This is another story from my career, which means I’ll be changing some details to protect the privacy of those involved.
At a company I was working for, the financial year had come to a close and employee self-assessments were due. The company prided itself on its newly introduced system of performance-related pay (PrP). Employees would rate themselves across several areas of performance, their line managers would carry out a review and provide a manager rating in each area, and then HR would collate the data and use it to allocate pay rises and bonuses to employees in each department. So far, so good.
Then the powers-that-be in my department made a mind-numbingly stupid decision: they forced line managers to regrade their employees lower.
Why? The explanation I was eventually given was that the department didn’t have enough budget to allocate pay rises to employees based on the initial distribution of assessment ratings. So, some employees needed to be assigned lower ratings, in order to achieve a ‘bell curve’ and ‘balance the books’.
This decision was a disaster for morale in the department and a major contributing factor to multiple employees leaving the company in the months that followed. Let’s walk through the key reasons why, as a cautionary example for other companies that operate systems like this.
The principle of performance-related pay was completely undermined.
The simple, meritocratic premise of PrP is that great work should be rewarded. I’m not a huge fan of PrP as the details of the implementation matter hugely to prevent people gaming the system, but it does signal a certain type of company culture that can encourage excellence. Anyway, by forcing employees to be regraded, the department leads sent a strong message that reward and effort were coupled arbitrarily: even if everyone in the department was a hardworking genius who drove massive increases in productivity, only a select few could be fairly rewarded; everyone else’s work was to be considered subpar because the department as a whole had to average out as merely adequate.
Line managers’ judgment was disregarded.
Managers and their direct reports work together closely and should have good visibility into each other’s work during the year, making them best placed to assess each other’s contributions to the department. Airily handing down a dismissal of this assessment from higher up the management chain undermines the authority of line managers to ascertain and communicate an accurate understanding of their direct reports’ performance. This could lead to distorted, suboptimal staffing decisions at a later date.
Employee morale nosedived.
There was widespread anger when employees learned that their ratings had been adjusted downwards. Employees felt insulted and cheated out of the pay and bonuses they would otherwise have received. Some left the company, while others moved departments.
How should management have handled this situation?
Presumably, a certain amount of additional staff budget had been allocated in advance to the department leads. This would have been divided into budget for pay increases vs bonuses. In my view, the initial employee ratings should have been allowed to stand, and used to determine pay increases for each employee, as was the stated policy of the company. Bonuses could then have been allocated at line managers’ discretion to employees who went above and beyond, even in the context of a high-functioning department where every employee contributed a great deal to the company’s mission. (This wouldn’t necessarily guarantee that all employees would be satisfied with their pay and bonuses afterwards, but it would avoid a strong, justified perception of unfair collective treatment by management.)
Another way to look at it, though, is to recognise that – assuming a company is not under serious financial pressure – the overall level of employee reimbursement is a business decision along the same lines as how much to spend on capital expenditure or how much to distribute to shareholders in dividends versus reinvesting. Some companies decide to pay salaries far in excess of the market rate, because they want to boost employees’ loyalty and morale, reduce the disruption and cost associated with higher staff turnover, and empower their employees to serve customers more effectively (especially if done in tandem with wider cultural changes). In this type of company culture, managers have much more discretion to reward employees and foster more openness and autonomy. In a similar vein, unlimited holiday leave and flexible working policies rest on a foundation of high mutual trust between employees and managers, empowering everyone to seek arrangements that make work more effective and more fulfilling – and which ultimately provides customers with a better service.
Further reading
- Elissa Bandler, August 2023. Author Talks: Empower employees, reduce turnover. https://www.mckinsey.com/featured-insights/mckinsey-on-books/author-talks-empower-employees-reduce-turnover. McKinsey & Company interview with author Zeynep Ton, who lays out an alternative high trust operating model called the ‘good jobs system’, that treats employees as engines of production rather than costs to be minimised.
- Delcie D. Bean IV, December 2019. A small tech company tried it all to stop employee turnover. Only one thing worked. https://www.cnbc.com/amp/2019/12/03/a-tech-firm-tried-it-all-to-stop-turnover-only-one-thing-worked.html. CEO of Paragus talks about how his company couldn’t afford across-the-board pay rises but embraced high turnover and actively addressed employee concerns, to create a strong corporate culture that reduced turnover later on.
- Stephanie Hegarty, February 2020. The boss who put everyone on 70K. https://www.bbc.co.uk/news/stories-51332811. CEO of Gravity Payments, Dan Price, raised all staff salaries to $70k, raising employees’ capability to work and taking the business to new strengths. A well-known case study in alternative approaches to employee pay.