Performance Appraisal, Merit Pay, Bonuses

For most of my career I have worked as a consultant or contractor, not as an employee.  When I worked as an employee I sometimes had to go through a performance appraisal or evaluation to determine my merit increases in pay.  On one of these occasions, I received an evaluation that was toward the low end of the scale.  If I recall I got an overall 2 on a 7-point scale. 

My boss at the time said that my separation and impending divorce had made my performance suffer.  I knew that he had to force all the six or eight who reported to him to a curve, and he had a difficult job because he had selected and developed a team of very effective people in his organization. We had different talents, but we were all professional and dedicated to our work and often called on each other for help in areas in which we knew our colleagues had greater strengths.

I suspected that he seized on my up-coming divorce as an excuse, because someone had to be at the lower end.  I felt resentment against my boss and my colleagues, even though I understood that my boss was caught in an appraisal process that was not of his making. I am not sure if this caused me to be less of a team player, but I do recall the feeling.

Edwards Deming was highly critical of performance appraisal, merit pay, and individual performance bonuses.  Deming contributed a great deal to the Japanese quality and effectiveness revolution, and may be the most respected American in Japan. He is dismissed or disregarded by much (though by no means all) of business leadership in the United States.

Deming said:

In practice, annual ratings are a disease, annihilating long-term planning, demobilizing teamwork, nourishing rivalry and politics, leaving people bitter, crushed, bruised, battered, desolate, despondent, unfit for work for weeks after receipt of rating, unable to comprehend why they are inferior...

He stated this sentiment in other words, just as forceful, adding merit pay, merit bonuses, and payment on commission to performance ratings.  This resonates with my experience working with numerous clients in various countries.

One company paid bonuses for suggestions, using a formula that shared a portion of the resulting savings with the worker who made the suggestion.  The Plant Manager of the main manufacturing facility held a coffee and donuts session to honor the top ten bonus recipients.  Several managers and engineers were in attendance. The honorees had each received thousands of dollars for their suggestions, made within the previous year.

The Plant Manager asked that we go around the room and hear from each honoree about how they had come up with the idea for their suggestion and tell us a little bit about it.  Instead of responding to the question, every single reward recipient described how he had been required to file a union grievance to get his due, either for this suggestion or for a previously submitted suggestion.  I looked at the process engineers in the room and saw clenched jaws and downcast eyes.   After the meeting, they unloaded their resentments to me about the company paying huge bonus for suggestions on which they had already been working.  The bonus only went to hourly (union) workers, not to salaried engineers.

This plant was having not very good luck with problem-solving teams. Who wants to share ideas in a team meeting, when you can be paid for them if you keep them to yourself and submit them to the suggestion program?

At another plant there was an incentive for extra production.  We were trying to introduce lean concepts, making only what was needed when it was needed, just-in-time.  The workers were understandably resistant to a program that would take away an opportunity to often make 15% to 20% above their base pay, by producing over the standard.

Managers and supervisors do not have the tools or the skills to make accurate distinctions in performance on a seven or nine-point scale. When Deming was asked what he would put in the place of performance evaluation, he replied, “leadership.” He has also suggested “process evaluation,” arguing that as much as 95% of an employee’s performance is determined by the process and the way managers manage it.

Part of a process evaluation can be sitting down individually with employees and discussing what prevents them from doing their best.  They will probably come up with problems regarding material, machines, methods, and the feedback that they get from the process on how things are going. What results the process yields and what factors most influence that.  They may even mention things that they can do better, if they put their mind to it, or if they receive additional training, instruction and education.

An effective leader can hear these comments, weigh them, and address the real needs. All too often managers do not want to take the time to listen to “complaints.”   Deming describes a creative case in which a CEO set up a barber chair in a room next to his office.  During certain lunch hours each week the hourly workers could get a haircut from the CEO, who had learned how to cut hair.  During the haircut, the CEO asked questions and listened to his workers comments.  Every manager does not have to learn how to cut hair.  A leader will find ways to make sure he is hearing about what is going on in his organization.

To provide an appraisal that is not divisive, supervisors may be able to rate employees on a three-point scale:  1. Unsatisfactory (needs correction or separation); 2. Satisfactory (the employee and his immediate supervisor can discuss how to build on strengths); and 3. Outstanding (limited to employees whom would be seen by many, if not most, of their colleagues as outstanding in some way). 

In an organization in which there is on-going process evaluation, where leadership truly listens to and supports the employees, contributing to their development and integration into the organization, there should be few unsatisfactory employees.  Outstanding employees will also be few and widely recognized. Some of these may be the first candidates to include in succession planning.

I worked with a company that occasionally removed an unsatisfactory employee.  Most of the shop floor supervisors had been developed from the ranks, many with very little formal education, but a lot of learning from years on the job.  The plant was productive with people who worked hard and cooperated with each other.  At the end of the year every employee with a good attendance record received a percent of base pay bonus, based on years of service.  It was understood and shared by all. This is far different from attempting to make fine distinctions among individuals, which tend to have the effect that Deming describes.  This approach encourages teamwork and pulling together.

Notes: Edwards Deming’s view described here come from The New Economics For Industry, Government, Education and Out of the Crisis.  Deming has a lot to say about bringing out the best in workers and the workplace.  I will be referring to him more in the future.