Page 217 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 5. Salary 203

the ratee how performance is proceeding so there is time to make adjustments and also so
there are no surprises at year-end. These rater comments during the year and when the final
evaluation is made are called “feedback.” It has to be done; it must be done right. While
shortcomings must be exposed, it should be a developmental opportunity rather than a
tortuous infliction of a thousand cuts.
Performance-management systems can be structured for either consequences or devel-
opment. In addition, for use in determining pay, a consequence objective results in actions to
terminate, retrain, or promote. A development objective would focus on performance
improvement and possible preparation for positions of greater responsibility. A 360 review is
useful when the objective is development. However, it is not ideal for pay actions because of
the possible impact of favoritism or perceived favoritism.
Performance-management systems can assess a single individual, a defined group, or the
entire company. This is highlighted in Table 5-20. The number of “groups” will vary by
organization, with more in larger companies than smaller ones. Groups may be defined by
team type, ad hoc or long-standing, as well as project vs. process. As shown, salary actions are
typically based only on the individual’s performance, while short-term incentives are based
on three types of performance appraisals (individual, group, and corporate). Long-term
incentives typically use only corporate performance.

Type of Performance
Individual Group Corporate
Salary

Short-term incentives
Long-term incentives

Table 5-20. Level of performance rating vs. pay element

Yet another appraisal method is called a critical incident approach. It is a look back at a
specific event, with feedback on the extent to which the “what” and the “how” met or did not
meet expectations.
Regardless of the method, the process must lead to an overall rating for pay purposes.
Typically, this means giving a weight to each performance objective. This begins with giving
each an equal weighting and then making adjustments. For example, if there were 10 objec-
tives, each would start with a weighting of 10 percent and then be adjusted to the extent it
was more or less significant than the average. In addition, the process must establish a rating
scale to assess the level of performance.
By multiplying the performance rating by the assigned weighting for each objective and
dividing by the total number of points, it is possible to calculate an overall performance rat-
ing. For example, such a system might use the university-based 4.0 system with the results
summarized in a verbal manner, as shown in Table 5-21. Note that any score between 2.6
and 3.5 would be considered “superior.” This rating might be further subdivided so that
2.6 to 3.0 was “very good” while 3.1 to 3.5 would be “superior.” However, the difficulty in
identifying key words that clearly describe differences in performance levels has caused some
people to simply stay with the numerical results.