Armstrong's Handbook of Reward Management Practice

Transcription

1 Armstrong's Handbook of Reward Management Practice i

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3 iii fourth edition Armstrong's Handbook of Reward Management Practice Improving performance through reward Michael Armstrong

4 iv Publisher s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors. First published in 2005 as A Handbook of Employee Reward Management Practice by Kogan Page Limited Second edition, 2007 Third edition published in 2010 as Armstrong s Handbook of Reward Management Practice Fourth edition, 2012 Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road 1518 Walnut Street, Suite /23 Ansari Road London N1 9JN Philadelphia PA Daryaganj United Kingdom USA New Delhi India Michael Armstrong, 2005, 2007, 2010, 2012 The right of Michael Armstrong to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act ISBN E-ISBN British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Armstrong, Michael, 1928 Armstrong s handbook of reward management practice : improving performance through reward / Michael Armstrong. -- 4th ed. p. cm. Includes index. ISBN ISBN Incentives in industry. 2. Employee motivation. 3. Compensation management. I. Title. HF I5A dc Typeset by Graphicraft Limited, Hong Kong Printed and bound in India by Replika Press Pvt Ltd

5 v Contents Introduction 1 Part one Essentials of reward and performance management 3 01 An overview of reward management 5 Introduction 6 Reward management defined 6 Aims of reward management 6 Reward philosophy 7 Guiding principles 7 The reward system 9 Reward systems in action 13 Contextual factors affecting reward 15 Developments in reward management 19 References Performance management 23 Introduction 24 Characteristics of performance management 24 Principles of performance management 25 The performance management cycle 26 Performance and development agreements 27 Performance planning 27 Managing performance throughout the year 28 Reviewing performance 28 Assessing performance 29 Recording the performance agreement and review 33 Web-enabled performance management 36 Performance management as a rewarding process 36 Impact of performance management on performance 36 Line managers and performance management 40 Case studies 41 References 45

6 vi Contents 03 Performance and reward 47 Introduction 47 The meaning of performance 48 Influences on performance 49 How does reward impact on performance? 50 Impact of reward on organizational performance 51 References Motivation and reward 53 Introduction 54 The process of motivation 54 Types of motivation 54 Instrumentality theory 55 Reinforcement theory 56 Content (needs) theory 56 Process theory 59 How motivation theories affect reward management 63 References Engagement and reward 67 Introduction 67 Why engagement is important 71 The factors that influence engagement 71 Enhancing engagement 71 Developing engagement policies through reward 73 Conclusion 74 References Talent management and reward 77 Introduction 77 Talent management 78 The contribution of reward and performance management to talent management 78 References Financial rewards 81 Introduction 82 Incentives and rewards 83 The theoretical framework 84 The role of money 84 Views about the importance of pay 85

7 Contents vii Research on the effectiveness of financial rewards 88 Arguments for and against financial rewards 92 Criteria for effectiveness 94 References Non-financial rewards 99 Introduction 99 The significance of non-financial rewards 100 Types of non-financial rewards 100 Individual extrinsic rewards 101 Individual intrinsic rewards 102 Collective extrinsic rewards 103 Collective intrinsic rewards 103 References Total rewards 107 Introduction 108 Total rewards defined 108 The elements of total rewards 109 The significance of total rewards 110 Benefits of total rewards 110 Models of total rewards 110 Introducing total rewards 113 Total rewards in practice 119 Conclusion 124 References International reward 127 Introduction 127 The international scene 128 International reward strategy 129 Guiding principles for international reward 131 Rewards for expatriates 132 References The ethical approach to reward and performance management 137 Introduction 138 Ethical decisions in reward and performance management 138 Why is an ethical approach desirable? 138 Fairness 139 Treating people justly 139

8 viii Contents Resolving ethical dilemmas 142 The ethical role of reward professionals 145 An ethical code of practice for reward and performance management 146 References Strategic reward 149 Introduction 149 Strategic reward defined 150 The characteristics of strategic reward 150 Critical evaluation of the concept of strategic reward 150 Reward strategy 152 Case studies 157 References 159 pa r t t wo Base pay management Introduction to base pay management 163 Introduction 164 Base pay 164 Base pay management 164 Factors affecting pay levels the conceptual framework 165 Pay determination within organizations 170 Summary of factors affecting pay levels 172 Managing pay 172 Base pay management and performance 172 References Job evaluation 175 Introduction 176 Job evaluation defined 176 Aims of job evaluation 176 Achieving the aims 177 Formal job evaluation 177 Informal job evaluation 177 Analytical job evaluation schemes 178 Non-analytical schemes 182 Market pricing 184 Levelling 185 Job analysis for job evaluation 187 Computer-aided job evaluation 188 Choice of approach to job evaluation 190 Developing a point-factor job evaluation scheme 193

9 Contents ix Implement job evaluation 198 Ensuring that the scheme is unbiased 199 References Market rate analysis 203 Introduction 204 Aims of market analysis 204 The concept of a market rate 204 Job matching 205 Use of benchmark jobs 206 Sources of market data 206 Interpreting and presenting market rate data 209 Using survey data Grade and pay structures 213 Introduction 214 Grade structures 214 Pay structures 215 Guiding principles for grade and pay structures 215 Multi-graded structures 216 Broad-graded structures 219 Broad-banded structures 221 Career-family structures 227 Job-family structures 231 Combined career-/job-family and broad-banded structures 233 Pay spines 233 Unstructured pay systems 235 Spot rates 235 Individual job grades 236 Choice of grade and pay structures 236 Developing a grade and pay structure 239 Career-family structure design 244 Minimizing bias in grade and pay structure design 245 References Equal pay 247 Introduction 247 Reasons for unequal pay 248 The Equality Act Defending an equal pay claim 253 Achieving equal pay 255 Risk assessment 256 References 257

10 x Contents part three Rewarding and recognizing performance Merit pay 261 Introduction 261 Characteristics of merit pay 262 Method of operation 263 Performance-related pay 264 Competency-related pay 267 Contribution-related pay 269 Overall conclusions on merit pay 272 Developing merit pay schemes 272 References Bonus schemes 277 Introduction 277 Bonus schemes defined 278 Aims of bonus schemes 278 Rationale for bonus schemes 279 Criteria for a bonus scheme 280 Types of scheme 281 Designing a bonus scheme 281 Introducing a bonus scheme 285 Earn-back pay 285 Bonus schemes and performance 286 References Team pay 289 Introduction 289 Team pay defined 290 Aim of team pay 290 Rationale for team pay 291 How team pay works 291 Requirements for team pay 292 Advantages and disadvantages of team pay 293 Developing team pay 294 NHS case study 294 References 296

11 xi 21 Rewarding for business performance 297 Introduction 297 Types of schemes 298 Aims 298 Profit-sharing 298 Share ownership schemes 300 Save-as-you-earn schemes 300 Gain-sharing 300 References Recognition 303 Introduction 303 Recognition schemes defined 304 Benefits of recognition schemes 304 Principles of recognition 304 Types of recognition 305 Examples of non-cash awards 306 Designing a recognition scheme 307 Examples of recognition schemes 307 pa r t fo u r Rewarding special groups Executive reward 313 Introduction 314 Executive pay levels 314 Factors affecting the level and nature of executive rewards 315 Why has executive pay grown so much? 316 Corporate governance and executive remuneration 318 The elements of executive remuneration 320 References Rewarding sales and customer service staff 327 Introduction 327 Rewarding sales representatives 327 Rewarding customer service staff 333 References 336

12 xii Contents 25 Rewarding knowledge workers 337 Introduction 337 What motivates knowledge workers? 338 Approaches to rewarding knowledge workers 338 References Rewarding manual workers 343 Introduction 344 Factors affecting the pay of manual workers 344 Time rates 345 Pay structures 345 Incentive schemes for manual workers 346 Payment by results schemes 348 Collective schemes 351 Summary of schemes 352 Single status and harmonization 352 References 355 part five Employee benefits Employee pensions and benefits 359 Introduction 359 Rationale for employee benefits 360 Employee benefit strategies and policies 360 Types of benefit 360 Incidence of benefits 366 Choice of benefits 366 Administering employee benefits 366 Total reward statements 367 References Flexible benefits 369 Introduction 369 Reasons for introducing flexible benefits 369 Types of flexible benefits schemes 370 Introducing flexible benefits 373 References 375

13 Contents xiii pa r t s i x The practice of reward management Evidence-based reward management 379 Introduction 379 Evidence-based management 380 Evidence-based reward management 380 Reviewing reward 382 Measuring reward 384 Evaluating reward 387 Conclusions 390 References Developing reward systems 391 Introduction 391 The task of developing and implementing reward systems 392 Objective setting 392 The process of development and implementation 393 The development and implementation programme 396 Advice from practitioners (e-reward) 396 References Managing reward systems 403 Introduction 404 Reward policies 404 Controlling reward 407 Monitoring and evaluating reward policies and practices 408 Conducting pay reviews 410 General reviews 410 Individual reviews 411 Reward procedures 414 The use of computers in reward management 415 Communicating to employees 418 References Managing reward risk 421 Introduction 421 Risk management 422 Reward management risks 422 The risk management process 425 References 426

14 xiv Contents 33 Responsibility for reward 427 Introduction 427 The role of the reward professional 427 Role of line managers 429 Using reward consultants 431 References 432 Index 433

15 1 Introduction This handbook provides guidance on how to use reward processes to improve organizational, team and individual performance while catering for the needs of employees. Reward is defined as the recognition of the contribution or achievement of individuals or groups by a financial payment or some form of non-financial recognition. The book is evidence-based in that it makes use of the practical lessons learned from academic research projects but also refers to the considerable number of surveys and case studies conducted or produced by organizations such as e-reward and the Chartered Institute of Personnel and Development (CIPD). The theme of the book is that reward delivers performance. It is in line with the main message of the performance and reward professional map produced by the CIPD. This spells out that those involved in reward management are there to build a high-performance culture by delivering programmes that recognize and reward critical skills, capabilities, experience and performance, and ensure that reward systems are market-based, equitable and cost effective. American and some British companies refer to compensation or compensation and benefits rather than reward. The objection to compensation is that it implies that people need to be recompensed for the unpalatable necessity of having to work for a living. The term is not therefore used in this book. Plan of the book The book consists of the following parts: Part One Essentials of reward and performance management This part is designed to give a general introduction to reward and performance management. In it, reward and performance management systems are described, an analysis is made of how reward impacts on performance, the elements of total rewards financial and non-financial rewards are considered, as are the special features of international reward policy and practice. Importantly, a new chapter deals with the ethical approach to reward and performance management and the part is completed with a review of the contribution of strategic reward, which takes account of each aspect of reward considered earlier.

16 2 Introduction Part Two Base pay management This part covers the fundamental process of base pay management, which involves deciding on pay levels, fixing rates of pay and developing and operating grade and pay structures. The first chapter in the part examines amongst other things the factors that affect pay levels. Subsequent chapters are concerned with job evaluation, market rate analysis and the features and design of grade and pay structures. The part ends with a chapter dealing with the important subject of equal pay. Part Three Rewarding and recognizing performance In this part individual merit pay and bonus schemes are described. The part also covers rewards based on team or organizational performance and recognition schemes. Part Four Rewarding special groups Consideration is given in this part to the reward requirements of the special groups of people who are employed in organizations executives and directors, sales and customer service staff, knowledge workers and manual workers. Reward practices may differ between these groups and the result may be a degree of segmentation in the reward system. Part Five Employee benefits This part focuses on policies and practices in the provision of pensions and benefits and the flexible benefit schemes that allow an element of choice to employees. Part Six The practice of reward management The practice of reward management as described in this part covers the use of an evidence-based approach to the review and evaluation of reward systems, the development and management of reward systems, managing reward risk, and the allocation of responsibility for reward.

17 Part one Essentials of reward and performance management 3

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19 5 01 An overview of reward management Key concepts and terms Base pay management Reward philosophy Contingent pay Reward system Evidence-based reward management Segmentation Guiding principles Strategic reward Integrated reward management Total remuneration Performance management Total rewards Reward management Learning outcomes On completing this chapter you should be able to define these key concepts. You should also know about: The meaning of reward management The aims of reward management Reward philosophy The reward system The contextual factors affecting reward Effective reward management

20 6 Essentials of Reward and Performance Management Introduction This chapter is about the essentials of reward management the process of ensuring that people are rewarded fairly for the work they do and for contributing to the achievement of the organization s purpose and aims. Reward management provides answers to two fundamental questions: 1) What do we value? and 2) What are we prepared to pay for? The focus is on the aims and philosophy of reward management and the nature of a reward system. But because reward is very much about performance, the chapter should be read in conjunction with the next two chapters so that the full picture of reward and performance management can be obtained. Reward management defined Reward management deals with the strategies, policies and processes required to ensure that the value of people and the contribution they make to achieving organizational, departmental and team goals is recognized and rewarded. It is about the design, implementation and maintenance of reward systems (interrelated reward processes, practices and procedures) which aim to satisfy the needs of both the organization and its stakeholders and to operate fairly, equitably and consistently. These needs will particularly include the improvement of performance (reward and performance issues are examined in Chapter 2). But it should be emphasized that reward management is not just about pay and employee benefits. It is equally concerned with non-financial rewards such as recognition, learning and development opportunities and increased job responsibility. The aims of reward management are set out below. As discussed later, reward management processes are based on a philosophy which may be expressed in the form of guiding principles. They function through the reward system within the context of the organization. Aims of reward management The aims of reward management are to: support the achievement of business goals by developing a performance culture and stimulating high performance; define what is important in terms of behaviours and outcomes; align reward practices with employee needs; reward people according to the value they create; attract and retain the high-quality people the organization needs; motivate and win the engagement of employees; add value through the introduction of effective but affordable reward practices.

21 An Overview of Reward Management 7 But Ghoshal and Bartlett (1995) reminded us that reward management is essentially about adding value to people. It is not just about attaching value to them. Reward philosophy Reward philosophy consists of the set of values and beliefs that influence reward strategy and the design and operation of the reward system. An organization s reward philosophy may be defined and set out in the form of guiding principles. But it may be implicit all organizations have a reward philosophy which governs reward practice even if they do not articulate it. And it may be just a crude understanding of what is done, such as offering competitive rates of pay or paying for performance. Reward philosophies are concerned with the ways in which people are paid, the levels of payment, the extent to which pay should be related to performance, the scale of employee benefits and the adoption of total reward policies which provide for both financial and non-financial rewards. They also cover the degree to which reward practices are ethical in the sense that they are fair, equitable and transparent. The following is an example of a reward philosophy produced by Colt Telecom: Colt believes that talented and motivated people make a difference; talented people put us ahead of the competition and deliver the results on which the success of Colt is built. Colt seeks to offer a compensation and benefits package that rewards people for their contribution to the success of the company and ensures that external market competitiveness and internal relativities are taken into account. Guiding principles Guiding principles specify the approach an organization intends to use in managing reward. Reward guiding principles may be concerned with such matters as: developing reward policies and practices which support the achievement of business goals; providing rewards which help to develop a high-performance culture and attract, retain and motivate staff; maintaining competitive rates of pay; rewarding people according to their contribution; recognizing the value of all staff who are making an effective contribution, not just the exceptional performers; allowing a reasonable degree of flexibility in the operation of reward processes and in the choice of benefits by employees; devolving more responsibility for reward decisions to line managers. Guiding principles are often agreed by top management with advice from company reward specialists or external consultants. But they will be more acceptable if members

22 8 Essentials of Reward and Performance Management of the organization are involved in their definition. Guiding principles can then be communicated to everyone to increase understanding of what underpins reward policies and practices. However, employees will suspend their judgement of the principles until they experience how they are applied. What matters to them is not the principles themselves but the pay practices emanating from them and the messages about the employment deal that they get as a consequence. It is the reality that is important, not the rhetoric. The following are some examples of guiding principles. BT business linkage; clarity and transparency; market competitiveness; performance differentiation; choice and flexibility; equal pay. Tesco We will provide an innovative reward package that is valued by our staff and communicated brilliantly to reinforce the benefits of working for Tesco. Reward investment will be linked to company performance so that staff share in the success they create and, by going the extra mile, receive above-average reward compared to local competitors. All parts of the total reward investment will add value to the business and reinforce our core purpose, goals and values. Civil Service 1 Meet business need and be affordable. Business, operational and workforce needs are the drivers for a reward strategy. Business cases outline benefits, risks and costs and justify investment. Reward arguments need to be sustainable. 2 Reflect nature of work. Recognize and reflect workforce groups identified by function and skills utilized (eg operational, corporate or policy decisions). Organizations employing similar workforce groups in similar markets are encouraged to consider similar reward arrangements. 3 Recognize performance. Reward reflects the continuing value and the sustained contribution of an employee and their performance in a given position. Value and performance rewarded reflect how jobholders contribute to their organization, impact delivery and meet Professional Government (PSG) requirements.

23 An Overview of Reward Management 9 4 Manage total reward. Reward includes all aspects of the employee deal ; tangible and intangible elements of what is offered. Total reward is tailored and promoted to attract, engage and retain the right talent as well as providing personal choice and flexibility. Employers/employees need to develop a full understanding and appreciation of the value of the total reward package. 5 Manage all cash. Total cash comprises base pay and variable pay. Base pay reflects job challenge and individual s competence in the job. Variable pay reflects performance delivered against agreed objectives. Face the market. Reward levels, generally and for specific skills, aligned with agreed market positioning to attract, motivate and retain the right talent. Reward competitiveness covers each element of total reward (eg base pay, pensions, leave) and the overall deal. 6 Support equal pay. Eliminate direct and indirect reward discrimination and reduce any unjustified gender pay gaps. Operate reward systems that are perceived by staff to be reasonable and transparent. Reward systems and structures evaluated and kept up to date to ensure that they continue to meet the requirements of legislation. Diageo Performance: rewards are developed that reflect team and individual achievements. Market: rewards reflect the market in which an employee is based, whether that be geographical or functional, and compare favourably with those of competitors. Communication: Diageo aims to explain to everyone the components and value of their reward package, the criteria that affect it, and how they can influence it. Effectiveness: the company seeks best practice and ensures its benefits programmes remain effective for the business and our employees. The reward system A reward system consists of the interrelated processes and practices which combine to ensure that reward management is carried out effectively to the benefit of the organization and the people who work there. It consists of six major elements:

24 10 Essentials of Reward and Performance Management 1 base pay management; 2 contingent pay; 3 employee benefits; 4 non-financial rewards; 5 performance management; 6 total rewards. These elements are interconnected and contain various sub-elements as set out in Figure 1.1. They flow from the business and reward strategies as influenced by the organization s context and combine to achieve performance and reward objectives. Figure 1.1 The reward system Non-financial rewards Job evaluation Market rate analysis Business/HR strategies Reward philosophy Reward strategy/policy Context Grade and pay structure Base pay management Contingent pay Total remuneration Total reward Achieve aims: Performance Define/ influence behaviour Attract and retain Motivate and engage Add value Pension and benefits Allowances Performance management The main elements are described on the next page.

25 An Overview of Reward Management 11 Business strategy The starting point of the reward system is the business strategy of the organization. This identifies the business drivers and sets out the business goals. The drivers are unique to any organization but will often include items such as high performance, profitability, productivity, innovation, customer service, quality, price/cost leadership and the need to satisfy stakeholders shareholders and employees. Reward strategy and policy The reward strategy flows from an analysis of the business drivers. The question is: How can these be supported by reward in order to achieve the goals of the business? The strategy will define longer-term intentions in such areas as pay structures, merit pay and other forms of contingent pay, employee benefits, steps to increase engagement and commitment, and adopting a total rewards approach. The strategy will be influenced by the reward philosophy of the organization and by the context within which the organization operates its internal culture, structure, operations and size and the external economic and competitive environment. Reward policy will cover such matters as levels of pay, achieving equal pay, approaches to merit pay and other forms of contingent pay, the use of job evaluation and market surveys and flexing benefits. Base pay management Base pay is the rate for the job. Its management involves deciding on pay levels and developing and operating grade and pay structures as defined in Chapter 16. The base pay management areas of job evaluation, market rate analysis, and the design and operation of pay structures are described in Part Two. Contingent pay Contingent pay consists of payments which are related to performance, competency, contribution, skill or length of service. They provide for pay progression by being added to base pay, ie consolidated. Individual performance, competency or contributionrelated schemes are referred to as merit pay schemes in this book (see Chapter 18) in that they are designed to provide rewards and incentives which are related to how well individuals are carrying out their jobs. Skill-based pay (see Chapter 26) is most often used for manual workers and aims to encourage and reward the acquisition of additional skills and is added to the base rate for the job. Alternatively or additionally cash bonuses may be paid to individuals as described in Chapter 19. This is often, confusingly, described as variable pay and the payments are not consolidated. Bonuses may also be paid based on team or organizational performance and these are dealt with respectively in Chapters 20 and 21.

26 12 Essentials of Reward and Performance Management Service-related pay Pay progression in some organizations, especially in the public and voluntary sectors, can be provided by fixed increments on a pay scale or pay spine related to time in the job (service-related pay). There may sometimes be scope for varying the rate of progress up the scale according to performance. Service-related pay is supported by many public sector unions because they perceive it as being fair everyone is treated equally. It is felt that linking pay to time in the job rather than performance or competence avoids the partial and ill-informed judgements about people which managers are prone to make. Some people believe that the principle of rewarding people for loyalty through continued service is a good one. It is also easy to manage; in fact, it does not need to be managed at all. The arguments against service-related pay are that: it is inequitable in the sense that an equal allocation of pay increases according to service does not recognize the fact that some people will be contributing more than others and should be rewarded accordingly; it does not encourage good performance, indeed, it rewards poor performance equally; it is based on the assumption that performance improves with experience but this is not automatically the case; it can be expensive everyone may drift to the top of the scale, especially in times of low staff turnover, but the cost of their pay is not justified by the added value they provide. These arguments have convinced most businesses, although some are concerned about managing any other form of contingent-pay scheme. In the public sector any desire to change may face strong resistance from the trade unions and there may be uncertainty on the part of management about what exit strategy they should adopt. They may therefore stick with the status quo, which in some cases they will prefer because they believe it is the right thing to do or they favour an easier life. Pensions and employee benefits Pensions and employee benefits such as sick pay, insurance cover, company cars and a number of other perks comprise elements of remuneration additional to the various forms of cash pay and also include provisions for employees that are not strictly remuneration, such as annual holidays. Flexible benefit schemes allow employees to decide on the make-up of their benefits package within certain limits. Allowances Allowances are paid in addition to basic pay for special circumstances (eg living in London) or features of employment (working unsocial hours). They may be determined unilaterally by the organization but they are often the subject of negotiation. The main types of allowances are location allowances, overtime payments, shift payments, working conditions allowances, stand-by or call-out allowances (made to those who have to be available to come in to work when required).

27 An Overview of Reward Management 13 Performance management Performance management processes define individual performance and contribution expectations, assess performance against those expectations, provide for regular constructive feedback, and result in agreed plans for performance improvement, learning and personal development. They are a means of providing non-financial motivation and may also inform contingent pay decisions. Non-financial rewards Non-financial rewards do not involve any direct payments and often arise from the work itself, for example recognition, achievement, autonomy, scope to use and develop skills, training and career development opportunities. Total remuneration Total remuneration is the value of all cash payments (base pay, contingent pay and allowances, ie total earnings) plus the pensions and benefits received by employees. Total rewards Total rewards are the combination of financial and non-financial rewards available to employees. Reward systems in action Aegon UK The career-family structure contains four career families. Target rates are defined which support three performance zones providing guidance on the pay range for different roles within the band. Pensionable, lump-sum bonus payments are awarded on a non-consolidated basis. An incentive scheme enables line managers to recognize and reward outstanding contribution by individuals or teams outside the annual pay cycle. A variety of financial and non-financial awards is available to recognize personal development and ongoing contribution which employees make towards the overall effectiveness and efficiency of the company. B&Q The 20,000 customer advisers are paid on one of six different spot rates in the upper quartile of similar jobs. Pay progression is based on the acquisition and application on the shop floor of skills and knowledge. There are four additional spot rates beyond the established rate designed to reward excellence in the role.

28 14 Essentials of Reward and Performance Management There is a store team bonus, based on sales, shrinkage (resulting from losses such as theft and stocktaking errors) and customer service measures set at store level, and a formal recognition scheme. BT Pay structure of 250-plus roles in 18 different job families representing major work functions. Broad pay ranges attached to each role are determined by reference to market data. All roles are benchmarked against equivalent roles and salary ranges in the external market in order to gather competitive reward data. Published salary ranges are attached to each generic role. Hierarchical promotion from grade to grade is replaced by role change. Simplified benefits package and target bonus percentage defined for each role. Based on benchmarking in external market. Each role assigned to one of three benefit levels. Three levels of bonus achievement linked to balanced scorecard. Salary progression within a role range is predominantly via annual reviews based on individual performance, position in range and affordability. Other principal type of salary progression results from role change a move between job families or within a job family. Friends Provident Five broad career bands for non-management staff. Three additional bands cover everyone below executive director. Eighteen job families with a small number of generic role profiles, based on key skills and competency levels, in each of the five career bands. Job-family salary ranges for each career band. An annual salary review, with individual reviews analysed by a range of criteria, such as gender, to help ensure fairness and equity across the company. Regional salary ranges, to reflect the influence of regional pay where appropriate. Performance management. A discretionary non-consolidated performance bonus. GlaxoSmithKline (GSK) The pay structure has five bands. Each band is divided into a number of zones. The combination of band and zone produces the grade, and there are 29 grades in total. The grades determine bonus entitlement. The pay for each grade ranges approximately 25 per cent either side of the range mid-point. The main method of paying for performance each year is through the bonus scheme, but individuals are also able to progress through their grade

29 An Overview of Reward Management 15 range on the basis of performance, their behaviours, relativities with peers and their market value. There is a two-way performance and development planning process whereby individuals agree their objectives with their manager and identify development needs for the forthcoming year. The financial recognition scheme rewards effort above normal job requirements. There are four different levels of award. Kent County Council Jobs allocated to one of 35 generic job profiles organized into seven job families. Jobs evaluated using the Hay system and placed into one of six pay grades. Summary band descriptions of the grades enable staff to understand why their job falls in a particular grade. The analytical points factor system ensures that staff are all evaluated on a fair and equal basis. Regular equal pay reviews are conducted. Total Contribution Pay (TCP) rewards the how of someone s performance, as well as the results that they deliver. Managers can recognize the contribution of their staff on an ongoing basis with cash and non-cash awards. A total award approach is adopted. Contextual factors affecting reward Reward strategies and practices are strongly influenced by the internal and external context of the organization. Internal context The characteristic features of the internal context are as follows. The organization s culture Organizational culture consists of shared values, norms and assumptions which influence the way people act and the way things get done. In reward management, the most important aspects of culture that need to be taken into account are the core values of the organization which express beliefs about what sort of behaviour is desirable. Reward practices should fit in with and support the culture and they can help to reshape it. Organization type The degree to which the organization is bureaucratic will affect reward practice. As defined by Trevor (2011), the differences between a bureaucratic organization and a post-bureaucratic one are shown in Table 1.1.

30 16 Essentials of Reward and Performance Management Ta b l e 1.1 Bureaucratic Bureaucratic and post-bureaucratic organization Post-bureaucratic Vertically integrated Hierarchical Rational design Control and order (compliance) Policies, rules and procedures Horizontal integration Network, not hierarchy Informal system Focus on individual capabilities Common task Tendencies in reward practice in a bureaucratic or a post-bureaucratic organization are illustrated in Table 1.2. Table 1.2 Tendencies in reward practice in a bureaucratic or a post-bureaucratic organization Bureaucratic Multi-graded pay structure or pay spine Job content determines grading and pay Pay progression strictly governed by performance ratings or service criteria Fixed range of benefits Tight centralized control of pay decisions Post-bureaucratic Broad-banded structure or spot rates Grading and pay strongly related to personal skills and competencies Flexible approach to pay progression Flexible benefits Maximum devolution of pay decisions to line managers The organization s business or sector The business or sector of the organization for example manufacturing, financial services, retail services, transport, media, public sector services, not-for-profit services or education will govern its ethos and therefore core values. It will influence the type of people it employs and the degree to which it is subject to turbulence and change. All these factors will affect reward strategy and practice. Work environment The ways in which work is managed and carried out will influence pay structure and the use of contingent pay. The introduction of new technology may result in considerable changes to systems and processes. Different skills are required, new methods of working and therefore reward are developed. The result may be an extension of the skills base of the organization and its employees, including multiskilling.

31 An Overview of Reward Management 17 A team-working environment may encourage the introduction of team pay. Traditional piecework pay systems in manufacturing industry may be replaced by higher fixed pay and rewards focused on quality and employee teamwork. People People s occupations may affect their wants and needs. Bankers, entrepreneurial directors or sales representatives will be more interested in financial incentives than, say, people engaged in charitable work. Reward strategies and policies should take account of the different needs of people and this may mean segmenting rewards to meet those individual needs. Business strategy Where the business is going the business strategy determines where reward should go: the reward strategy. Integrating reward and business strategies means combining them as a whole so they contribute effectively to achieving the mission or purpose of the organization. Political and social climate Organizational politics and social factors such as the way people interact will affect how the organization functions and therefore what approach to reward management it adopts. External context The following aspects of the external context may affect reward management policies. Globalization Globalization requires organizations to move people, ideas, products and information around the world to meet local needs. Traditionally, discussions of international reward strategies and practices have tended to focus on an elite of expatriate workers, sourced from headquarters locations and rewarded in isolation from local country staff. A more diverse and complex pattern is now emerging, requiring a much more strategic approach as described in Chapter 10. Rates of pay in the marketplace The external environment exerts considerable influence on rates of pay and pay reviews within organizations. Market or going rate levels and movements have to be taken into account by organizations if they want their pay to be competitive. Some organizations are affected by national agreements with trade unions. The economy The economy, whether it is in a boom or bust mode, will inevitably affect reward policy and practice. A recession increases the attention organizations pay to getting value for money and reduces the amounts that can be distributed in the form of base and contingent pay and the scale of benefits provision.

32 18 Essentials of Reward and Performance Management Societal factors Views about reward held in society at large may affect internal reward policies. For example, the opprobrium recently leveled at fat cats in boardrooms and the bonus culture in the City may possibly have some influence on members of remuneration committees. Again, it may not. UK employment legislation The following pieces of UK legislation directly or indirectly affect pay policies and practices: The Equality Act 2010 provides that pay differences are allowable only if the reason for them is not related to the sex of the job holder. Equal pay legislation is described in Chapter 11. The National Minimum Wage Act 1998 provides workers in the UK with a level of pay below which their wages must not fall regardless of where they live or work or the sector or size of company in which they work. It is not a going rate. The government prescribes by regulation the minimum wage. The Working Time Regulations 1998 provide, inter alia, for a limit of 48 hours on average weekly working time which an individual worker may voluntarily agree to exceed and a minimum of four weeks paid annual leave subject to a 13-week qualifying period. The Data Protection Act 1998 provides inter alia that employees are entitled to make a formal request to access information on the personal data held on them and the uses to which this will be put. The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) provide that when a business or part of a business is transferred the workers in that business automatically transfer into the employment of the transferee together with their existing terms and conditions of employment (except for pensions) intact and with their accrued periods of continuous service. The Financial Services Act 1986 places restrictions on the provision of financial advice to employees. Only those who are directly authorized by one of the regulatory organizations or professional bodies are permitted to give detailed financial advice on investments. The trade unions Trade unions, especially in the public sector, influence reward practices at national level through national pay negotiations, pronouncements on such issues as the pay of top executives, and exerting pressure to achieve equal pay. They produce policies and advice for their members on job evaluation (they are in favour of analytical schemes while emphasizing the need for involvement in their design), pay structures (they tend to be against broad-banded structures) and performancerelated pay (they are generally hostile to it, preferring traditional service-related incremental scales).

33 An Overview of Reward Management 19 Developments in reward management Four surveys conducted in 2010 and 2011 revealed how reward management is changing. e-reward An e-reward (2010) survey asked respondents if they had made changes to any of their key areas of reward in the last three years. The most widespread changes were made in three areas: reward strategy; bonus and incentive plans; pensions and flexible benefits. The most common reason for these moves was to align reward practice with changes in business strategy so as to reflect business needs. This was followed by three other pressures for change: cost/financial pressures, the need to match market practice and the need to overcome weaknesses or shortfalls. Respondents were also asked whether their reward function was under greater pressure to demonstrate the value which they and their reward systems deliver. As many as 83 per cent said that they were, with 24 per cent claiming that such pressure was substantial. AON Hewitt As reported by Brown (2011), respondents to an AON Hewitt survey in 2011 indicated that their five top reward priorities in order of importance were: 1 Rewarding and motivating key performers. 2 Retention of key staff. 3 Ensuring pay and incentives are tied to performance. 4 Enhancing staff engagement. 5 Getting the most from total reward. Brown noted the following changes: From fixed pay and bonus to variable pay. From business, business, business to business and employees. From pay, flexible benefits to total rewards. From reward technique/hr to reward management/line. From act of faith to evidence-based. CIPD The CIPD (2011) annual reward management survey established that reward priorities for 2011 will be to ensure alignment with business strategy, to ensure reward is market-competitive, to align pay with individual employee and business performance, to ensure reward is internally fair and cost minimized.

34 20 Essentials of Reward and Performance Management Hay Group As reported by Hyland (2011), the four main themes emerging from the Hay 2011 survey were: Increasing profile of reward. Reward strategy all change! The return of the employer brand. Communicate! Communicate! Communicate! In order of importance the reasons given by respondents for change were: 1 Link to business strategy. 2 Enhance employee engagement. 3 Minimize costs. 4 Retain talent. 5 Improve employee performance. Reward management twelve tips Reward people according to the value they create. Reward people according to what the organization values and wants to pay for. Take account of employee as well as business needs. Best practice is preferable to best fit. Strive to be different, even unique, when developing reward policy and practice as long as they fit the needs of the organization and its people. Adopt an evidence-based management approach which involves managing reward systems on the basis of fact rather than opinion, on understanding rather than assumptions, on grounded theory rather than dogma. Ensure that the reward system is developed and operated in accordance with a clearly defined set of guiding principles. Provide for the reward system to be integrated the separate parts are mutually supporting and contribute to achieving the overall aim of the system. Take account of the views of stakeholders on the design and operation of the system. Do not overcomplicate the system as a whole or any part of it. Communicate regularly to employees on how the system functions and how it affects them. Review and evaluate the effectiveness of the system regularly.

35 An Overview of Reward Management 21 References Brown D (2011) Back to Reward Fundamentals, Presentation at e-reward conference, November Chartered Institute of Personnel and Development (2011) Annual Reward Survey, London, CIPD e-reward (2010) Assessing Reward Effectiveness Survey, Stockport, e-reward Ghoshal, S and Bartlett, C A (1995) Changing the role of top management: beyond structure to process, Harvard Business Review, January February, pp Hyland, S (2011) Which Way Now for Reward, Presentation at e-reward conference, November Trevor, J (2011) Future Organization and Reward, Presentation at e-reward conference, November

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37 23 02 Performance management Key concepts and terms Multi-source assessment (360-degree feedback) Objectives Performance appraisal Performance management Personal development planning SMART objectives Learning outcomes On completing this chapter you should be able to define these key concepts. You should also know about: Characteristics of performance management Principles of performance management The performance management cycle Performance and development agreements Performance planning Managing performance throughout the year Reviewing performance Assessing performance Recording the performance agreement and review Web-enabled performance management Performance management as a rewarding process Line managers and performance management

38 24 Essentials of Reward and Performance Management Introduction In this chapter the focus is on performance management systems as they are applied to individuals. It starts with a review of the characteristics and principles of performance management and continues with descriptions of how performance management works, how it functions as a rewarding process and how it contributes to higher performance. The chapter is completed with a discussion of the role of front-line managers in performance management, and with a selection of case studies. But it should be noted that performance management is ultimately concerned with team and organizational performance. Shields (2007) observed that: Individual results flow into group results, which in turn contribute to organization-wide results. But he also pointed out that collective behaviour both arises from and shapes individual behaviour. Characteristics of performance management Individual performance is developed through performance management systems which provide the framework for improving performance through the agreement of performance expectations and the formulation and implementation of performance improvement and personal development plans. As vehicles for feedback, recognition and development and by providing motivation, they have a major role in a performance and reward system. They can also inform contingent pay decisions. Pulakos and O Leary (2011) stressed that performance management plays a critical role in enabling work to be performed. The importance of the developmental aspect of performance management is often recognized by calling it a performance and development management system. The process of performance management Individual performance management is a planned process of which the five primary elements are agreement, measurement, feedback, positive reinforcement and dialogue. It is concerned with measuring outcomes in the shape of delivered performance compared with expectations expressed as objectives. In this respect, it focuses on targets, standards and performance measures or indicators. It is based on the agreement of role requirements, objectives and performance improvement and personal development plans. It provides the setting for ongoing dialogues about performance which involve the joint and continuing review of achievements against objectives, requirements and plans. It operates as a continuous cycle as described in the next section of this chapter. Performance management is concerned with both what people achieve, and how they achieve it, ie outputs and inputs. The latter are often expressed as behavioural competency requirements which have been set out generally in a competency framework and specifically in role profiles. Developmental needs are identified by defining these requirements and assessing the extent to which the expected levels of performance

39 Performance Management 25 have been meeting behavioural standards. These standards can be set out in a competency framework and in role profiles. It is not just a top-down affair in which managers tell their subordinates what they think about them, set objectives and institute performance improvement plans, which is what performance appraisal used to be like. It is not something that is done to people. As Buchner (2007) emphasized, performance management should be something which is done for people and in partnership with them. Performance management is continuous and flexible. It involves managers and those whom they manage acting as partners within a framework which sets out how they can best work together to achieve the required results. It is based on the principle of management by contract and agreement rather than management by command. It relies on consensus and cooperation rather than control or coercion. Performance management focuses on future performance planning and improvement and personal development rather than on retrospective performance appraisal. It functions as a continuous and evolutionary process, in which performance improves over time. It provides the basis for regular and frequent dialogues between managers and individuals about performance and development needs based on feedback and self-assessment. The emphasis is on development, although performance management is an important part of the reward system through the provision of feedback and recognition and the identification of opportunities for growth. It may be associated with merit pay but its developmental aspects are much more important. Principles of performance management Extensive research conducted by the CIPD (Armstrong and Baron, 1998 and 2004) identified the following 10 principles of performance management as stated by practitioners: A management tool which helps managers to manage. Driven by corporate purpose and values. To obtain solutions that work. Only interested in things you can do something about and get a visible improvement. Focus on changing behaviour rather than paperwork. It s about how we manage people it s not a system. Performance management is what managers do: a natural process of management. Based on accepted principles but operates flexibly. Focus on development, not pay. Success depends on what the organization is and needs to be in its performance culture.

40 26 Essentials of Reward and Performance Management The performance management cycle Performance management is a natural process of management. It is not an HRM technique or tool. As a natural process of management the performance management cycle as shown in Figure 2.1 resembles William Deming s (1986) Plan Do Check Act model. F i g u r e 2.1 The performance management cycle PLAN Performance and development planning performance agreement Role definition Objectives Competencies Performance improvement Personal development REVIEW Joint analysis of performance Dialogue and feedback Agree strengths Build on strengths Agree areas for improvement ACT Performance and development activities Carry out role Implement performance improvement plan Implement personal development plan MONITOR Manage performance throughout the year Monitor performance Provide continuous feedback Provide coaching Deal with underperformers The processes involved during the cycle as described below are concluding performance and development agreements, performance and personal development planning, managing performance throughout the year, conducting performance reviews and assessing performance. The outcomes of the planning and review activities may be recorded on a performance management form.

41 Performance Management 27 Performance and development agreements Performance and development agreements form the basis for development, assessment and feedback in the performance management process. Expectations are defined in a role profile which specifies key result areas and the knowledge, skills and abilities (KSAs) required, and sets out what has to be accomplished in the form of objectives. The criteria for an objective can be expressed in the form of the SMART mnemonic: S = Specific/stretching clear, unambiguous, straightforward, understandable and challenging. M = Measurable quantity, quality, time, money. A = Achievable challenging but within the reach of a competent and committed person. R = Relevant relevant to the objectives of the organization so that the goal of the individual is aligned to corporate goals. T = Time framed to be completed within an agreed timescale. Performance agreements emerge from the analysis of role requirements and the performance review. An assessment of past performance leads to an analysis of future requirements. The two processes can take place at the same meeting. Agreement is also reached at this stage on how performance will be measured and the evidence that will be used to establish levels of competence. It is important that these measures and evidence requirements should be identified and fully agreed now because they will be used by individuals as well as managers to monitor and demonstrate achievements. Performance planning The performance planning part of the performance management sequence involves agreement between the manager and the individual on what the latter needs to do to achieve objectives, raise standards and improve performance. Performance planning may include a performance improvement plan which specifies the areas in which the individual needs to improve. The improvement plan may be extended by a personal development plan which provides a learning action plan for which individuals are responsible with the support of their managers and the organization. This may include formal training but, more importantly, it will incorporate a wider set of learning and development activities such as self-managed learning, coaching, mentoring, project work, job enlargement and job enrichment. If multi-source assessment, also known as 360-degree feedback, is practised in the organization this will be used to discuss development needs. Multi-source assessment involves the assessment of and feedback on someone s performance by a number of people who may include their manager, subordinates, colleagues and even customers.

42 28 Essentials of Reward and Performance Management Managing performance throughout the year Perhaps one of the most important features of performance management is that it is a continuous process which reflects normal good management practices of setting direction, monitoring and measuring performance and taking action accordingly. Performance management should not be imposed on managers as something special they have to do. It should instead be treated as a natural function which all good managers carry out. This approach contrasts with that used in conventional performance appraisal systems which were usually built around an annual event, the formal review, which tended to dwell on the past. This was carried out at the behest of the personnel department, often perfunctorily, and then forgotten. Managers proceeded to manage without any further reference to the outcome of the review and the appraisal form was buried in the personnel record system. Reviewing performance Although performance management is a continuous process it is still necessary to have a formal review once or twice yearly. This provides a focal point for the consideration of key performance and development issues. The performance review meeting is the means through which the five primary performance management elements of agreement, measurement, feedback, positive reinforcement and dialogue can be put to good use. It leads to the completion of the performance management cycle by informing performance and development agreements. It involves some form of assessment as considered in the next section of this chapter. The review should be rooted in the reality of the individual s performance. It is concrete, not abstract, and it allows managers and individuals to take a positive look together at how performance can become better in the future and how any problems in meeting performance standards and achieving objectives can be resolved. Individuals should be encouraged to assess their own performance and become active agents for change in improving their results. Managers should be encouraged to adopt their proper enabling role: coaching and providing support and guidance. There should be no surprises in a formal review if performance issues have been dealt with as they arise during the year. Traditional appraisals are often no more than an analysis of where those involved are now and where they have come from. This static and historical approach is not what performance management is about. The true role of performance management is to look forward to what needs to be done by people to achieve the purpose of the job, to meet new challenges, to make even better use of their knowledge, skills and abilities, to develop their capabilities by establishing a self-managed learning agenda and to reach agreement on any areas where performance needs to be improved and how that improvement should take place. This process helps managers to enhance performance by improving their ability to lead, guide and develop the individuals and teams for whom they are responsible.

43 Performance Management 29 Assessing performance Most performance management schemes include some form of assessment which is usually carried out during or after a performance review meeting. This may be carried out by overall assessment, rating or visual assessment as described below. Overall assessment Overall assessment is based on a general analysis of performance under the headings of the performance agreement. The aim is jointly to decide on future action rather than to produce a summarized and potentially superficial judgement of individuals by their managers. The latter are expected to reach an understanding with their team members as a result of the analysis, which will ensure that the individuals concerned appreciate how well or not so well they are doing. The analysis should also identify the high flyers and those who are failing to meet acceptable standards. An overall assessment is recorded in a narrative consisting of a written summary of views about the level of performance achieved. This at least ensures that managers have to collect their thoughts together and put them down on paper. But different people will consider different aspects of performance and there will be no consistency in the criteria used for assessment, so it is therefore necessary to have a framework for the analysis. This could be provided on a what and how basis. The what is the achievement of previously agreed objectives related to the headings on a role profile. The how is behaviour in relating to competency framework headings. The results for each what and how heading could be recorded following a joint analysis during a review meeting One problem with this form of assessment, and indeed any form of assessment, is that we can recognize people at either extreme (top performers and inadequate performers) but cannot accurately distinguish performance differences in the bulk of people lying between those extremes. What managers can do is to tell an individual that she has done exceptionally well and that she will therefore be included in the talent management programme, or they can inform another individual that he has not done very well and that they must discuss what needs to be done about it. The others can be told that they are doing a perfectly good job and discussions can take place on how they can build on their strengths or on any learning activity (preferably self-directed) which might help them to do even better. Overall assessments can be bland, superficial and overgeneralized. This is why many schemes use ratings. Rating Rating summarizes on a scale the views of the rater on the level of performance achieved. A rating scale is supposed to assist in making judgements and it enables those judgements to be categorized to inform merit pay decisions or simply to produce an instant summary for the record of how well or not so well someone is doing. Rating scales can be defined alphabetically (a, b, c, etc), or numerically (1, 2, 3, etc). Initials or abbreviations (ex for excellent, etc) are sometimes used in an attempt to disguise the hierarchical nature of the scale. The alphabetical or numerical points

44 30 Essentials of Reward and Performance Management scale points may be described adjectivally, for example a = excellent, b = good, c = satisfactory and d = unsatisfactory. Alternatively, scale levels can be described verbally as in the following example: Exceptional performance: Exceeds expectations and consistently makes an outstanding contribution which significantly extends the impact and influence of the role. Well-balanced performance: Meets objectives and requirements of the role; consistently performs in a thoroughly proficient manner. Barely effective performance: Does not meet all objectives or role requirements of the role; significant performance improvements are needed. Unacceptable performance: fails to meet most objectives or requirements of the role; shows a lack of commitment to performance improvement, or a lack of ability which has been discussed prior to the performance review. An example of a framework for narrative assessments is illustrated in Figure 2.2. Figure 2.2 Narrative assessment Reviewer rating based on assessment of achievement against job requirements, objectives and applied skills and knowledge. Description Tick description that best fits: comment if appropriate Exceptional: has demonstrated outstanding contribution in the job through a combination of exceptional achievement against objectives and job requirements: is recognized by others as a role model in their job, both with respect to what they have done and how they have gone about doing it. Value added: has demonstrated a positive contribution that adds sustained value, through achievements in the job and how the individual has done it, demonstrating growth and development in the job. Acceptable: Undertaking the job in a satisfactory manner: getting on with it at an acceptable level that is regarded as satisfactory: generally meets objectives without adding sustained additional value over the course of the year. Underperforming: performance in the job has not met required standards (it is expected that performance management steps will already have been taken to deal with performance issues). The e-reward 2005 survey of performance management found that ratings were used by 70 per cent of respondents. The most popular number of levels was five (43 per cent of respondents). However, some organizations are settling for three

45 Performance Management 31 levels. There is no evidence that any single approach is superior to another, although the greater the number of levels the more is being asked of managers in the shape of discriminatory judgement. It does, however, seem to be preferable for level definitions to be positive rather than negative and for them to provide as much guidance as possible on the choice of ratings. It is equally important to ensure that level definitions are compatible with the culture of the organization and that close attention is given to ensuring that managers use them as consistently as possible. The main problem with ratings is that they are largely subjective and it is difficult to achieve consistency between the ratings given by different managers. Because the notion of performance is often unclear, subjectivity can increase. Even if objectivity is achieved, to sum up the total performance of a person with a single rating is a gross oversimplification of what may be a complex set of factors influencing that performance to do this after a detailed discussion of strengths and weaknesses suggests that the rating will be a superficial and arbitrary judgement. To label people as average or below average, or whatever equivalent terms are used, is both demeaning and demotivating. The whole performance review meeting may be dominated by the fact that it will end with a rating, thus severely limiting the forward-looking and developmental focus of the meeting, which is all important This is particularly the case if the rating governs performance or contribution pay increases. Another problem is that managers may inflate ratings to avoid confrontation with the individuals concerned. Some organizations 8 per cent of the respondents to the CIPD performance management survey (Armstrong and Baron, 2004) attempt to counter this by using forced distribution, which requires raters to conform to a laiddown distribution of ratings between different levels; for example: A = 5 per cent, B = 15 per cent, C = 60 per cent, D = 15 per cent and E = 5 per cent. This achieves consistency of a sort but managers and staff rightly resent being forced into this type of straitjacket. An alternative to forced distribution is ranking. It is more common in the United States than in the UK. Managers are required to place their staff in order from best to worse. The problem with ranking, as with forced distribution, is that the notion of performance may not be defined and is therefore unmeasurable. Thus in the case of ranking it is unclear what the resulting order of employees truly represents. The other problem with ranking is that while it may not be too difficult to sort out the best and the worst there may be problems in ranking people in the middle. Some organizations, mainly in the United States, have gone as far as adopting the practice of terminating annually the employment of a proportion of the consistently lowest performers, often 5 per cent to 10 per cent. This has been called crudely a rank and hank system. It is claimed that this practice raises the bar, ie it is said that it improves the overall level of performance in the business. There is no evidence that this is the case. Visual assessment An alternative to rating is to use a visual method of assessment. This takes the form of an agreement between the manager and the individual on where the latter should

46 32 Essentials of Reward and Performance Management F i g u r e 2.3 Visual performance assessment matrix High Employees placed here have an effective behavioural style but are not delivering well Employees placed here are top performers Possible actions: medium reward provide feedback coach/train to improve delivery set milestones Possible actions: full recognition and high reward challenge/stretch fast-track career (talent management programme) coaching Behavioural style Employees placed here have both behavioural and performance problems Employees placed here have good business results but need to focus on style Low Low Possible actions: provide feedback coach/train set milestones monitor decision whether to continue or end employment Business performance Possible actions: medium reward recognize contribution provide feedback coach to improve style High be placed on a matrix or grid, as illustrated in Figure 2.3. The vertical axis of the grid in this example assesses the behavioural style adopted by the individual in carrying out the role, ie inputs. The elements of behaviour to be assessed would be defined in a competency framework and this would be amplified in schedules of what would be regarded as acceptable or unacceptable behaviour for each area of competency (an example is given in Figure 2.4). The horizontal axis measures the level of business performance, ie outputs or what the individual delivers. The assessment can place someone anywhere in one of the four quadrants according to behavioural style and delivery. Examples of possible actions are provided. A picture is thus provided of the individual s overall contribution which is presented visually and as such provides a better basis for analysis and discussion than a mechanistic rating.