in Graph 5 on page 4. Does Leadership Support Really Matter? Sibson s additional analysis of the study results shows that leadership support of the system really does matter. Sibson examined the financial performance of participating publicly traded companies and compared the results of the highest and lowest performers. In high-performing, publicly traded companies, the performance management outcomes are much stronger. The presence of line-leader champions makes a profound difference in the quality of performance management. As illustrated by the data in Graph 6 on page 5, organizations with line-leader champions have stronger performance management outcomes. CONCLUSION The results of the WorldatWork/Sibson State of Performance Management Study indicate that improvement in performance management is needed in many organizations and that performance management is stronger in higher performing companies. But the basics of performance management are similar among most organizations. To improve a performance management system, an organization must analyze not only the design of its program, but also the key drivers of a successful system: leadership and execution. The organizations getting the most impact from performance management are those that have strong leadership support, as well as those that are successful in differentiating performance and giving performance messages. These seem to be the hardest challenges in performance management. Getting leadership on board is an important part of the solution. Graph 3 Reported Alignment of Goals of Senior Managers, Middle Managers and Non-Managers with Corporate Goals The State of Performance Management WorldatWork, July

6 Graph 4 Rating of Performance Management System by Letter Grade by Top vs. Bottom Quartile Publicly Traded Companies* Graph 5 Agreement with Statements about Performance Management by Percentages of Top vs. Bottom Quartile Publicly Traded Companies* The State of Performance Management WorldatWork, July

7 Graph 6 Agreement with Statements about Performance Management by Percentages of Line vs. Staff Champions The State of Performance Management WorldatWork, July