Abstract
Financial rewards have been used by everyone from kings to retailers to parents. One thread has been consistent in each instance: the “boss”—here managers and supervisors—has traditionally had considerable discretion to make decisions governing who is rewarded and how much they receive. Controls have been in place—salary increase budgets, target award guidelines, and so on—but they have more than enough discretion to make “unfair” decisions. Decisions have been subject to review by the next level or two of management and/or HR, but it is rare for their decisions to be denied. The reviews have typically been perfunctory.
In the early factories, managers had almost complete power. They could hire and fire, discipline, and dictate an employee’s pay. It was in part their abuse of power that led to unionization and the labor–management clashes of the 1930s. The early Personnel offices were formed to create a more humane work environment. When managers were forced to share their authority, it triggered the friction between line managers and HR that continues today.
Financial rewards were central to the work of the early “efficiency” experts and to piece-rate pay systems. In that context the goal was control with every worker movement analyzed and documented. The 1936 Charlie Chaplin movie Modern Times attempts to portray the life of a factory worker in that era.
That era also saw the early use of profit sharing and the then-new concept of gainsharing. At the foundation of these practices was the belief that money is an effective motivator. In reading that history it is almost as if the planners saw workers as similar to the salivating dogs in Pavlov’s experiments. Dangle the prospect of additional income and workers were expected to work harder. The fact is those early practices were effective and are still used. Sales incentives continue to be based on that logic.
But it is also important to keep in mind that this is not the Great Depression. Now we have two-income families, and the focus is on employee engagement, not the fear of termination. Manager/worker relationships are very different. It has only been in the past few years that employers have come to understand how important an employee’s emotional commitment is to their performance. Money and the way it is managed is an important tool, but it is not as simple as the old “donkey and carrot” analogy suggests.
At the executive level, in the years after World War II, financial incentives were and continue to be central to the transition from owner/managers to professional managers. Executive incentives were initially a form of profit sharing, with a bonus pool generated as a percentage of profit over a threshold or minimum level of profitability, with the pool shared among plan participants. Today’s executive plans have evolved but company success is still a primary driver of the amounts paid. Individual awards commonly are based on a combination of company financial performance and individual success in achieving performance goals.
Looking back there were two factors that contributed to the success of those practices:
Employee pay and performance ratings were confidential, with disclosure sometimes carrying the threat of termination.
“Hard” data were the basis for calculating awards. The use of financial data provides a shared understanding of what’s required to earn awards.
When either or both are missing, differences in perspective, especially between managers and staff, can trigger dissatisfaction, friction and even confrontations that undermine working relationships.
Both factors continue to evolve. Discussions of pay would now rarely be a firing offense or even one that warrants disciplinary action. In fact, pay transparency has recently become a popular topic in the blogosphere. There are still serious differences of opinion about the appropriate level of transparency, but the information related to the management of individual salaries and bonuses has steadily increased over the past decade or more.
The Weak Link: Performance Ratings
Below the executive/manager level, performance ratings are often the basis for both salary increases and bonuses awards. However, it has become very clear that with increased transparency, managers find it difficult to be completely honest in their feedback and end up granting inflated ratings. Performance ratings often have little credibility. Everyone it seems agrees that it is a problem—and for that reason many employees are convinced their salary increase or bonus is unfair.
It is also clear of course that performance management as a process has lost a great deal of credibility (if it ever existed). The problems with appraisals are discussed almost daily in blogs, columns and articles. Dr. John Sullivan, a recognized expert on HR issues, once posted a blog on TLNT that listed “50 problems with performance appraisals.”
One of the almost universal problems that Sullivan failed to list was the obvious fact that the work context has changed dramatically over the past two decades. Now it is common for a manager to rarely have occasions to observe a direct report for weeks or even months at a time. There are situations where a “direct report” is stationed miles from his or her “supervisor.” Furthermore, with many jobs simply observing an employee discloses little about their performance. The old notion of “span of control” now seems almost quaint. To evaluate staff performance, managers need to have timely, 360-degree feedback from employee “customers” and coworkers.
The dissatisfaction exists at executive levels as well but for different reasons. It is widely acknowledged ratings are inflated—that is to say, higher than warranted by employee performance. There are no reliable data from the corporate world on how serious the problem may be, but it is the reason more than a few companies have adopted a version of forced distribution or stacked ranking. Inflated ratings make the management of rewards problematic. When ratings are inflated, the true star performers do not stand out. Stacked ranking exacerbates the dissatisfaction, however, since it violates widely shared tenets of fairness.
With a forced distribution policy, ratings have virtually no relevance. Even a fully satisfactory rating does not guarantee an employee will not be fired. The forced ranking process is essentially a second evaluation separate from the usual performance rating. A serious flaw is that the rankings are not based on any specific criteria; every manager relies on his or her own judgment.
At this point, where distrust exists, employers are not going to convince employees their latest salary increase or bonus is “fair.” Even small differences in the amounts can trigger dissatisfaction. It is often not the differences in the amounts, however; it is the individuals’ interpretation of what the differences mean.
The Answer Is Attention to “Procedural Justice”
Procedural justice is an academic phrase that “concerns the fairness and the transparency of the processes by which decisions are made.” In a work environment, the issue is how employees perceive the outcome decisions—salary increases, bonuses, promotions. Academics differentiate it from discussions of “distributive justice”—or the perceived fairness of the outcomes.
The outcomes have had most of the attention in HR research. Both job satisfaction and pay satisfaction are closely related to reactions to salaries and/or bonuses. But that depends largely on employee perceptions of the amounts relative to an employee’s performance. Ratings are central to their perspective. When performance ratings lose credibility, it triggers concern about the fairness of rewards.
Research by the Hay Group shows that employees in organizations that maintain a credible linkage between performance and rewards “were markedly more favorable regarding the overall degree of equity and fairness [and expressed] more positive views” consistent with the procedural justice argument. That consistency carries over to employee views of career advancement opportunities and to the marks they give their supervisor for “dealing fairly with everyone.”
Where ratings are a problem, employee reactions are driven by their perception of the decision process. They want to know what they can expect, what is expected of them and to know they will be treated fairly. When rewards are perceived to be unfair, Hay’s research and that of a long list of academics confirms it can undermine employee engagement and contribute to absenteeism, turnover and poor performance.
It is frankly not realistic, however, to anticipate each manager and supervisor will be fully competent in managing performance. Too many managers simply do not possess the personal styles or skills to be open and honest, and to create a work environment where staff can expect to be rated fairly. Training is essential but does not overcome human tendencies. A few weak managers along with outspoken and dissatisfied employees can undermine support for a performance system.
Performance management of course can be an effective process. When the focus is on achieving individual goals, the performance criteria are job-specific and measureable. Then, the employee typically has some level of involvement in defining the goals. That is a key. They then “own” the goals. Goal-based performance management is credible, and normally defensible. When done well—relying on SMART goals is a proven approach—employees know throughout the year if they will meet or exceed expectations.
However, individual goals do not make sense for many jobs. Too often employers force fit the use of individual goals—and that undermines the sense of procedural justice since employees know it is not a fair way to assess their performance.
The traditional alternative is basing appraisals on abstract or generic performance criteria—traits—applied to all employees. Those old standbys like Dependability, Creativity, Initiative and Communication always sound relevant but they do not apply in the same way to every job and make it virtually impossible to “measure” anything. They also are not suited to constructive job-related feedback.
(Note: When criteria like those and other traits were adopted years ago, the purpose was to confirm employees had stayed out of trouble and performed satisfactorily. They were superficially relevant but do not provide a framework for evaluating performance.)
Another potentially better alternative is the use of competencies, but when the same ones are applied across a diverse group of job families they are no better than traits.
The notion of procedural justice encompasses the entire process from the time early in the year when performance plans are finalized until the year-end discussion of development plans, salary increases and bonus awards. The research confirms that when people are involved in the planning, they are far more likely to feel performance expectations are fair. They feel committed to achieving the plans and look for constructive feedback and advice as the year unfolds.
The process ideally is very similar to coaching a sports team. There is a game plan and throughout the game, players get feedback. Each position (in almost every sport) has a unique set of performance goals, requires a different of set of competencies (or skills) and involves different performance measures. That is true of virtually every “team” in the workplace. The role of the “coach” is to get the best performance from each team member.
Competencies can be highly effective when they are job-specific. A compensation analyst, for example, needs to be competent in analyzing numbers. Recruiters may not need the same competencies. Trainers clearly do not need the same competence with numbers but they do need platform skills. Although these are all HR jobs, force fitting a one-size-fits-all competency profile is not an ideal answer.
Small teams of recognized high performers in a job family can generally identify relevant competencies in a couple of meetings. They can also define what is “high performance” for job incumbents, along with the minimal acceptable performance on the competency. With those anchor points, their work product serves as a behavioral rating scale for the competency. That is consistent with procedural justice when managers use the scales conscientiously. The profile of competencies will be understood and accepted by incumbents as relevant to the jobs. It provides a shared basis for performance discussions. Developing the profile requires an investment of time but the payoff is virtual certain.
Another proven step in establishing procedural justice is adopting the idea of a “calibration committee.” That idea has been in use now for a decade or so and has gained acceptance. Managers proposing to rate a subordinate at the highest (as well as lowest) levels are required to explain and defend the ratings to a group of peer-level managers. It minimizes possible bias and discrimination, increases honesty in ratings and also raises the recognition value of the ratings. Perhaps more important it highlights management’s commitment to fairness.
Managers Are the Key
A fundamental concern is the commitment of managers to effective performance management and to fair ratings and reward decisions. In far too many organizations the selection of managers is based on their technical, professional expertise and not on the personal characteristics associated with being a good manager of people. Employers also cut back on training in the recession.
But the most effective way to secure their commitment is to tie their rewards in part to their effectiveness as people managers. Recent research confirms middle managers have a greater impact on organization performance than top management. That is because they have a greater impact on the performance of the employees who report to them.
The best can also play an important role as coaches. The sports analogy is again relevant. Even the superstars occasionally benefit from spending time with a coach. Coaches should always be available.
It would also reinforce the commitment to procedural justice to give employees the opportunity in the 360-degree feedback process to comment on the strengths and weaknesses of their managers.
The most effective managers should be rewarded; the least effective moved to nonsupervisory roles. That sends a powerful message.
Financial Rewards Can Be Powerful Incentives
People want to work for successful organizations. In the right situation they will work long hours, go home exhausted but be anxious to return the next day. In contrast, there are other situations where large numbers of employees have become disengaged, almost hostile to management. They are physically present but mentally absent. Those organizations at some point fail.
Employees need to know what they are expected to achieve, to know the rules and the limits to their discretion and to know they have the resources to complete the job. They really do not need supervision unless they experience problems beyond their authority, resources or capabilities.
Communication and sharing of results, both good and bad, are also important to sustaining workforce commitment. They want to know if problems surface. That helps employees feel they are partners in achieving success.
From my experience, when management practices reinforce the value of the workforce, it feeds a culture where employees are committed to organization success. The effective management of performance is or should be a priority. Financial rewards are commonly important to that work environment. As long as pay for performance is perceived to be fair, it can be a very effective policy.
The amounts do not have to be large. Several years ago I worked with a city government where each department had the potential for team-based bonuses under $500, based on achieving operational goals like reduced lost time accidents. When the checks were handed out, the city compensation manager told me, “I am always amazed by how excited employees are.” They felt their combined efforts were responsible for achieving the goals, and that they earned the money.
But above all employees want to be treated fairly. It helps when they are involved in the planning of policies or systems that will affect their jobs. It helps when they have access to performance feedback as the year unfolds. It helps if they know their opinions will be considered, especially when problems surface. Then at year-end, there should be no surprises. Procedural justice encompasses those practices.
What is surprising is that employers ignored the obvious reasons why procedural justice is important and allowed managers to act in ways that are counterproductive.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.