Performance reviews
6 min read

Performance reviews: Aligning development and compensation

<span id=Performance reviews: Aligning development and compensation">

Alexis Croswell

Senior Content Marketing Manager, Culture Amp

Nearly 95 percent of managers are dissatisfied with how their company approaches performance reviews, and 90 percent of HR leaders believe their performance management system doesn’t deliver accurate information about employee performance.

It’s no wonder that companies everywhere are looking for a better way to evaluate employee performance.

Companies, managers, and employees shouldn’t settle. - It’s time to let go of performance management that doesn’t work.

While the “death to performance reviews” rallying cry might be enticing, creating a new process is hard work. Abolishing an old performance review system without something new in place to address performance, compensation, and development can spell disaster instead of revolution.

In our newest eBook, Raising the Standard for Performance Management: How to Align Development and Compensation With Business Strategy we present a plan for rebuilding and rebranding performance management at your company. Here, we provide an overview of how to align development and compensation in performance reviews.


What you’ll learn in our eBook

- Understanding the needs of stakeholders in the performance review process

- The 8 steps to rebuilding performance management

- How to encourage employee buy-in to your new performance review process

Performance ebook

Get the free eBook


The top 3 stakeholders in the performance review process

Within every organization, different stakeholders use performance reviews for different purposes, leading to a process with too many contradictions to function well: 

1. Companies want to hold each employee accountable to performance standards while also uncovering information about strengths and weaknesses to maximize individual performance and development.

2. Managers want documentation to support their hiring and firing decisions while also soliciting honest feedback from employees.

3. Employees want a formal opportunity to evaluate their compensation, but they also want to receive constructive feedback about their performance and development.   

The differing needs from each stakeholder lead to a process that historically accomplishes little. However, because companies are the ones with the most power in this scenario, they’re the ones dictating how performance reviews play out. The needs of employees to have a clear path towards growth and fair opportunity to evaluate compensation are often left out.

Performance and development: What’s the difference?

When companies rally behind the cry to get rid of performance reviews, they often replace them with more frequent “development” conversations. While this intention is great (we’re all about giving and receiving feedback well) it misses the mark on some of the key stakeholder needs above (namely, evaluating compensation).

So, what is the difference between performance feedback and developmental feedback?

Performance

- How well an employee executes their role-related expectations

- Includes extra-role behaviors that support the organization’s strategic objectives

- Focus on accurately measuring and differentiating high/average/low performers

- Extrinsic motivation: Performance relates to things like compensation, titles, and a sense of security or clarity about one's role

Development

- The refinement or acquisition of skills, knowledge, abilities, and mindsets

- Inspiring, equipping, and enabling employees to greater levels of performance

- Enhance future growth, even beyond an employee’s current role

- Intrinsic motivation: People want to develop for pure growth in their role, career, or overall life goals.

When employees and managers sit down for their performance review, employees are focused on compensation. This is the (often only) time they have to rally for compensation increases or defend their performance for a more favorable rating. This extrinsic motivation (title/compensation) shuts down the intrinsic motivation (learning and growth). How can you make this better? Separate performance reviews from development, and increase how often employees and managers talk about both.

Separate performance management from development

Bringing clarity to the difference between performance measurement and developmental feedback is important. This gives HR leaders the data they need to make compensation decisions while optimizing for development year-round. From an administrative standpoint, performance data can be used to deliver strategic learning resources for employees to help focus and accelerate employee growth.

From the individual standpoint, separating performance measurement from development frees the tension of extrinsic and intrinsic motivation mentioned above. Employees are now able to focus on their development continuously, understanding how it fits into the performance review conversation.

Get 60 performance review phrases you can use today to make your next review easier

When it comes to peer feedback, colleagues are more likely to give constructive, developmental feedback when they know it will help an employee develop but won’t be used against them for compensation purposes.

Build a culture of learning and growth

Champion a growth mindset throughout the organization and transition from programmatic learning and development to a comprehensive learning culture.

This requires leadership commitment and resources, evolving to a growth mindset at all levels of the organization, making feedback a natural part of how people work and interact, and incorporating development into performance processes and goals.

The second piece, evolving to a growth mindset, is a concept introduced by Stanford Professor Carol Dweck. She explains there are two mindsets, fixed or growth, that influence how people succeed and are motivated. In a fixed mindset individuals are born with a fixed level of intelligence and ability whereas in a growth mindset no matter where a person is now in terms of intelligence and ability, they can always improve.  

Focusing on a growth mindset helps drive development and learning, opening up channels for ongoing feedback among employees and managers. 

Your performance review process matters

How you approach performance management at your company has a profound impact on your employees. Just how profound that impact is can be best appreciated through the concept of organizational justice. This term refers to how employees judge the behavior of an organization, and their resulting attitude and behavior because of that judgment.

There are three components to organizational justice that come into play. As you read them, consider them through the employee’s viewpoint of your company’s performance review process.

Process

- Are the decision-making rules clear and consistent?

- Were potential biases acknowledged and minimized?

- Did I have an opportunity to voice my input?

Interactions

- Interpersonal treatment: Was I treated with respect and compassion?

- Information: Was I informed on how the process works?

Outcomes

- Did I get what I wanted?

- Was it appropriate and equitable?

So, what do you think matters most to employees? Process, interactions, or outcomes?

Overwhelming, the answer is process and interactions. When it comes to performance reviews, we don’t need to tell you that employees are often frustrated with the process. Outcomes are likely to be variable across the board. When the traditional annual review period concludes, data show that less than 10% of employees will likely be promoted. Out of the roughly 90% of the remaining workforce, there will undoubtedly be someone who is left disappointed with the result.

However, the effects of being disappointed with the outcome of a performance review can be short-lived. Evidence shows that employees can become more engaged after a disappointing review, so long as they are satisfied with the process and perceive fairness in the decision. 


Are you ready to raise the standard for performance management?

Get all of the insights in this article and more in our eBook

Get the free eBook