Performance management: what a performance

Performance management is more than merely skimming off the 10% of poor performers in any organisation. Sally Whittle explains what HR needs to do to motivate staff.

Up to 10,000 jobs are expected to be lost in the UK financial services sector alone in the next six months as the global financial downturn takes its toll. It’s not an environment that makes life easy for HR practitioners, says Daniel Kasmir, HR director at accounting group BDO Stoy Hayward.

“There is no question whatsoever that the credit crunch is affecting our staff,” says Kasmir. “Although the media hype is fuelling the situation, people are certainly concerned about the slowdown, and the difficulty businesses are facing in getting credit is certainly a problem.”

To help survive the downturn, employers are turning to performance management to ensure staff are maintaining motivation levels and working efficiently.

Performance management is often seen as a euphemism for firing the bottom 10% of the workforce but the truth is much more complex, says Duncan Brown, a director in the HR services group at consultancy PricewaterhouseCoopers. In reality, performance management should be a way to align business strategy and HR strategy to show a clear relationship between salary costs (the biggest single expense for many businesses) and business performance.

“What HR directors should be doing now is meeting with business leaders and finding out their strategic goals, then working on metrics for performance management to ensure the business can monitor performance where it matters. There’s no point tying people’s bonuses to customer service metrics if all the business really cares about is whether you’ve hit the office budget,” says Brown.

In detail

Managing performance isn’t about individuals, it’s about the organisation, agrees Kasmir. “If the focus of the business is on driving sales, there’s no sense in rewarding people for developing great admin systems or building customer relationships,” he says. “You need performance management in a tough market to ensure that you are driving business success through HR practice.”

The key to success is in the detail, adds Gary Browning, chief executive of consulting group Penna. The first mistake many HR professionals make is thinking that performance management is something that you can buy in. “It can be enabled by technology, but performance management is only as good as the information you put in,” he says.

Workplace appraisal metrics should be very clear about roles and responsibilities, says Browning. For example, you should specify that an employee performing role X at level 2 has specific accountabilities, what management expectations are and how the metrics will measure performance.

“The important thing is that metrics should cascade through the organisation. If employees can see how their performance goals are tied into the wider business strategy, it can be highly motivating and people can clearly see what’s expected of them and why. It’s helping them to perform at their very best,” he says.

Of course, gathering information through performance appraisals is only half the story. What should you do with the data once you have it, and how can you use such intelligence without damaging morale and employee engagement?

Be informed

“First and foremost, make sure that the way performance management is handled is consistent, fair and transparent,” advises Brown. In a tough market where people might not be happy with the outcome of performance management processes – perhaps because there are pay freezes or redundancies – it’s more important than ever that workers you want to retain feel valued and informed about the process.

Brown advises HR leaders to think about the distribution of high and low performers across the company – does this suggest your managers are interpreting the rules in the same way, or is more training needed? Are different departments rated appropriately? Some departments might benefit from financial targets, where other departments gain more value from soft skills and relationship building. Is money available for pay rewards, bonuses and benefits fairly distributed, and is this in line with business priorities?

“This information lets you make better choices about employees,” says Brown. “You might choose to give a 10% pay bonus to your highest performers rather than a 5% across-the-board increase, and you’re doing it from an informed perspective.”

The right time

If your company isn’t in a position to offer cash bonuses or pay rises, you’ll need to take a smarter approach to the situation. One option is to revisit your benefit packages and consider whether reorganising benefits could provide a reward for high performers.

“During a downturn, voucher schemes can be highly attractive because they let people save money, but a private dental scheme or gym membership would be seen as less attractive,” says Brown.

Benefits can also be made more attractive with a little careful packaging, adds Stuart Duff, a business psychologist at Pearn Kandola. “Sometimes, it’s not the size of the bonus that creates the positive feeling in an employee, it’s the timing. If I’m the only person getting a bonus, and I get it before Christmas, I might feel more positive than I would about a relatively small annual salary increase.”

At Pearn Kandola, employees rarely receive financial bonuses, but rewards are personalised to individual staff, adds Duff. “We recently had someone with a wedding coming up, and the company provided a gift to the groom,” he says.

And as the ubiquitous credit crunch takes hold, it’s probably the small gestures that count as employers won’t have the funds to pay out big bonuses.

How to manage performance effectively

Performance management is likely to become increasingly important over the next five years, as companies turn to HR to help identify top performers and those whose performance is not meeting expectations.

However, experts believe that training is required for managers working with performance management systems.

“In good times, it’s very easy to let it go if someone is not meeting expectations,” says Stuart Duff, business psychologist at Pearn Kandola. “But all of a sudden, managers are going to find themselves having some pretty difficult conversations with people who aren’t performing to the required level.”

Duff recommends coaching for managers who will be working with performance management, and particularly focusing on remaining positive. “Research shows that companies using more positive language, more of the time, generally weather difficult times more successfully,” he says.

In addition, consider providing managers with workshops explaining the performance management data and processes. Having confidence in the system will give managers more confidence in applying the data to their dealings with employees, says Duff.

Case study: Reader’s Digest

At publishing company Reader’s Digest, annual bonuses are tied to performance management data, but the metrics are tailored to individual departments, explains Joanna O’Hagan, administrative manager in the commercial director’s office.

“We have a set of metrics that guarantee a bonus to workers, which is set at a percentage of their annual salary, if they meet those metrics,” she says.

In the sales office, for example, metrics are based on factors such as lead generation, customer retention and new customers acquired, while administrative staff are measured according to a series of financial targets.

“It’s good for the company and the employees,” says O’Hagan. “It means we’re all working to the same target of hitting our budget, and the company saves money overall.”

Vouchers for childcare are one of the main benefits offered to employees at the publishing company, which believes such benefits are a major retention tool, particularly in a recession.

“With childcare vouchers, someone receives £243 a month of vouchers to pay for childcare, and they don’t pay tax on that portion of their salary, so it’s a significant saving,” explains O’Hagan. “When money is a bit tight, that sort of benefit becomes especially popular.”

Reader’s Digest also offers a small number of other, carefully selected employee benefits including a 100% employer’s contribution pension scheme and a death in service insurance scheme. To ensure the benefits remain in place, other cost savings have also been made including reducing stationery costs and cleaning services.

“There is some cost to the company but we see the rewards. The majority of our staff have worked with us for 10 years or more, and are incredibly loyal,” notes O’Hagan.

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