Merit-Based Performance Management

Employee performance is central to many human resource decisions. When determining compensation changes, incentives, promotions, demotions, reductions-in-force, and while also explaining pay differences, organizations lean on employee performance as the deciding factor. Given its importance, employee performance needs to be carefully documented, managed, and utilized in decision-making. However, recent research suggests many organizations are falling short on performance management.

The Society for Human Resource Management (SHRM) and the Society for Industrial Organizational Psychology (SIOP) have performed decades of research related to the effectiveness and validity of performance management processes. A summary of the last 5 years of selected research is below:

1. Most employees feel that their managers need more training in people management skills, communication, team development, time management, performance management, and leadership skills; and that employee performance is greatly impacted by managers being in leadership roles that they are unqualified for as a leader.
2. Too many organizations are relying on traditional systems of subjective ratings that are done just once or twice per year even though there is extensive evidence that a focus on development and performance discussions throughout the year are much more effective in developing the workforce.
3. SIOP surveys over the past 3 years have shown that employees see little value in performance management processes that are infrequently done; employees are not inspired by processes that are seen as biased or performed as a checkmark.
4. Growing evidence shows that organizations need to adopt more frequent, real-time feedback and coaching with level-setting/calibration and incentives for seeking and completing current- and next-level development.
5. Current people analytics research done by SHRM shows that traditional performance management processes often get it wrong – and that ratings are more based on relationships in the organization than actual performance; this same research suggests manager bias in performance leads to more high-performing employees leaving the organization.

What can organizations do to improve their performance management process? Some recommendations are below:

1. Split the What and the How
   
   a. Have one process based on organizational objectives that measures employee success in completing job duties and tasks (the What)
   
   b. Have a second process based on the processes and manners used by that employee to be successful (professionalism, attention to detail, time management, etc.) at completing the objectives (the How).
2. Incorporate Talent Management into Performance Management - For employees who have stated they want to seek promotion, also provide ratings on next-level skills and readiness to assist with succession planning.
3. Performance management should be documented year-round and be between more than just the employee and their manager. Comments and feedback should be gathered from anyone at the organization, as well as clients and customers, to create a clearer picture of employee performance.
4. Performance management should include level-setting/calibration meetings where a neutral facilitator helps managers recognize any potential biases they have (such as recency, halo, similar-to-me, leniency, severity, etc.) and adjust their ratings and documentation to ensure consistency in the application of the rating scale.
5. Performance management processes should be based on the results of job analysis, so employees are being rated only on aspects that are valid for their position instead of subjective feelings or feedback. This is a fundamental part of any merit-based performance management system. To effectively evaluate and improve performance based on the merits of what the employee brings to the work, the organization must first understand what the performance domain looks like in terms of essential duties and competencies needed for success.

Ultimately, implementing an effective performance management process is more complex than many organizations recognize. And getting it right is critical to ensure the process is an effective management tool. With the current focus on making merit-based decisions, performance management should be tied to specific job requirements. To advance a skills-based hiring process, the process should also be focused on learning and development, rather than simply completing a requirement. For a performance management process to be successful, it requires organizational commitment from all levels to spend the time necessary to yield actionable information for employees.