My manager and I were negotiating my rating, and his job was to see to it that I didn't get the raise I believed I earned. And that brings up the one of the main issues in abandoning performance ratings. How do you pay for performance if you don't have performance ratings?
Pay for performance is a basic fundamental matter of fairness in employee communications and compensation. Only the most rabid Maoist would argue for equal outcomes regardless of performance (and China isn't even Maoist anymore). With ratings, it was pretty easy to fashion a system of pay that correlated to contribution. Without ratings, you still need to have that correlation, or your best people will leave and your worst people won't.
The companies that have dropped ratings from their performance management system seem to agree on one thing – communication with each employee about performance is vital. You keep the productive parts of the old review process, the conversations about career development and expectations, and the demoralizing parts are gone.
The manager no longer takes on the role of negotiator, but rather that of coach. This requires a completely different approach, which itself demands different training. All of that falls on HR's shoulders.
Businesses have become quite creative in keeping pay for performance after they get rid of performance ratings in their compensation and employee communications systems. Some firms use proxies for ratings, something that says the employee has done something to merit more money – successful completion of a project, enhanced skills through education, and promotions are all ways to get a sense of how the employee is doing.
Some companies have experimented with giving managers discretion when it comes to raises. In theory, a manager knows who her most valuable staff members are and will compensate them accordingly. HR can allow this so long as it keeps an eye out for favoritism that has nothing to do with job performance.
Others simply let the employee decide her compensation. Communicate to your top talent what the going market rate for their skills happens to be. After all, the easiest way to get a raise is to change companies, so preempt that by letting them know what they could get elsewhere and work with them to settle on a rate they are happy with.
In the end, every company is unique and will have its own solution to the problem – a few will even keep performance ratings. Whatever approach you adopt, it should create clear communications about expectations, and provide regular feedback, recognition and guidance regarding those expectations.
