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Performance Management at Vitality Heath Enterprises : -

1. What are the problems and what its root cause at Vitality Health?

A1. Problems at the Vitality Health are:

 The morale of the employees was low .

 The competition was increasing but there was a culture of ineffective performance
management leading to a number of missed product launches.
 Increase in the employee turnover especially among the high talented research scientists
 The current performance management system presented a lot of problems with employees
working in team as it was having 13 different rating level which directed a way to managerial
 The new performance management system that was enforced was also not widely accepted
and had many challenges

The issue of ‘being fair to everyone’ was the root cause of the problem as the top performing
employees also received the same ratings and rewards as their less productive co-workers. The
managers can give any ratings they feel to their employees. Therefore this created a sense of being
unfair and undervalued. Also the current evaluation system was not able to identify the low

2. How are the levels of salaries determined at VH? What is compa-ratio?

A2. The levels of salaries were determined on the basis of the Rating Level.

 The company had 13 different rating levels from A to E but it mostly depended on the
managers how they would like to grade and not on the performance of the employees
like many managers were worried about offending their employees and gave almost C or
B to everyone provided few D or A ratings which left the top performing employees
insulted and demotivated.
 Apart from this rating system they used point system which was further modified by
comparative ratio for salary calculations and performance-based raises

Compa-ratio is a formula used by companies to assess the competitiveness of an employee’s pay

level for specific position. For example a ratio of 75 means that the employee is paid 25% below the
industry average.

3. Are salary levels at VH high / low? Is pay related to performance in old system?

A3. To retain the employees the salary of VH was high as compared to the competitors. However
the pay was not related to performance. The system focused on a pay stability of a flat salary
with little or no provision for bonuses. This meant the system result in high salary irrespective of
the overall performance of the employees resulting in a relaxed and un-productive culture.

4. What are the key features of the revised program of VH?

A4. The key features of the revised program of VH are:

 Establishment of a forced distribution model which required the managers to rank each
employee on the basis of their performance into one of the five categories: Top
Achiever, Achiever, Low Achiever, Unacceptable and Not Rated.
 In the new system employees will be rated with respect to one another. There was a
shift from an absolute ranking system to a relative ranking system
 Defining responsibilities and measures relating to every job class
 Managers along with their employees consent were instructed to develop specific goals
for them which can be used as a secondary component in the performance
 As per revised program mangers rating was also changed. They were rated on meeting
staffing needs, their effectiveness in training, development and employee relations,
their clarity in communication and their implementation of corporate initiatives.
 Performance review was conducted at the start of the calendar year
 Compensation was also adjusted as the new plan incorporated a system of performance
related short and long term cash and equity bonuses.

5. What problems of old system were resolved in the new system?

A5. The problems of the old system that were resolved in the new system are:

 The rating system: with new system the employees were rated with respect to one another.
PMET tried to eliminate the problem where bulk of employees were receiving high rankings
even when their department was failing to meet development and production goals and
time-to-market schedules.
 To limit the effect of external factors on the relative rankings.: Performance review
conducted once a year which also helps to better measure the collaborative effects by
putting the entire company on the same review cycle.
 The Compensation system: Earlier Vitality used comparative ratio or compa-ratio for salary
calculations and performance-based-raises. The new system included performance related
to short and long term cash and equity bonuses. Also this will allow to give stock options to
upper levels of management and directors as an incentive to successfully implement the
new performance management system.

6. What problems arise in the new system?

A6. The main problem was the acceptance of the new system by both employees and managers

Problem with employees

 Only half of the employees preferred the new system (54%) whereas 31% still preferred
the older one.
 Employees were not in a favour to perform duties that were not a part of the review
 Trouble adjusting to being rated against each other
 Employees were not given any trainings on all these changes.

Problem with the managers

 Managers felt with the new system it is more difficult to discuss performance with the
 Managers were not keen to implement the new system as they felt that it was an under
rewarded task and simply distracted from performing other duties.
 Managers felt the forced distribution system was too rigid.
 Some managers continued with their uniform ranking and left it to the higher
management who were not so familiar with the individual performances which can
again lead to the top performing employees being undervalued.
 Some managers rather than being fair to the performance rotated the highest ranking
between their employees from one year to the next.

7. How will you address the issues of the new system? Why?

A7. For any change to work it should be accepted by both employees and managers. If these
issues are not addressed it can lead to high turnover among employees and managers and
ultimately will lead to the failure of the company.

The issues can be addressed by taking the following steps:

 There is a significant communication problem in the company therefore Communication

champions should be appointed who will help in clearly communicating to managers
about any changes
 Training sessions should be provided to both employees and managers both these
 Separate meetings should be held with managers informing them the benefits of the new
system. Mangers should then be encouraged to ask questions or if they have any doubt
that should be addressed. Further managers should be motivated to explain the benefits
of this system to their employees also.
 Rather than measuring the performance of the employees with against each other they
should find out some method which can align the duties of employees with the company
goals and give salaries based on that system like 360 degree appraisal system.

 If a change has be brought collaboration and commitment from both managers and
employees is required so if there is some problem like managers were finding it difficult
as they had too much to do in the start of the year. So these issues should resolved by
meeting and discussing with the managers and finding a common way out.

 For giving a salary increase to a person in a team, instead of force fitting a few top
performers and a few bottom performers, we can add a weightage for team’s
performance or business unit performance in terms of their performance benchmarked
across with other BU’s and teams across the company.

 Increasing the manager accountability is very important. As we see, both in new and old
systems managers were very apprehensive to give too low or high ratings which results in
central tendency error and lower motivation/morale of employees. Hence manager
should be made crux of the system and at the same time employees should be given an
opportunity to approach higher level f he/she feels they were under rated.

 Parameters for evaluation should be different for different departments. Eg., R&D
scientists and sales executive job profiles are different in nature ,hence different
parameters should be defined for different job roles.