1. Whatwere the problems with Vitality Health’s old Performance Management System?What were the root causes of those problems? Vitality Health’s Old PerformanceManagement studied the evaluation and rewards system, employing internal andexternal benchmarking, focus groups, and employee interviews.
Problems associatedwith the old Performance Management System were:TheRating System· It had 13 different rating levels (fromA to E including pluses and minuses). This one led to managerial abuses. · Many managers when worried aboutoffending their employees, gave almost everyone a C or a B, provided few D or Aratings, and very rarely gave Es.· This type of performance managementresulted in a homogenous ratings spread that failed to sharply distinguishperform from nonperformers. · Managers rarely gave A ratings for fearof upsetting a sense of teamwork and egalitarianism within the R&D groups,which left top performing employees feeling slighted.
· One of its root cause was the managersdidn’t want to upset employees and the sense of teamwork and second cause wassince the grading system was not clear for managers it hampered the evaluationof the employees.ThePoint and Salary System· Vitality used for salary calculationsand performance – based raises. Each position had a base-level monthly salarythat was modified upward along a pay policy line depending on the number of”job evaluation points” associated with the position.
· Individual salaries were furthermodified by a comparative ratio or ‘compa-ratio’ based on individualperformance in the company.· This comparative ratio broughtdiscrimination in pay and dissatisfaction among employees. The reason was,comparative ratio was determined depending upon what market was actually payingfor that specific job. It was not associated to the performance of theemployee. That’s why sometimes an employee got higher raise with a relativelypoor performance in comparison to a top performer just because he was gettinglesser than the market level. 2.
Wouldan employee with superior performance year after year keep receiving higher andhigher pay increases?No, an employee withsuperior performance wouldn’t keep receiving higher and higher pay prices. · In the old performance management systemof Vitality Health the pay increase was basically dependent upon the ratingsgiven by the managers and comparative ratio. The rating scale was large and thelevels were not well defined. The managers didn’t have proper training toimplement this performance management system. Therefore they gave ratings justto avoid conflict and offending their sub-ordinate. These ratings were notbased on the employee performance. That’s why the employees who performedbetter sometimes they got the same or relatively lower rating than that oftheir colleagues who didn’t perform well.· Again the compa-ratio factor was one ofthe reason behind the mismatch between benefits and performance.
A betterperformer received lesser raise in pay as compa-ratio for his specific job washigher, where as an employee with poor performance got a higher raise in paybecause compa-ratio for his job was lower. Here also there was no connectionbetween performance and pay raise.· For example, a position assigned 500 jobevaluation points would have a target monthly salary of $7430.
If an employeehad a compa-ratio of 90%, his or her 2009 monthly salary would be $6687. Actualcompa-ratios ranged between 80% and 125% of the target salary, a meritincreases to compa-ratio tended to decrease on a percentage basis as anemployee climbed through the range. For example, an employee with a compa-ratioof 85% might receive an increase of 5%-7% while an employee with equalperformance but a compa-ratio of 110% would receive an increase of only 2%-3%. To lower turnoverVitality emphasized more on pay stability by keeping pay level higher than thecompetitors.
So pay raise was tied mainly to the seniority of the employeeinstead of the performance. This at last meant that employees with consistentlyhigher performance sometimes even received smaller raises than their less-productive colleagues. 3.
Whatare the key features of Vitality Health’s revised program? · The new revised system is more efficientto distinguish performers and nonperformers by strictly following thedistribution model of performance rating. It follows 4 point scale instead of13 point scale.· The new program is a shift from absoluteranking system to relative ranking system.· It directs further research on the corecompetencies and key duties associated with different job. The positions whichare difficult to rate and the employees who are too new for the organizationare exempted from this rating system. They will be coming under fifth category’Not Rated’.
· In this system managers need to setspecific goals with their employees and to use those goals as a component ofperformance management.· In turn managers were to be rated ondifferent perspectives like their effectiveness, in training, development andemployee relations etc.· Performance reviews are to be conductedat the beginning of the year. This plan incorporates a new system ofperformance related short and long term cash and equity bonus rather thanrelying only on salary increase, also limited stock options for upper level ofmanagement and directors. 4. Whatproblems under the old system are solved or mitigated by the new system? The newly designed system followed 4 point scale instead of 13 pointscale which made the task of evaluation easier.· Under the old system one of the problemwas the rating system that was incapable of distinguishing performers andnonperformers explicitly as it led the way to managerial abuse and homogenousrating.
To resolve this instead of measuring against predetermined measures,employees are now rated with respect to one another. It brought adifferentiation among the employees on the basis of performance.· This system holds employees accountable fortheir actions and incentives employees on the basis of their performance. Italso eliminates a key problem of rewarding bulk of employees when theirdepartments fail to meet the specified development, production goals andtime-to-market schedules. · Another problem in the old performancemanagement system was the provision used to calculate salary of an employeebasing upon compa- ratio and the tenure for which the employee was associatedwith the organization.
To resolve this problem compensation was adjusted byincorporating a system of performance related short and long term equitybonuses. This system also allowed for limited stock options to upper levels ofmanagement and directors as an incentive for the successful application of thisnew performance management system. · All performance reviews were to beconducted at the start of the calendar year and delivered to the employees inconjunction with the annual goal setting process in January. This is inrelation to put the entire company on the same review cycle for measuring thecollaborative efforts and to reduce the effect of external factors. 5. Whatproblems arise under the new system and what issues are still not resolved fromthe old system? PMET2 compared performance rankingsdata for early 2009 and early 2011 and found a shift in distribution ofrankings.
When employees were surveyed only 54% supported the new system, 31%preferred old system and 15%remained indifferent.· After implementation of the new systemmanagers found it more difficult to discuss with employees regarding theirperformance assessment and to disclose the rankings as yearly review processwas directly connected to raise in pay level.· With the added burden of compensationemployees were less open to coaching.· Some managers and employees wereunwilling to spend time on it as they think it’s an under-rewarded task.· They also considered forced distributionas a rigid system that initially helped to get rid of poor performers but laterit removed good performers also. High performing team needed to come up withthe targeted number of achievers even though they had many of them. On thecontrary, the low performing team also had equal number of top achievers.
· Some of them continued to givehomogenous ratings as they were doing in old system to avoid offending othersand burdened this responsibility on the HR managers. They used “not rated”employee category as a tool to reserve veteran employees without consideringtheir performance at work place. It again resulted in seniority based incrementrather than performance based.
· They also made a rotation of highestrankings between employees from one year to another just to maintain uniformityand to avoid angering their teams that led to rating employee on the basis ofthe job and its requirements not relative to each other. 6. Nowthat they are forced to distinguish, what will managers do? As now they are forced todistinguish, Managers responded to new system in the following manner:· Managers felt difficult to discuss withemployees since it affects the merit increase.· Employees didn’t do the work which werenot part of their evaluation.
· Unwilling to spend time on implementingprocess as they think it’s an under-rewarded task· Rigid forced distribution system · Using ‘Not Rated’ employees category asa tool to reserve high rankings for old employees· Uniform rankings just to avoid angeringtheir teams· Reluctant to disclose the rankings tothe employees· Rotation of highest rankings betweenemployees from one year to the next. 7. Whenmight relative performance management systems be preferred? · In relative performance system employeesare evaluated by comparing their performance to the performance of otheremployees.Here employees can be placed in aclassification reflecting their relative performance which is called group order ranking. Employees areplaced in a classification reflecting their relative performance, such as “topone-fifth.”· In individualranking employees are ranked from highest to lowest.· In pairedcomparison each individual is compared to every other employee and finalranking is based on number of times the individual is preferred member in apair.Relative performance managementsystem are generally used by firms having diversified business line.
Industrydominated by a few large firms that shape its direction and evolution implementrelative performance evaluation method. The firms those are large in sizeusually prefer relative performance management system. Organizations havingfewer insiders in board use relative performance management. Except all this,firms with greater institutional ownership and higher dividend yield also userelative performance evaluation. 8. Whywere managers lumping all employees together before? Managers were lumping all employeestogether before because of the following conditions:· Some of the managers continued to givehomogenous ratings as they were doing in old system to avoid offending othersand burdened this responsibility on the HR managers, forcing them to fit all inthe distribution curve.· They used “Not rated” employee categoryas a tool to reserve veteran employees without considering their performance atwork place.
It again resulted in seniority based increment rather thanperformance based.· They also made a rotation of highestrankings between employees from one year to another just to maintain uniformityand to avoid angering their teams that led to rating employee on the basis ofthe job and its requirements not relative to each other. 9. Ispay more closely related to performance under the new system? The new revised performancemanagement system was a step in the right direction.· The performance management system wasrevised in such a way that the new system was more efficient in differentiatingperformers and nonperformers. · It was also capable of aligning pay with performance evaluation.Relative ranking, adjusting compensationby incorporating performance related short and long term equity bonuses andlimited stock options to upper level managers and directors were somemodification done in the new system. · Still it failed to change many oldpractices.
The number of scales got reduced from 13 to 4 but the scenario ofrating remained same as that was in the old system. Managerial dissemble might be a cause that resulted in uniform rankingand tenure based pay raised rather than performance based. The distribution of the top performer andachiever were almost similar. There wasno provision to rate the new employees even if they perform very well.
These willbring low enthusiasm and motivation.· Forced distribution was a rigid system thatprevented so many high performers from getting reward as higher ratings wereused up for other divisions. Although the new system was better than the oldsystem in terms of performance evaluation but there were some loop holes thosemade the system less effective. 10. If you were part of the PerformanceManagement Evaluation Team, what changes would you recommend and why? How wouldyou implement these changes? · As Vitality looks at revising theirnewer corporate performance management system, in conjunction with their corporatevision, they should ensure that the CPMis aligned.
Ex. Kaplan &Norton’s Balanced Scorecard.· The BSCframework consist of 4 elements: Financial, Customer, Internal Process andLearning Development. By cascading these perspective to the performancereview, Managers and Employee will always feel that what they reviewing andconduct is part of their job responsibility and measured through KPI.
· Refreshingand re-communicating the strategy through management andemployee training, the entireorganization will be able to understand the vision that CEO is seeking forcontinued growth.· Provide a new system for performancepayout that does not include a confusing forced distribution and only valuesindividual performance.· It also should be noted that Beth Williamsand PMET should be aware of the correctbalance of job motivations ofR staff, as opposed to sales and marketing staff. In the case ofR and scientists, where work can be extremely complex, bonuses canlargely undermine employee’s work ethic.
· Intrinsicmotivation vs extrinsic motivation or satisfying needindirectly through monetary compensation depends largely on the category thatemployees fall into.· Leadershipis also something that vitality need to develop amongst their Managers.· Coaching,mentoring can help the annual appraisal to become moremeaningful and monitored.