Executive summary Management Concerns in 2011 Vitality Health Enterprises, a medium-sized firm that manufactures health and personal care products, has experienced six straight quarters of strong revenue growth. James Hoffman, the new Senior Vice President of Human Resources, fears that the chain of success is shifting the company's focus away from effective performance management. Recently, Vitality has been faced with increasing turnover among the company's talented research scientists that may be due to a performance management system that leaves top performing employees slighted by the practice of uniform ratings. In an effort to retain top employees, the company institutes a forced distribution model of performance rankings, moving from an absolute ranking system to a relative one. Hoffman and his performance management evaluation team must assess the practical and strategic effectiveness of the new system and present their findings and recommendations to the Board.
Original Performance Management System (Till 2009)
Due to decreasing earnings in 2009, the company decided to adopt a new business strategy that would focus on:1. Adopting cost-cutting measures 2. Reviewing the current performance management system and making it coherent so as to increase employee accountability and motivation Till 2009, the company used a PMS which had 13 different rating levels (A-E and pluses and minuses) and managers were asked to rate employees on the scale based on their individual performance levels. In order to decide salary, first, job evaluation points were computed for each position depending on the technical knowledge, problem-solving skills and level of accountability required for that position. Then, a target salary, known as control point, was established for each position based on these job evaluation points. Control point = Base salary + (Job evaluation points * Increase per point) Finally, an employees actual salary ranged from 80 to 125% of the control point based on his/her comparative ratio. This ratio was defined as the employees current salary divided by the current market rate as defined by the companys competitive pay policy. An analysis of the current PMS revealed the following problems:1. In order to prevent offending low-performing employees or making the top performers complacent, managers tended to award similar grades to all employees which defeated the purpose of the evaluation
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2. Top performing employees, due to being graded similar to other less productive colleagues, were not rewarded sufficiently monetarily (since performance ratings were used to determine wage increases), which led to high levels of frustration among them 3. The comparative ratio technique used by the company led to consistently high performers receiving smaller raises than their less productive colleagues. That was because the increase in compa ratio decreased as the ratio moved higher up its range. 4. The compensation structure did not give due concern to overall performance since there was no bonus or alternative form of reward/recognition. The structure simply provided for a salary increase with tenure, keeping the salary 7-8% higher than competition. As a result, it was difficult to identify and reward top performers or terminate low performers and hence, the low turnover experienced by the firm was among productive scientists and product engineers. This was crucial as the rapidly increasing competition in the personal care products sector made the R&D engineers and scientists a highly valued asset for the company.
Introduction of a new PMS in 2009
The company designed a new PMS to replace the existing absolute ranking system by a relative one .i.e. employees would be evaluated not just with respect to the pre-determined standards for their respective jobs but also with respective to the performance of their colleagues. These relative grades would then be fit to a distribution in order to enable a visualisation of the relative performances of all employees. This system replaced the earlier 13-point scale with a 5-point scale, which made it easy to determine which category each employee fit into. Secondly, the new system also evaluated employees based on their performance in terms of achieving specific goals identified for their respective jobs. Also, managers themselves were to be rated on their performance in meeting staffing needs, their effectiveness in training, development and employee relations, their clarity in communication and their implementation of corporate initiatives. Thirdly, the new system removed another major drawback of the earlier system by incorporating performance based incentives in the compensation structure. These incentives included short and long term cash and equity bonuses and limited stock options to senior managers. This was aimed at retaining top talent. Another advantage of the new system was that it conducted reviews and announced results for all employees at the same time of the year, thus ensuring better measurement of collaborative efforts and reducing the impact of external factors on relative rankings. Thus, the new system sought to do away with some major drawbacks of the initial one in the following manner:1. Relative ranking: to prevent all employees from being graded similarly 2. Fewer point rating scale: to make it easier to identify categories for employees
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Vitality Health Enterprises Inc 2013
3. More comprehensive rating criteria: taking into account both performance relative to colleagues and delivery of identified objectives 4. Rating of managers: to promote a more genuine rating effort on the part of managers, thus leading to more reliable ratings 5. Inclusion of performance based incentives in the compensation structure: to incentivise and retain top talent
Review of new PMS, 2011
Although the new system improved upon the earlier one in various ways, it led to a number of new problems. 1. Since compensation was very closely tied with performance review, employees became more defensive and less open to coaching 2. Since the new system only considered duties which were a part of their job description, employees were unwilling to perform duties outside the same 3. The new system required a higher level of involvement of the managers but did not reward them appropriately for it 4. Due to the concept of relative ranking every team would have some top achievers and some poor performers .i.e. even if a team was performing poorly, there would be some top achievers in it and even if a team performed excellently, it would have some poor performers 5. In order to save the higher rankings for their veteran employees, managers tended to award a Not rated ranking to any employee who had been in the group for less than a year 6. Despite the system of relative rankings, some managers still submitted uniform rankings to avoid differentiating between their employees. As a result the HR department had to change the rankings to fit them to a distribution, thus leading to inaccurate rankings 7. Some managers submitted rankings which would fit the curve but told employees that they had submitted something higher- also to maintain good relations with employees 8. Some managers rotated higher rankings between their employees from one year to the next either to avoid putting in too much of effort (which ultimately went unrewarded) or to avoid angering their teams 9. Employees were finding it difficult to adapt to the practice of being rated against each other
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Recommendations Market comparable basic pay Instead of using the concept of compa-ratio during the appraisal, the basic pay can be made comparable to the market. The concept of compa-ratio is flawed as we can see from exhibit 2 that a person getting an A ranking and a compa-ratio of 120+ gets a hike of only 3.5% comparing this to an employee with a ranking of B and a compa-ratio of 80-95 which is 6.2%. This would cause a negative impact on the former employee.
Percentage of basic pay
The complications in the current system can be reduced by changing the salary line formula. Instead of setting a fixed increase across all employees for each job evaluation points. The job evaluation points can be used to allot a rating and there can be fixed % increase on basic pay assigned to each rating.
Hierarchy based increments
The percentage increase should be different for different levels in the hierarchy. For example the scientists can have a minimum incremental percentage much higher when compared to line staff. And even the incremental is higher than low level hierarchies. The case does not have much information about the organizational structure of the company. This will reduce the turnover of the high performing scientists.
Team and personal appraisal
The % increase in the basic pay can be divided into two heads. One linked to the teams performance and the second linked to individual performance. Thus the employees are incentivized to improve their own performance as well as contribute to the team goal. It solves the problem of imposed rigidity of the new system. The points allotted to individual by managers should be open and there should be proper justification for their point allotment. This will solve the problem of managers finding difficult to discuss the appraisal with the individuals.
Additional Work Incentives
Under the current system the employees are less likely to do work outside their JD. A 360 degree review would incentivize the employees to work with other teams and this function can be incorporated in their goals.
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