Hello everyone, my name is James Hoffman, and I am the vice president of Human Resources, here at Vitality Health, and I would like to thank the board members for allowing me to present the findings by the Performance Management Evaluation Team. (PMET)
Today, I will discuss the current performance management system that is in place; we will also discuss the effectiveness of the current system, bring to light any gaps that are present, address potential legal risks, and talk about some pros and cons of the system. I will also suggest ways to move forward to ensure that Vitality Health continues to be a leader in the Health & Wellness industry.
Currently, Vitality Health has seen strong revenue growth; however, we are presently experiencing a toxic work environment, as expressed by current members on the team, due to an ineffective performance management system. This environment has resulted in losing talented team members to competitors. The time is now to decide whether we want to continue in the direction the company is headed, or move in a new direction to ensure a lasting growth for years and years to come.
Some questions the PMET asked when evaluating our current system and alternatives were, Is the newly implemented performance management system the right one for us? Will this allow us to retain young talent? Alternatively, should we embrace a new system?
Allow me to give you the facts to assist the decision-making process. We have made good decisions in the past, as we moved away from the overly complicated system that was in place pre-2008 and moved to a new performance management system. Although there was much to be proud of, we still have room for improvement, as is evident by current employee morale and engagement. I will give you a better sense of where the culture stands currently, and you can decide if this is the vision that Hikaru “Fred” Kikuchi had for Vitality Health. Are we living by his favorite saying, “Outer beauty can only be achieved as inner harmony is reached.” (Harvard Business Publishing, 2012)
Allow me to present to you the facts, and you make your own decision if we are living by this statement.
As part of the PMET here at Vitality Health, we were meticulous in our research, and I will present our findings. The most glaring problem with the system in place is that it is resulting in employee turnover. We are losing key players due to an unfair system that is a result of a poor perception by our team members towards our performance management system. If the company expects to remain the industry leader, we must decide what direction we will move going forward. Although there were significant issues with the old appraisal system, the PMET recognizes that there are still issues with the newly implemented performance management system, which needs addressing.
What would you say would be a cause of high employee turnover? Our first thought was that we are failing to create “buy-in” by team members and not achieving horizontal alignment, (Henderson, 2018) as brought to light by employee survey results. The reasoning was that employees did not feel that the system allowed team members to be compensated appropriately for their efforts.
A contributing factor was having too broad of a rating system with too many rating levels in place. This concept resulted in many problems, one being “central tendency” (Dressler 2013, pg. 303). What is central tendency? In short, it means “managers evaluate most of their employees as “average” when they apply a rating scale.” (Bascal & Associates, 2015) By doing this, you “distort the evaluation, making them less useful for promotion, salary, or counseling purposes.” (Dressler, 2013, pg. 303)
This also resulted in management abusing the system. Some results of those abuses are that some members of management were rating the majority of their team members at a C or a B rating, (Exhibit 2) in an attempt to keep from “offending their employees.” (Harvard Business Publishing, 2012, pg. 4) This complacent method of evaluation led to managers rarely giving the highest ratings because of fear of “upsetting a sense of teamwork and egalitarianism within the R & D groups.” (Harvard Business Publishing, 2012) In the old system, management had 13 ranking levels, and this was changed to 5, which was a good move. By limiting the number of rating levels to 5, the team hoped that it would be less likely for employees to automatically receive higher ratings, even if their departments were not meeting performance standards.
However, although good intentions were used in making this change in rating levels, it still fell short. This resulted in some of the most valued employees not feeling rewarded for their efforts. This lack of recognition became apparent after reviewing surveys that were submitted by employees and reading comments, such as, “I do good work for this company, but I see nothing for it.” (Harvard Business Publishing, 2012, pg. 4)
So, let us take a look at the effectiveness of the current system. What gaps are present? Are we at risk legally? What are some pros with the system, and what about areas for improvement?
Not only are we not rewarding the team members that deserve it, but we found that we were not achieving a consistent message for our team members. As is evident in Exhibit 4, comments that were gathered as part of employee surveys were highly critical of the old system. Recognizing the need to change was an excellent first step, but was it enough? If you read the comments by our team members, it reveals extreme dissatisfaction with the old system, and there is dissatisfaction that remains with the current system as well. For example, a comment by one associate was, “On the plus side, the forced distribution has made manager actually make some decisions. If nothing else, I’ve heard about some interesting discussions about performance.” (Exhibit 4) Although there was a positive slant in this comment, the idea that management is “actually” making some decisions is not positive in the real sense of the word. It is clear that we are still not where we want to be to retain top talent.
Another potential problem with the rollout of the more recent performance management system was lack of transparency and timely communication. One comment relating to this was, “Where was the training on all these changes? I think I remember seeing an email, but that’s about it. Can someone please explain to me what’s supposed to be happening? (Harvard Business Publishing, 2012, pg. 8) As you know, it is vital to maintain an open and accessible (Hill ; Lineback, 2010) pipeline through times of change. If we fail to do this, it creates a disconnect between the system and the team members. This disconnect means that we are at risk of losing more talent if we do not act fast.
The PMET needed to discover what gaps were present with the newly implemented management system. Although our financial state is better than it has been in the past, the loss of team members could lead to innovative talent leaving our company and joining our competitor. The culture is on the decline, and we are not acting as a team.
Currently, we know that potential appraisal problems, as defined by Dessler (2013), consist of unclear standards, halo effect, central tendency, leniency or strictness, recency effects, and bias. To ensure an effective appraisal process, we must understand the performance appraisal problems. Some ways we will ensure that we avoid those problems is through recognizing our gaps and risks in our current performance appraisal process. When we understand those problems, it will allow the board to ensure a fair process by using the right appraisal tool that the board agrees upon for Vitality Health moving forward.
In our estimation, a miscalculation is using a forced distribution system (Dressler, 2013) as our technique for performance appraisals. By using this technique, we are not able to appropriately reward the team members what they earned for their performance. As it stands, currently, management would tend to rate employees who have “been in the group for less than a year,” a “Not Rated ranking.” (Harvard Business Publishing, 2012, pg. 7) By doing this, it means that the higher ratings were saved for the veteran employees. This presents a breeding ground for bias, and this could lead to legal issues if not addressed. Not only that, but the new team members could be disengaged and seek new employment, again, resulting in the loss of untapped talent and innovative ideas. Along with those team members that we lose, they could also encourage some of our current top performers to jump ship and see what other opportunities are out there. If we intend on remaining an industry leader, we must make a career at Vitality Health attractive.
Not only was the technique not useful, but the number of appraisals each year is a problem area for managers as well. Managers feel that the timing of the performance evaluations made it “difficult to discuss performance with employees” because the employees were more “defensive and less open to coaching.” (Bingham ; Beer, 2012) As I will touch on this later in my presentation, this is something that needs addressing when selecting a new method of performance appraisal.
Once again, a third gap with the current system in place is central tendency. If we refer to Exhibit 2, you will see that 74.86% of employees were rated at the “Achiever” ranking. (Exhibit 2) By doing this, it could warp the evaluations, which means an ineffective development discussion. The team members will not receive an accurate rating and could be confused and, again, the word disengaged comes to mind.
One area that was mentioned in the surveys multiple times was compensation. One comment relating to this was, “it’s tiring to do so much work and not bring anything home to show for it.” (Exhibit 4) Another comment by an employee that “cracked the code for our leading anti-aging eye cream” only received a “2% raise” while “If you go just down the hall you’ll find two guys who get 5% just for showing up.” (Bingham ; Beer, 2012, pg. 5) As it stands, people are not evaluated on their accomplishments, but instead by the “comparative ratio.” (Exhibit 3) With the “comparative ratio” the company is assessing the “competitiveness of an employee’s pay level for a specific position.” (Harvard Business Publishing, 1997, pg. 4) For example, “A compa-ratio of 100 means that the employee is paid exactly what the industry average pays and is at the midpoint for the salary range. A ratio of 75 means that the employee is paid 25% below the industry average.” (Harvard Business Publishing, 2012, pg. 4) This results in “employees with consistently higher performance sometimes even received smaller raises than their less-productive colleagues.” (Harvard Business Publishing, 2012, pg. This has resulted in a toxic culture, and that will only spread and do more damage than we can recover from unless we reassess and
The lack of accurate compensation is a very tough pill to swallow for team members. You put all this time and energy in trying to help the company achieve greatness, and you do not feel that your effort is appreciated. That is the message we are sending with the ineffective appraisal system currently in place.
All of the inefficiencies of our current processes have resulted in “trigger events.” (Spector, 2013, pg. 14) So, what does our team recommend as ways to improve the performance management system and try to realign and achieve vertical and horizontal alignment? One obvious move is choosing a new performance appraisal method. Although we understand that choosing a new method is not an easy decision to make, it is an obvious one. To successfully manage change, we must communicate openly and timely. There must be a commitment from the top down, and part of this will require an open door policy to support our team members through the transition process fully. These are all actions we must take in “order to support strategic renewal and maintain outstanding performance in a dynamic environment.” (Spector, 2013)
Our recommendation for the type of appraisal and rating system that would be most effective at Vitality Health would be a “Management by Objectives” (Dressler, 2013, pg. 300) appraisal system. By doing so, it means that we can more effectively “Evaluate how well an employee has accomplished critical objectives in job performance. It also aligns objectives with quantitative measures such as sales, profits, & customer service.” (Henderson, 2018) This method will also encourage engagement “with subordinates by jointly setting goals and periodically providing feedback.” (Dressler, 2013, pg. 300)
One problem we realize with moving into a new system so quickly is that it can be scary for employees. However, after reading the comments by the team, it is evident that it is time to move in a new direction. I believe, if done respectfully, we will gain the support of our team members, and they will adopt the new system.
For feedback to be useful, we must have a system in place that allows managers to identify both good and bad performance. (Harvard Business School, 2006) We need to get away from staying in our comfort zone by rating all team members centrally.
More frequent feedback is also a recommendation for improvement to the performance management system. To accomplish this, we ask that management conduct quarterly performance reviews, to provide direction to stay abreast of any issues/concerns the team members may have. The more frequent meetings with managers are crucial in building high commitment by our team members. The ongoing performance feedback loop ensures that the manager and team members assess current state, more effectively identify skill gaps, and target areas that could benefit from development and training efforts.
There should also be regular evaluations of the performance management system and how it is performing, not only by the leadership team but by the team members at all levels. We recommend there be yearly employee opinion surveys conducted to ensure the voice of the team is heard. The surveys could be in a traditional online survey format, or what we recommend is introducing an innovative system that allows all team members to give regular feedback to their peers, as this will help create a more engaged culture. By creating an app, you can “manage and evaluate an individual’s work on a daily basis; creating a single place where employees can set priorities, organize discussions with managers, and share insights with fellow team members.” (Emma Albert, Dayan Anandappa, James Blomberg, Li Chen, David Hunter, Jeff Lau, 2018) By implementing a system, such as this, it will give the team members the sense that their voice matters.
Finally, I will close out what the PMET sees as being required of the board to move forward on our recommendations. We must be urgent in our call to action, doing everything possible to align our team members. Vitality Health used to feel like a family, and we want to regain this feeling. Again, we can achieve this through innovative tools that will allow open and honest feedback from direct reports, peers, and management. We must also complete more regular performance reviews and reevaluate the process to ensure ongoing effectiveness.
The current system in place encourages tenured employees to put in minimal effort to earn a “high salary, regardless of overall performance.” (Harvard Business School, 1997) We must implement a new system that aligns with our people and rewards employees appropriately. We can do this by “involving individuals in decisions that impact them, both at the front end (collecting valid data) and the back end (allowing individuals to refute ideas and assumptions), making transparent the thinking that underlies decisions, and making clear the criteria that have been and will be used for decision making.” (Spector, 2013)
And finally, to ensure we remain a leader, we can fairly encourage a “removal and replace” (Spector, 2013, pp.115-117) system for team members who “cannot or will not adopt behaviors required of the redesigned organization.” (Spector, 2013, pp. 115-117) If we are expected to maintain growth and increase profits, we must recruit and retain top talent.
If you follow our advice, our team is confident that we can return the culture at Vitality Health to greatness and maintain it for years to come.
Thank you for your time.