How to Create an Employee Performance Management System

How to Create an Employee Performance Management SystemDespite the understanding that talent is a source of competitive advantage, establishing an effective performance management program remains a challenge for most organizations.

According to Mercer’s 2013 Global Performance Management Survey, only 3 percent of organizations worldwide said their performance management system delivered exceptional value, while almost half (48 percent) said their overall approach to performance management needed work.

The profile of pay-for-performance has never been higher than it is now, with everyone from academia to mass media weighing in. Most organizations are not satisfied with their pay-for-performance programs and there is a general sense of dysfunction.

According to Mercer’s survey, attracting and retaining the right employee ranks highest among expected outcomes of pay-for-performance programs, as reported by 86 percent of participating organizations. This outcome is followed closely by motivating employees to focus on the right things and perform at higher levels. Additional priorities, cited by more than one-third of organizations, are encouraging specific behaviors and promoting employee engagement.

Clearly, workforce capability and motivation are two areas advisory firms can focus on to drive performance.  By investing more time in assessing employee needs, determining where critical talent lies and identifying factors that influence employee behaviors, advisory firms can improve their pay-for-performance programs and enhance their overall success.

Managing performance is difficult and complex. On the other hand, it is also one of the most important activities a financial investment firm can undertake. The potential impact of the performance management process cannot be underestimated.

Improving pay-for-performance can be a matter of choosing the right model.  Mercer cites three pay-for-performance models that organizations should consider deploying as alternatives to, or in combination with, traditional variable pay models:

  • In a promotion-focused or “tournament” model, pay varies significantly from one career level to the next, with less emphasis on differentiation based on performance between employees at the same level. In this model, competition for advancement, rather than the size of pay increases or annual incentives, motivates employees to perform well. The best performers earn more via promotions based on relative performance evaluation. About 14 percent of those in the 2013 survey reported using this type of model.
  • In a membership or “efficiency wage” model, overall pay (and benefit) levels are targeted above the market median, and employees must perform at high standards to stay with the organization. In this model, the desire to keep a high-value position is what incentivizes employees to perform well. Around 14 percent of respondents in the 2013 survey said they use this model to attract and retain high-performing talent and stimulate performance.
  • In a service or “bonding” model, a trajectory of planned increases shifts pay from early to later in the career, once performance is credibly demonstrated. This model also locks in employees over the long haul by preserving firm-specific knowledge that is key to productivity, while enforcing performance minimums to stay with the organization. Only 7 percent of respondents in the 2013 survey reported using this type of model.

Good performance management is a process that provides feedback, accountability and documentation for performance outcomes. Investing the right amount of time, effort and resources in performance management can yield untold returns, increased productivity, enhanced employee morale, a higher quality of work and reduced turnover.

There are many ways to approach the task of creating a performance management process, but most are organized something like this:

  • Individual goals and corporate strategy are defined and communicated company-wide
  • Progress on goals is monitored, and management provides coaching on performance
  • Individual performance is appraised with feedback and formal documentation
  • Compensation is given based upon performance
    • If performance meets or exceeds the desired standard, a reward is given
    • If performance does not meet the desired standards, a performance development plan is created to address the gap and a new performance review date is scheduled.

Ultimately, companies must invest more time in identifying talent needs and strategies, critical talent, and factors that influence employee behaviors. It’s a matter of being open to alternative models, assessing fit to context, monitoring effectiveness and optimizing accordingly. Despite all the noise and negativity surrounding pay-for-performance in today’s wired world, it’s a riddle each organization must solve in its own way.

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Summit Brokerage Services is part of Cetera Financial Group, RCS Capital Corporation’s (NYSE: RCAP) retail investment advice platform.

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