Pay for Performance Evaluating Performance Appraisal and Merit Pay (1991) / Chapter Skim
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6 Private-Sector Practice and Perspectives
6 Private-Sector Practice and Perspectives
Pages 102-121
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From page 102... ...
The committee reviewed several sources of information on private practice: major proprietary surveys, a special survey of Conference Board firms conducted at the committee's request, and invited interviews with the personnel managers of five Fortune 100 firms whose appraisal and merit plans are generally regarded as successful. More details on the surveys reviewed by the committee appear in Appendix A
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From page 103... ...
We focused on the-individual and group incentive plans that do not add pay increases into base salaries, and we have labeled these variable pay plans. In each section we describe general trends concerning performance appraisal and merit and variable pay plans to provide a profile of "average" practice; we then use information from our interviews with the personnel managers of the five Fortune 100 firms to provide richer detail about performance appraisal, merit, and variable pay plan practices that are generally considered successful.
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From page 104... ...
Design Characteristics The Conference Board (1977) reported that, despite the fact that most personnel managers believe job analysis, description, and evaluation provide necessary foundations to effective performance appraisal plans, less than half the companies in its survey even reviewed job descriptions prior to plan development or revision.
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From page 105... ...
Several surveys (Bretz and Milkovich, 1989; Wyatt Company, 1989b; committee's survey of Conference Board firms, 1990) reported that employee participation in performance appraisal design and administration was mostly limited to personnel staff; line managers were involved in administration only via actual assessments of their employees; employees were involved only if there was joint manager-employee setting of performance objectives for the appraisal and, in some cases, the appeals process.
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From page 106... ...
were the most likely employees to be questioned in opinion surveys, as well as the most likely to view plans as "very effective" or "partially effective," but even they recognized problems. In general, less than 20 percent of personnel managers polled in recent surveys gave their performance appraisal plans an overall rating of "very effective"; another 60 to 70 percent, however, rated their plans "partially effective." Other managers and employees were similarly unenthusiastic.
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From page 107... ...
7-8. according to personnel managers' opinions about whether their performance appraisal plans met objectives.
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From page 108... ...
The performance appraisal tails provided to the committee by the five personnel managers we interviewed follow effective practice as reported by Wyatt. Four of tlie; five lions 100 firms had hIBO performance appraisal pews coveting exempt employ~s; the fifth ha-d several types of performance appraisal plans for exempt em-pl~yees, and one of these was an MBO plan (Only; one of the peanuts describe covered unionized employees; it was not an ~30 format.,)
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From page 109... ...
Since our profile of the typical organization's performance appraisal plan indicates that most organizations do use perfo~ance ratings for merit pay allocations, the integration of performance appraisal and the pay system that is characteristic of more effective plans makes sense. However, a traditional rule of thumb among managers of performance appraisal has also suggested the wisdom of decoupling the appraisal process from merit pay.
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From page 110... ...
The personnel managers in these firms believed that ranking helped to separate the performance appraisal process from the decisions about merit pay and promotion, thus strengthening managers' and employees' association of the appraisal process with counseling and development. They also believed that the joint management meetings involved in the ranking process helped managers calibrate and define their expectations about individual employee performance.
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From page 111... ...
All five of the personnel managers we interviewed indicated that their firms regularly canvassed employee opinions regarding performance appraisal plans; they were most concerned with indicators related to specific objectives- such as "the plan helps communicate work expectations" or "the plan links pay to performance" than to overall satisfaction ratings. They believed these more specific indicators provide a better yardstick against which personnel managers can judge whether employees perceive that performance appraisal plans are operating as intended.
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From page 112... ...
The details of performance appraisal practice provided by the five personnel managers we interviewed, as well as the distinctions drawn between effective and ineffective performance appraisal plans in the Wyatt report (1989b) , both suggest the importance of performance appraisal process and its fit with the organization's culture and personnel philosophy.
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From page 113... ...
General mends in Ment Ad Variable Pay Practice Prevalence, Distribution, and Objectives Recent surveys report that merit pay plans cover exempt employees in 95 percent of private-sector organizations (Wyatt Company, 1987b; HayGroup, Inc.,: 1989; Hewitt Associates, 1989~. Executives and hourly employees, especially unionized hourly employees, are less likely to be covered by merit pay plans, and larger organizations are slightly more likely than smaller ones to have merit pay programs (Bureau of National Affairs, 1984; Hewitt Associates, 1989~.
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From page 114... ...
; however, the vast majority of employees have not been covered by variable plans. The 1989 Hewitt survey suggests that variable pay plans may now be covering some nontraditional employee groups.
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From page 115... ...
Taken as a whole, these reports suggest that organizations adopt variable pay plans to improve organization performance, increase employee acceptance and involvement in organization goals, and regulate costs. Plan Design Characteristics Merit pay plans are typically implemented via a merit grid (see Figure 6-11.
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From page 116... ...
Employees distributed across performance ratings FIGURE 6-1 Sample merit grid. spectrum of variable pay plan designs, there are some common design issues that must be addressed in all such plans: determining the performance measure to be used, identifying employee eligibility, specifying the payout distribution rules, and setting payout form and frequency (Milkovich and Newman, 19901.
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From page 117... ...
There is no average set of administrative guidelines for variable pay plans. Unlike merit plans, however, variable pay plan administration—or perhaps the better word here is implementation—often goes hand in hand with much broader organization changes such as job redesign, team development, changes in management style, increased investments in employee participation, major communication efforts, more sharing of information with employees, more explicit provisions for job security, training for plan administration, and so forth (Conference Board, 1990; TPF&C, 1990; Wallace, 19901.
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From page 118... ...
Richer Detail on Merit Pay Plan Practices Our review of survey results on merit pay suggests that most private-sector organizations use merit pay plans for their exempt employees, that there is little variation in plan design and administration, and that most top managers and personnel managers report that merit pay is an important part of their pay systems in part because they believe that U.S. social values support the rightness or fairness of tying pay to individual performance.
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From page 119... ...
The five personnel managers we interviewed believed that merit pay plans helped their organizations regulate the distribution of the annual merit payments so that employees were treated consistently and payments were within budget. The committee did not interview the five personnel managers regarding variable pay plans in their organizations.
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From page 120... ...
These details may offer one explanation for the persistence of performance appraisal and merit pay plans in the face of less than universal enthusiasm about them. These five personnel managers all stressed that their performance appraisal and merit plans are embedded in meritocratic personnel philosophies and work cultures that support merit pay.
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From page 121... ...
PRIVATE-SECTOR PRACTICE AND PERSPECTIVES 121 Management flexibility is just one of many context factors that may influence the federal government's merit pay reforms. We have listed a number of other potentially influential context factors throughout this report.
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