1. few D or A ratings, and very

1.     
What
were the problems with Vitality Health’s old Performance Management System?
What were the root causes of those problems?

 

Vitality Health’s Old Performance
Management studied the evaluation and rewards system, employing internal and
external benchmarking, focus groups, and employee interviews. Problems associated
with the old Performance Management System were:

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The
Rating System

·        
It had 13 different rating levels (from
A to E including pluses and minuses). This one led to managerial abuses.

·        
Many managers when worried about
offending their employees, gave almost everyone a C or a B, provided few D or A
ratings, and very rarely gave Es.

·        
This type of performance management
resulted in a homogenous ratings spread that failed to sharply distinguish
perform from nonperformers.

 

·        
Managers rarely gave A ratings for fear
of upsetting a sense of teamwork and egalitarianism within the R&D groups,
which left top performing employees feeling slighted.

·        
One of its root cause was the managers
didn’t want to upset employees and the sense of teamwork and second cause was
since the grading system was not clear for managers it hampered the evaluation
of the employees.

The
Point and Salary System

·        
Vitality used for salary calculations
and performance – based raises. Each position had a base-level monthly salary
that was modified upward along a pay policy line depending on the number of
“job evaluation points” associated with the position.

·        
Individual salaries were further
modified by a comparative ratio or ‘compa-ratio’ based on individual
performance in the company.

·        
This comparative ratio brought
discrimination in pay and dissatisfaction among employees. The reason was,
comparative ratio was determined depending upon what market was actually paying
for that specific job. It was not associated to the performance of the
employee. That’s why sometimes an employee got higher raise with a relatively
poor performance in comparison to a top performer just because he was getting
lesser than the market level.

 

 

 

2.     
Would
an employee with superior performance year after year keep receiving higher and
higher pay increases?

No, an employee with
superior performance wouldn’t keep receiving higher and higher pay prices.

·        
In the old performance management system
of Vitality Health the pay increase was basically dependent upon the ratings
given by the managers and comparative ratio. The rating scale was large and the
levels were not well defined. The managers didn’t have proper training to
implement this performance management system. Therefore they gave ratings just
to avoid conflict and offending their sub-ordinate. These ratings were not
based on the employee performance. That’s why the employees who performed
better sometimes they got the same or relatively lower rating than that of
their colleagues who didn’t perform well.

·        
Again the compa-ratio factor was one of
the reason behind the mismatch between benefits and performance. A better
performer received lesser raise in pay as compa-ratio for his specific job was
higher, where as an employee with poor performance got a higher raise in pay
because compa-ratio for his job was lower. Here also there was no connection
between performance and pay raise.

·        
For example, a position assigned 500 job
evaluation points would have a target monthly salary of $7430. If an employee
had a compa-ratio of 90%, his or her 2009 monthly salary would be $6687. Actual
compa-ratios ranged between 80% and 125% of the target salary, a merit
increases to compa-ratio tended to decrease on a percentage basis as an
employee climbed through the range. For example, an employee with a compa-ratio
of 85% might receive an increase of 5%-7% while an employee with equal
performance but a compa-ratio of 110% would receive an increase of only 2%-3%.

To lower turnover
Vitality emphasized more on pay stability by keeping pay level higher than the
competitors. So pay raise was tied mainly to the seniority of the employee
instead of the performance. This at last meant that employees with consistently
higher performance sometimes even received smaller raises than their less-
productive colleagues.

 

3.     
What
are the key features of Vitality Health’s revised program?

 

·        
The new revised system is more efficient
to distinguish performers and nonperformers by strictly following the
distribution model of performance rating. It follows 4 point scale instead of
13 point scale.

·        
The new program is a shift from absolute
ranking system to relative ranking system.

·        
It directs further research on the core
competencies and key duties associated with different job. The positions which
are difficult to rate and the employees who are too new for the organization
are exempted from this rating system. They will be coming under fifth category
‘Not Rated’.

·        
In this system managers need to set
specific goals with their employees and to use those goals as a component of
performance management.

·        
In turn managers were to be rated on
different perspectives like their effectiveness, in training, development and
employee relations etc.

·        
Performance reviews are to be conducted
at the beginning of the year. This plan incorporates a new system of
performance related short and long term cash and equity bonus rather than
relying only on salary increase, also limited stock options for upper level of
management and directors.

 

4.     
What
problems under the old system are solved or mitigated by the new system?

 

The newly designed system followed 4 point scale instead of 13 point
scale which made the task of evaluation easier.

·        
Under the old system one of the problem
was the rating system that was incapable of distinguishing performers and
nonperformers explicitly as it led the way to managerial abuse and homogenous
rating. To resolve this instead of measuring against predetermined measures,
employees are now rated with respect to one another. It brought a
differentiation among the employees on the basis of performance.

·        
This system holds employees accountable for
their actions and incentives employees on the basis of their performance. It
also eliminates a key problem of rewarding bulk of employees when their
departments fail to meet the specified development, production goals and
time-to-market schedules.

·        
Another problem in the old performance
management system was the provision used to calculate salary of an employee
basing upon compa- ratio and the tenure for which the employee was associated
with the organization. To resolve this problem compensation was adjusted by
incorporating a system of performance related short and long term equity
bonuses. This system also allowed for limited stock options to upper levels of
management and directors as an incentive for the successful application of this
new performance management system.

·        
All performance reviews were to be
conducted at the start of the calendar year and delivered to the employees in
conjunction with the annual goal setting process in January. This is in
relation to put the entire company on the same review cycle for measuring the
collaborative efforts and to reduce the effect of external factors.

 

5.     
What
problems arise under the new system and what issues are still not resolved from
the old system?

 

PMET2 compared performance rankings
data for early 2009 and early 2011 and found a shift in distribution of
rankings. When employees were surveyed only 54% supported the new system, 31%
preferred old system and 15%
remained indifferent.

·        
After implementation of the new system
managers found it more difficult to discuss with employees regarding their
performance assessment and to disclose the rankings as yearly review process
was directly connected to raise in pay level.

·        
With the added burden of compensation
employees were less open to coaching.

·        
Some managers and employees were
unwilling to spend time on it as they think it’s an under-rewarded task.

·        
They also considered forced distribution
as a rigid system that initially helped to get rid of poor performers but later
it removed good performers also. High performing team needed to come up with
the targeted number of achievers even though they had many of them. On the
contrary, the low performing team also had equal number of top achievers.

·        
Some of them continued to give
homogenous ratings as they were doing in old system to avoid offending others
and burdened this responsibility on the HR managers. They used “not rated”
employee category as a tool to reserve veteran employees without considering
their performance at work place. It again resulted in seniority based increment
rather than performance based.

·        
They also made a rotation of highest
rankings between employees from one year to another just to maintain uniformity
and to avoid angering their teams that led to rating employee on the basis of
the job and its requirements not relative to each other.

 

6.     
Now
that they are forced to distinguish, what will managers do?

 

As now they are forced to
distinguish, Managers responded to new system in the following manner:

·        
Managers felt difficult to discuss with
employees since it affects the merit increase.

·        
Employees didn’t do the work which were
not part of their evaluation.

·        
Unwilling to spend time on implementing
process as they think it’s an under-rewarded task

·        
Rigid forced distribution system

·        
Using ‘Not Rated’ employees category as
a tool to reserve high rankings for old employees

·        
Uniform rankings just to avoid angering
their teams

·        
Reluctant to disclose the rankings to
the employees

·        
Rotation of highest rankings between
employees from one year to the next.

 

7.     
When
might relative performance management systems be preferred?

 

·        
In relative performance system employees
are evaluated by comparing their performance to the performance of other
employees.

Here employees can be placed in a
classification reflecting their relative performance which is called group order ranking. Employees are
placed in a classification reflecting their relative performance, such as “top
one-fifth.”

·        
In individual
ranking employees are ranked from highest to lowest.

·        
In paired
comparison each individual is compared to every other employee and final
ranking is based on number of times the individual is preferred member in a
pair.

Relative performance management
system are generally used by firms having diversified business line. Industry
dominated by a few large firms that shape its direction and evolution implement
relative performance evaluation method. The firms those are large in size
usually prefer relative performance management system. Organizations having
fewer insiders in board use relative performance management. Except all this,
firms with greater institutional ownership and higher dividend yield also use
relative performance evaluation.

 

8.     
Why
were managers lumping all employees together before?

 

Managers were lumping all employees
together before because of the following conditions:

·        
Some of the managers continued to give
homogenous ratings as they were doing in old system to avoid offending others
and burdened this responsibility on the HR managers, forcing them to fit all in
the distribution curve.

·        
They used “Not rated” employee category
as a tool to reserve veteran employees without considering their performance at
work place. It again resulted in seniority based increment rather than
performance based.

·        
They also made a rotation of highest
rankings between employees from one year to another just to maintain uniformity
and to avoid angering their teams that led to rating employee on the basis of
the job and its requirements not relative to each other.

 

9.     
Is
pay more closely related to performance under the new system?

 

The new revised performance
management system was a step in the right direction.

·        
The performance management system was
revised in such a way that the new system was more efficient in differentiating
performers and nonperformers.

·        
It was also capable of aligning pay with performance evaluation.
Relative ranking, adjusting compensation
by incorporating performance related short and long term equity bonuses and
limited stock options to upper level managers and directors were some
modification done in the new system.

·        
Still it failed to change many old
practices. The number of scales got reduced from 13 to 4 but the scenario of
rating remained same as that was in the old system. Managerial dissemble might be a cause that resulted in uniform ranking
and tenure based pay raised rather than performance based.  The distribution of the top performer and
achiever were almost similar. There was
no provision to rate the new employees even if they perform very well. These will
bring low enthusiasm and motivation.

·        
 Forced distribution was a rigid system that
prevented so many high performers from getting reward as higher ratings were
used up for other divisions. Although the new system was better than the old
system in terms of performance evaluation but there were some loop holes those
made the system less effective.

 

10.  If you were part of the Performance
Management Evaluation Team, what changes would you recommend and why? How would
you implement these changes? 

 

·        
As Vitality looks at revising their
newer corporate performance management system, in conjunction with their corporate
vision, they should ensure that the CPM
is aligned. Ex. Kaplan &Norton’s Balanced Scorecard.

·        
The BSC
framework consist of 4 elements: Financial, Customer, Internal Process and
Learning Development. By cascading these perspective to the performance
review, Managers and Employee will always feel that what they reviewing and
conduct is part of their job responsibility and measured through KPI.

·        
Refreshing
and re-communicating the strategy through management and
employee training, the entire
organization will be able to understand the vision that CEO is seeking for
continued growth.

·        
Provide a new system for performance
payout that does not include a confusing forced distribution and only values
individual performance.

·        
It also should be noted that Beth Williams
and PMET should be aware of the correct
balance of job motivations of
R staff, as opposed to sales and marketing staff. In the case of
R and scientists, where work can be extremely complex, bonuses can
largely undermine employee’s work ethic.

·        
Intrinsic
motivation vs extrinsic motivation or satisfying need
indirectly through monetary compensation depends largely on the category that
employees fall into.

·        
Leadership
is also something that vitality need to develop amongst their Managers.

·        
Coaching,
mentoring can help the annual appraisal to become more
meaningful and monitored.

 

 

 

 

 

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