Engage Employees Part 4: Is PMS Rating a Tool to Engage and Retain People?

Photo: Courtesy eremedia.com

In one of the earlier posts “Is Socialism at Work Killing business?”, I saw several comments why this was good in theory and how in practice when there was a war for talent it was almost impossible to differentiate. This reminded me of several situations when my clients wanted to be liberal with ratings in order to engage employees and retain them.

Let us examine some facts and situations:

1. Positive Impact of PMS Rating on Engagement

In several client organizations we had observed that performance ratings had a positive (or negative) impact for 6 to 8 weeks only. After this period people were back to the same level of engagement (or disengagement) as that before the ratings. The attrition was postponed by a few months or at best by a year. If the latter happened, HR achieved its goals of lowering attrition and so did the line mangers. But were these people productive? No, they were not productive. From a shareholders perspective and from a customer perspective they did not deliver as well as they ought to have delivered.

2. PMS Rating and Attrition

In another analysis we found that the attrition had no correlation with the undeserved high ratings. If people were disengaged and had a better opportunity with another organization, they would leave even if they were given a rating higher than that they deserved. However, if they were mediocre and could not find a job they would continue with the business. If they were people managers, they epitomized felicitation of non-performance leading to disengagement and mediocrity in the team.

3. PMS Rating, Performance and Attrition – A Case Study

In one of the consulting firms, PMS rating was rampantly used as a lever to engage employees and retain them. This led to a culture of work avoidance leading to an inefficient, non-responsive and loss making firm, despite having the best of the talent in the industry. There was no incentive to perform. In fact they reached a situation where team members, who were fresh from institutes and those with up to 5 years of experience, worked the hardest. Most of the Project Managers, Directors and even Partners were busy managing their managers rather than managing their performance or adding value to their clients or to their teams.   There was a profound belief amongst people that they needed to work hard for the first 3-5 years till they were promoted to Project Manager level. They felt after becoming a Project Manager life was “cool” and there was no need to work.

Any business in any industry and in almost any country had to work really hard to make losses in 2005-07 period.  This firm made it happen despite the best talent they employed and a great brand name they had. This is the far reaching consequence of using performance rating as a tool to solve the problems in the short term.

Did they manage to engage and retain employees with all the frivolous ratings that they came handed out? I understand that their engagement scores were in bottom quartile and their attrition was the highest in the industry.

With reducing lives of leaders and HR professionals in any organization, the focus on solving the problems in the short term is significantly high. Taking tough calls, even if we lose some good talent, becomes difficult if the long term orientation is missing. We can’t blame our fellow leaders in the industry and our HR fraternity as short term-ism is a global phenomenon. But the benefit of an undeserved performance rating is just too short to merit a consideration even in this world of short term-ism.

Now, if pay (Post: Pay More and Disengage Employees), promotion (Post: Promote and Part), and performance ratings do not lead to engagement, what engages employees? 

Let us discuss "what engages employees?" next week.

Engage Employees Part 2: Pay More and Disengage Employees

We hear frequently, from business leaders as well as HR leaders, that we should pay more and we will be able to engage employees. Alternatively we can’t engage employees because we can’t pay enough.

Let us examine the following examples and situations:

1.      Pay More and Disengage employees: A multinational bank paid its employees significantly higher than its peers. But it failed to provide challenging work and consequently could not ensure development and growth.  The employees were disengaged. They could not get jobs with other banks as their compensation could not be matched. This resulted in a pool of frustrated employees who did not service customers well.  Eventually it translated into accelerated non performance of business leading to lack of challenging work and development. So golden hand cuffs created a vicious cycle.

2.      Pay Less and Engage Employees:  One of the largest software services companies in India is known to pay the lowest salary amongst its peers. It always had the lowest attrition and the highest engagement. While in the short run some of the peers did well, over a larger horizon it outperformed its peers.

3.      ESOP a Golden Hand cuff: A well known player in communication and technology had a serious challenge in engaging its leadership team. The CEO asked me if they were so disengaged and that too perennially, why they didn’t leave. The answer was staring at his face – how can they leave such hefty ESOPs and go?  A disengaged leadership team could be disruptive for business.

4.      Can’t afford to pay. So can’t Engage:  The research by almost all consulting firms show that the engagement went up in more than two thirds of the companies in 2008 and 2009, when companies could not pay well.  Employees did understand the predicament of employers and responded positively, wherever leadership was receptive and demonstrated care.

Does this mean we should pay less or we should not pay more? NO, please consider the following:

1.    1.  Pay Enough:Dan Pink says that while money or monetary rewards did not result in engagement or in high performance, pay enough to get the pay discussion off the table and help people to focus on performance.

2.     2. Pay More and Engage: One of the largest companies in social media pays the highest salary in the industry. The employees are highly engaged. However, they do not want people to join them for money. They want people to join them for freedom to innovate, empowerment and freedom to perform. They take care of their employees by providing best of the facilities at work, to the extent that the employees do not miss their homes.

3.  3. Pay as Per Promise: Organizations need to set expectations and pay as per promise. If the organization does not keep its promise it will surely disengage its employees.

4. 4. Pay Fairly:Organizations must ensure fairness in compensation both internally and externally. Within the organization compensation should be fairly paid based on performance of an individual and her contribution to organization’s success. Both the performance management and the compensation management should be as transparent as possible. If we have a robust performance management system driven by business, as discussed in one of the earlier posts, it would be easy to be fair and transparent.  In the absence of organizational transparency grapevine takes over.

In a socially connected world, the compensation should be benchmarked with companies from where the organization hires talent and with the companies to whom it loses talent. This should also be transparent to the extent possible.  Transparency will ensure that people understand the fact that they are paid well and in line with the organizational promise, which will minimize the impact of misguidance by social network. 

5.     5. Take Recourse to Total Rewards: The software company that paid less and retained and engaged employees in the example above, ensured that they took good care of their employees and avoided retrenching them during down turn. The total perceived rewards, therefore, were higher than those due to higher salary paid by competitors.

Therefore, payenough, pay fairly and migrate to total rewards. And yes, fulfil your promise. This will ensure that you do not disengage employees. 

However, you will have to do very different things to ensure engagement. We will discuss how to engage various subsets of employees in subsequent posts over the next few weeks.

                              

Business and HR Part 1: Is "Corporate Socialism" killing businesses?

Most Indian organizations and foreign companies operating in India could have done better than what they are doing. There are many reasons for suboptimal performance of organizations, across business, Government and NGOs. These are lack of appropriate capabilities, lack of training and development, lack of leadership, improper risk assessment, inappropriate strategy or business model. Different companies are plagued with some or a combination of these issues. All of us know that even if strategy or business model is slightly defective or if the risk was not properly assessed, the key to success is excellent execution. However, most companies demonstrate lack of excellence in execution. What is the root cause?

The primary reason for lack of excellence in execution is "Socialism at Work", which cuts across most companies in almost all sectors in Asia and especially in India. If the organizations reward the high performer and low performer similarly, what is the incentive to perform? Even worse, the organizations do not give differential treatment to performers, in terms of opportunities, resources and recognition and appreciation.

What should companies do to enhance performance?

DIFFERENTIATE through:

1. A very transparent PMS process with quantified goals.

2. Capability of managers to call a spade a spade. 

3. Leaders own differentiation of performance and drive it though the year.

3. Very high differentiation in variable pay and increments between high and average performers.

4. The developmental and growth opportunities for the high performers, which should be distinct from those available to average performers.

5. Superior resources to high performers in order to help them be more productive and effective. This would ultimately help business perform better.

In Government sector the option to differentiate is limited. Therefore motivation  to perform is limited.

Some of the public sector companies, especially banks, have used differentiated opportunities and resources as key drivers to motivate high performers and help them deliver better. These organizations have excelled compared to their peer group. Their ability to influence or effect differentiation in compensation was limited.

In Private Sector all the levers are available. But the will to create differentiation is lacking in most organization. The challenge becomes bigger when CEOs do not want to differentiate, little realising that this will hamper the business performance and consequently their own performance, and may be survival. 

In an environment of Corporate Socialism, high performers are frustrated and leave for greener pastures. This leaves the well rewarded mediocre talent behind, resulting in a mediocre organization and mediocre business performance.

Leaders have to choose between socialism and high performing businesses.