The End of the Annual Performance Review

Ruth-Thomas-200x200Guest post by Ruth Thomas, Founder and Senior Consultant at Curo Compensation

Ruth has over 20 years of international experience in the management of compensation processes and the design of pay and benefit structures, salary progression systems, and management incentive plans. Her corporate experience includes Lloyds TSB Group, Price Waterhouse Coopers, Dow Jones Group and Credit Suisse.

If this is the end of the annual performance review what happens to pay for performance? 

An emerging theme amongst the various analyst predictions for HR trends in 2014 is the belief that the traditional annual performance management cycle is no longer fit for purpose. The forecast is that forward thinking organisations are now looking at moving from an annual evaluation-only approach to performance management that is achieved through on-going feedback and coaching designed to promote continuous development.  This is in response to a number of factors including the increasingly dynamic business environment that has emerged where business goals and strategies are changing at a rate that outpaces an annual setting and assessment of performance goals.  Similarly forced ranking or competitive calibration is generally seen as counterproductive in the drive for high performance and engagement. Organisations are also trying to consider how to engage and motivate the growing workforce population of millennials who are characterised by their need for more regular feedback and reinforcement.

So does this also mean the end of the annual compensation review as well?

I think this is unlikely; many organisations have strived to move away from the ad hoc or anniversary based review approach with its inherent problems of budget creep and limited ability for peer/market ranking.  This combined with the reality that many organisations still struggle to manage a single annual review cycle in a way that prevents it from being anything other than a challenging administrative exercise.

Compensation-decision-factors

A better approach is to extend the range of factors that drive effective compensation decisions, to include:

  • Individual performance will move to be assessed more regularly but still provide input into variable pay decisions annually.
  • Annual business outcomes will continue to drive variable pay outcomes, particularly at more senior levels.
  • An assessment of an employee’s talent potential and leadership capabilities should influence compensation decisions, particularly salary in order to retain and motivate high potential employees.
  • More focus on recognising those employees with critical skills or indeed business relationships and networks required to support future business strategy should influence salary decisions.
  • Fairness and equity and market competitiveness will remain overriding principals for all compensation decisions.

Presenting the data on this broader range of factors to Line Managers to enable them to make informed compensation decisions will be a challenge for many organisations that are struggling to effectively access and calibrate HR and talent data.  Now is the time to start adapting reward policies for the new post-recession landscape and preparing yourselves for the data management and analytics required to support these changes.