Page 214 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

200 The Complete Guide to Executive Compensation

As seen in Figure 5-19, executives with only “brief” experience and “acceptable” levels of
performance (combination E) should be in the lower one-third of the range. Conversely, only
individuals with “extensive” experience who have been consistently judged as “outstanding”
performers (combination A) should be paid near or at the range maximum.
The middle one-third of the range is appropriate for those individuals who have the
“optimal” experience and have been consistently rated as “good” (combination C). However,
experience and performance levels can offset each other. Combination C can also reflect an
executive with “extensive” experience who has been consistently judged as “acceptable,” or
an individual with only “brief” experience who is rated as “outstanding.” Additional experi-
ence and performance combinations suggest positions in the range shown by the letters D
and B.

Performance Appraisals

Differentiating pay by performance, by definition, necessitates the evaluation of executive per-
formance. While this may be nothing more than a five-minute reflection by the manager in
some instances, most organizations are more formalized in their appraisals. However, small,
threshold companies are likely to have a greater degree of informality than the larger, more
mature organizations. In some instances, formality can retard the growth of an organization,
as the bureaucracy of the process takes on a goal of its own.
Not uncommon is a lack of formal performance appraisals at the very senior levels of
management. The common reply is that the individuals know how they are doing simply by
examining their unit’s performance vs. the operating plan for the period. Admittedly, that
indicates how the unit is doing, but is the executive aiding or hindering the level of perform-
ance?
Interestingly, a number of executives hold two divergent views about performance
appraisal. They don’t believe appraisals are necessary for people who report immediately to
them (as there is enough interaction and data to make structured appraisal unnecessary);
however, they want to have their own performance reviewed by their superior! Under such
circumstances, the most satisfied individual is the one receiving a performance appraisal
(hopefully positive) who is not required to formally review the performance of his or her own
subordinates. Conversely, the most frustrated executive is the one who is told to have formal
review sessions with subordinates but is not given a session by a superior. A large number of
executives still fall into the latter category, although the situation is improving.
CEOs often find that they must continually remind their direct reports to complete per-
formance appraisals on their subordinates for the CEO’s review. A more drastic way of gain-
ing compliance than cajoling is to inform them their salary checks will be withheld until the
appraisals have been completed. This form of mandatory deferral not only can cause cash flow
problems for the affected, it also sends a very strong message throughout the organization:
performance reviews are important.
Appraisal Types. There are two types of appraisals: input based and output based.

Input Based. This consists of what a person has or possesses (often called competencies). It
consists of knowledge and values; it describes what a person can do and how likely he or she
is to do it. It is helpful in selecting individuals (ranging from hire to promotion), but not of
much use in pay actions as it does not measure performance. When used for pay actions, it is
likely to raise questions of legality. Input-based factors are often identified as competencies.