Is the removal of performance rating systems for financial services firms in the GCC a feasible solution? This article discusses resulting challenges and factors to consider.
In the Gulf Cooperation Council (GCC) region, performance rating systems are still commonly used within the financial services sector for everything from incentive payments to career progression decisions. However, many firms are beginning to question if the time and effort associated with managing a performance rating system is producing the right outcomes for the company and for the high-performing talent they wish to retain.
Critics of performance ratings often claim that they don’t see differentiated performance scores for top talent. They also believe that there is an inherent inability to use the lower ranges of performance metrics as a tool for identifying weak performers and either exiting or improving them.
Outside of financial services, there are numerous success stories to using alternative methods of performance management. We have learned in many of our conversations that most of our financial services clients are reluctant to move away from ratings, as they are more structured in their approach to performance management. However, in recent years, there have been some public examples of technology-focused companies, including Adobe, Netflix and more, that have strategically embraced this trend, eliminating performance ratings with thoughtful tactics like 270-degree appraisal (Note: the 270-degree appraisal is typically comprised of three groups of employees: the appraisee, the manager and peers/subordinates). While these firms have faced challenges in taking such an unorthodox approach to performance management, their preparedness and clear steps for overcoming any obstacles have been critical to their success, as has their focus to ensure top talent is significantly differentiated when it comes to rewards.
In this article, we explore challenges and potential solutions for financial services firms that have removed or are planning to remove their performance ratings without maintaining a shadow system where HR and managers agree on ratings for employees, but do not communicate them (i.e., a partial removal approach).
Challenges to Removing Performance Ratings
Why are some firms moving towards removing numerical rating systems in the first place? Questions around the time and effort needed to produce the results are frequent. Many executives are asking if having a formal performance rating process in place is even worthwhile.
Using a numerical rating approach often has no impact on variable pay outcomes, as firms in the region tend to be generous in their assessment of staff, which nullifies the impact of the performance scale. Additionally, firms that embrace a continual assessment and improvement approach enjoy the freedom of not being tied down to specific allotments of time for providing feedback and reviews. By taking a less rigid and formulaic route, managers can easily have open conversations with their team members without adding any unnecessary pressure. This promotes continuous feedback, an approach which finds a lot of support amongst the growing population of the millennial workforce.
However, the removal of the rating system itself could potentially cause issues, mainly related to the demotivation of high performers, who may feel as though they are not being properly rewarded or differentiated from their peers. Before completely removing performance ratings, it is important to have a well-defined plan in place, whether this pertains to a gradual transition or a more extreme method. Some options to consider include:
- Slowly phasing out the use of ratings, rather than going “cold turkey.” An example of this would be leaving the executive team (e.g., up to N-2) on ratings and excluding everyone below. In other words, balanced scorecards would still be maintained at senior executive levels for some time, where there is a clearer line of sight to quantify business performance and translate this into ratings.
- Alternatively, retain scores for manager grades and above. This enables performance ratings for roles with the power to have a direct impact and drive business results, either through the decisions they make or via the people management responsibilities they have.
The main challenge for these options is the classification of staff in the organization. Some employees may consider it unfair or inappropriate to have certain staff members on ratings and others not. Additionally, the same legacy performance system issues may carry on, but just on a smaller scale.
Regulations and Risks With Removal
Dependent on the jurisdictions, significant legal risks may arise when conducting employee performance evaluation. Applying the following best practices could reduce the risks associated with the removal of ratings:
- Practicing frequency of reviews, whereby all employees belonging to the same job group could be evaluated on the same time cycle.
- Evaluating workers based on well-defined objective criteria, like meeting sales numbers or projects deadlines. Frequently it is the lack of clearly articulated and measurable goals that leads to a poor performance system outcome.
- Establishing clear criteria for managers to select individuals responsible for performance evaluation (e.g., the evaluators should not have social or family connections with the employees being reviewed).
Despite these practices, some regulations require key performance indicators and related performance ratings to be in place, which by default, would prevent the option of removal. Additionally, in an increasingly litigious world, companies often feel comfort provided by a performance grade when making pay decisions to help protect them against accusations of bias and discrimination. This is also true when using performance management systems to address grievances in the workplace. Having a structure with a solid grievance guideline helps management develop policies and procedures that are acceptable to all employees, ultimately serving as an effective medium to express feelings of discontent and dissatisfaction openly and formally.
Linking Pay and Performance Without Performance Ratings
Eliminating ratings creates challenges for compensation teams and line managers who are now struggling to identify each employee within the wider performance spectrum, which is pivotal in linking pay with performance. Hence, companies are moving from calibration discussions that are focused on debating the accuracy of individuals’ ratings to discussions about focused performance differentiation. Many managers have a tendency to rate staff higher, knowing that the performance distribution curve will be normalized and consequently push colleagues back down. For instance, since they are expected to hope for a 4 rating, they often apply a 5 rating, accepting a moderated downgrade of one rank.
Differentiating Performance Without Ratings
As some financial services firms move away from ratings, managers often struggle to distinguish middle-range performance. Yet, there are now several cases where firms are ensuring pay differentiation by focusing on identifying top performers successfully without ratings. For instance, Adobe reinvented its performance management model by adopting “check-in” as a two-way dialogue between managers and employees. This improves the efficiency of the performance management process, resulting in higher employee productivity and engagement. Adobe even coaches their managers to think like business owners to ensure pay differentiation in a fair and appropriate manner.
Several firms have even completely separated the compensation cycle from the performance cycle. In this scenario, performance serves as a check-in on the career progress of a colleague rather than a driver for pay. Compensation decisions are made based on internal equity and market competitiveness. There is a common understanding that all employees are targeted at the rate for that particular job, with the underlying assumption that employees who remain employed are performing at the expected standard. In this scenario, incentive decisions involve a moderation process with decisions made based on year-round feedback rather than a traditional one-time rating.
Options to Consider When Removing Performance Ratings
When thinking about removing performance ratings, we recommend financial services firms consider the following solutions as well as risks.
Equal bonus outcomes for all: When Motorola removed its annual 4-points rating scale, it decided to pay bonuses as a percentage of an employee’s basic salary, determined solely on company performance with an additional pool of 25% set aside to reward top performers. However, this option runs the risk of creating an alternative value proposition for top performing individuals.
Sorting employees into two bonus outcome categories: In this scenario, companies would have one bonus category for a performing group and a separate non-performing group. A standard bonus payout will be given only to the performing group. In some cases, further differentiation may be needed within the performing group to distinguish out-performance. The risk associated with this option is slightly reduced since the top performers are differentiated from under performers. However, there can be challenges with the distribution of bonuses because group sizes may differ year to year.
Continue to operate a differentiated bonus: Employees are categorized relative to one another and a behind-the-scenes performance rating exists, resulting in differentiated pay outcomes. These are known as shadow ratings, wherein management conducts a rating exercise that isn’t shared with employees. Since the process is opaque to employees, it may result in demotivation, neglecting the entire intention of eliminating ratings in the first place.
Manager discretion: Managers are provided a rewards budget and discretion for awarding bonuses. A variable remuneration structure needs to be built at a team level, making the bonus payout an agile process. The risk here is that manager bias may come into the picture and compensation decisions may lack transparency and seem arbitrary.
Follow the market rate: With this approach, an organization selects a point as a target pay within the market range for each role. The important point to note here is that employees are paid equally to their peers regardless of performance. This option is likely attractive to those that believe pay for performance is not always necessary to motivate employees.
Focus the performance lens: Do all employees need to go through an assessment process that differentiates their performance? If the investment of time is not commensurate with the outcomes achieved, then apply the system in a tiered way. Keep differentiation in place for a smaller segment of excelling employees who truly impact company performance and can be compared against each other based on their contribution. Simply drop the process for the remaining team members who meet or don’t meet expectations.
Performance management has always been a labor-intensive task for all involved, from the reviewer to the reviewee and management. Therefore, the question remains — will financial services firms be able to keep up with competition from other industries, where the use of a numerical performance rating system is becoming less prominent?
Some organizations have successfully adopted various alternatives in determining performance-related pay, many of which have resulted in higher employee engagement and productivity. As indicated in our research and client conversations, equal bonus outcomes for all, sorting employees into two bonus categories, manager discretion and market rate continue to remain the top trends for managing pay without performance ratings. Some of these approaches have resulted in several benefits, like reduced operational costs and increased task-orientation. On the contrary, while many companies have removed ratings from their performance management systems, not all of them are benefiting from that action. What works for one firm may not work for another. Hence, it is critical to consider your firm’s business strategy, values and culture before implementing any changes to the performance management system.
To learn more about performance management and how to properly prepare leaders in your firm for the changes that lie ahead, please write to Aon - Middle East email@example.com.