93% organizations expect their PMS to drive business objectives while less than 10% look at performance process to drive creativity or recognize team contribution
The science of performance management has come into focus in recent times, with many Indian companies revisiting their approach towards performance measurement and management. PwC’s recent study on Performance Management in India indicates that 52 percent of organizations are making or planning to make a change to their current performance systems. While many of these changes are aimed towards making the process more transparent and development focused, the approach adapted varies widely. At one end we have organizations who are disbanding ratings altogether while others are looking at rejigging the rating scales or relaxing bell curve based forced ranking.
What is driving this need for change? PwC’s research indicates that these changes are attributable to a growing discontent with the current systems and processes – only 12 percent of organizations state that they found their current performance management systems highly effective in meeting set objectives. Key impediments faced by companies were – expectations not being clearly defined and agreed upon, managers’ inability and unwillingness to have difficult conversations and difficulty in assessing performance objectively.
While change may be inevitable, it is interesting to reflect on how organizations can leverage these changes to address immediate challenges and create long-term sustainability. Some key learnings that the study revealed are:
1. Importance of managerial capability in driving change in approach: For organizations to benefit from structural changes that they are making, they must ensure that their approach to performance management is in sync with their managerial capability and maturity. Most organizations that are disbanding forced ranking, pushing down ratings, decisions and decentralizing authority must ask themselves if they are simultaneously enabling managers to drive the performance process effectively. This means evaluating the capability of their managerial cadre, assessing their ability to demonstrate maturity in exercising judgement and establishing a governance framework that can control the possible misuse of this power. India has witnessed considerable job inflation in the last decade and this has resulted in the rise of a pool of young and enthusiastic but often inexperienced managers. These individuals have technical acumen but may not be equipped to deal with softer aspects of the job such as navigating difficult conversations or employing managerial discretion. This adds a layer of complexity to the responsibility that HR has in enabling these managers and establishing sufficient process checks to protect employee interests. In the course of our research, we also encountered organizations that have significantly reduced the scope for managerial discretion by hardcoding ratings using a combination of role expectations, business goals and market realities. While this has improved process transparency and employee satisfaction with the system, how it impacts the credibility of the manager is still to be evaluated. Success of this model could mean a paradigm shift for performance management in the future.
2. Balancing the achievement of business objectives while making employees an equal stakeholder in the process: The primary focus of performance management in India continues to be delivery of business goals. 93 percent organizations expect their PMS to drive business objectives while less than 10 percent look at performance process to drive creativity or recognize team contribution. This unidimensional approach to performance management often leads to one of the major stakeholders, the employee, being overlooked. They are focal point of the entire system and yet often have little say in the overall process outcomes. It is increasingly being appreciated that a system which only focuses on business outcomes and acts as a vehicle of distribution of rewards ends up disengaging employees. What employees are looking for today is to be part of an ongoing performance experience rather than just a mechanistic annual exercise. Similarly, recent research in neuro-leadership alludes to the fact that rating systems that reduces a year’s worth of employee effort into a single number or rating can often be dehumanizing and can negatively impact morale. While all this has led to organizations making development agendas central to the performance management process, one needs to be careful that the fine balance between business prerogatives and people outcomes is not compromised.
3. Innovative models of rewarding performance: Our research indicates that outcomes of performance evaluation have a closer linkage to immediate term decisions like annual bonus payout rather than longer term decisions like career progression and long-term incentives. While monetary incentivizing of performance continues to be the norm, there is a growing appreciation of the negative impact of heavily linking performance management to rewards. Interestingly, it is perceived that this linkage distorts decision-making on ratings (20 percent), undermines morale (8 percent) and creates interpersonal issues within the teams (12 percent). Success of new performance management models will hinge on the establishment of more innovative modes of rewarding performance. The time has come for organizations to seriously evaluate if financial reward is infact the best available motivational lever and whether hard-coding performance outcomes with financial rewards allows organizations to consistently overachieve.
There is definitely no uniform approach to managing performance and each organization’s approach must draw on its context. Organizations should explore the objectives they want to achieve and evaluate managerial maturity, employee agenda, HR capability and relevance of people's capability to succeed before investing in any changes to current systems. This exploration, more than anything, will decide the ease, appeal and success of any new performance management system implemented.