Page 222 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

208 The Complete Guide to Executive Compensation

the manager’s manager later agree with the ratee that the rater was incorrect in the rating. It
is also logical for the manager’s manager to review it after the performance review session,
especially when the individual is allowed to add written comments to the appraisal. This ses-
sion forms the basis for ensuring that an appropriate follow-up course of action is agreed
upon. It is common knowledge that some raters are more generous than others in rating their
subordinates. Unless there is a level playing field, ratees of the generous rater will receive
heftier pay increases than those under a stricter reviewer. One way to balance the ratings is
to have the CEO subordinates sit together and review each other’s ratings of their subordi-
nates. Under peer scrutiny, the “hard” marker may ease off and the “easy” marker may lower
assigned ratings. It may not completely level the playing field but it will help. More will be
said of performance standards and definitions in the chapters on short-term and long-term
incentives.

DISTRIBUTION OF PERFORMANCE RATINGS
Some companies mandate that distribution of performance ratings fit a prescribed pattern,
usually a bell-shaped normal distribution curve. This is called forced distribution. Others sug-
gest such a distribution but do not force it; this may skew the distribution negatively, as shown
in Figure 5-21, reflecting a “drift” to higher performance ratings. The normal distribution is
shown as a dotted curve.

Superior

Very Good
Distinguished
Good
Acceptable
Outstanding
Unacceptable

Figure 5-21. Distribution of performance ratings, normal vs. skewed
Forced distribution by grade usually is impossible because of the few individuals
involved; however, it is possible to develop bands of management as indicated in Table 5-25,
thereby achieving some normalcy in ratings except to the extent unit performance legitimate-
ly suggests overall higher or lower ratings. This distribution could be a guideline or require
mandatory compliance, with exceptions requiring top management approval. Mandatory
forced distribution systems are like mandatory pay controls: they do not work too long (if at
all) because they ignore size (and composition) of group and group performance. They may
also run into legal barriers, depending on end use. Unfortunately, they are a substitute for
effective management of performance ratings.
Ideally, performance distributions comparing one division to another should reflect dif-
ferences in performance rather than differences in raters. In many cases, however, what the