Performance & Compensation Plan Analysis

The Case Topic:

Vitality Health Enterprises has had a successful operation in the past. After experiencing some “let up” in performance and results, the Executive Manager is looking to make improvements. As part of the overall improvement effort, the Performance Plan that had been in place (the Old Plan) has been assessed for effectiveness and a New Plan has been constructed. The case affords you the opportunity to analytically assess performance and compensation plans and their impact on Job Satisfaction and Loyalty and Commitment. _____________________________________________________________________________________

Question 1.

What are the basic purposes of a Performance & Compensation Plan and how it is expected to impact organizational outcomes?

 Performance and compensation plans serve the following purposes: to provide a structure for the assessment of  employees’ job performance to provide guidance for compensation increases, to set and define goals for employee performance expectations, to promote communication between managers and their staff regarding performance, to motivate and encourage employees to perform successfully, to retain the best employees, and to promote the continued success and competitiveness of an organization.  Ideally, performance management systems should be in effect throughout the year, with clear and ongoing communication and feedback between managers and their employees, as opposed to taking place as an annual process (Pulakos, et al., 2004).  Companies who provide performance feedback on a regular basis foster an environment of trust between management and employees because the employee is more likely to be clearly informed of performance expectations and has ongoing opportunities to make adjustments to improve performance and to meet or exceed expectations.  Keeping employees engaged with the organization and aware of the importance of their contributions promotes the organization’s success, which is an important goal of a performance and compensation plan.

Question set 2.

What were the main problems with the old system? How did it impact Job Satisfaction and Commitment?

 There were several problems with the old system that impacted job satisfaction and commitment, and that worked against the goals of Vitality Health to increase the productivity of the product engineers in the R&D department:

• Lack of accurate performance rankings by managers due to their fear of disrupting their team work culture.
• Lack of distinction between high, medium, and low performers led to more productive employees feeling undervalued by management and increased bad morale among good employees.
• Too many rating options (13) to choose from made it hard for managers to determine where employees fit into the ranking.
• The point system and peer group comparison ratios used for salaries and raises could result in less salary increase over time for consistently high performing employees.

Job satisfaction was impacted by the problems with the old system because the top talent felt that there was no recognition given to them for performing well since there were employees performing less productively who were given the same or even higher raises, leaving top performers feeling unappreciated and devalued, according to the Vitality Health case study.  This led to some of the more talented employees leaving Vitality Health for other opportunities.  Additionally, there was no incentive for productive employees to keep performing at high levels because it had no effect on their compensation not their underperforming peers’ compensation.  In addition to losing their top talent, Vitality was faced with the lesser performing employees more likely to stay with the company, which worked against the company’s goal of achieving a high performing R&D team.

 Commitment was also affected by the old system because when employees feel unappreciated and undervalued they are more likely to want to seek employment elsewhere, and they are less engaged in the work that they are doing.  Colquitt, et al. (2019) discussed three kinds of commitment to an organization that an employee may have:  continuing to work at a company because you want to, need to, and ought to (p. 64).  The types of commitment that are most affected by the old system are “want” and “need” since some employees may “need” to stay with the company for the salary they make, but they may not be committed to the goals of the organization if they are unsatisfied, and some employees will not “want” to stay with the company if they have a choice to seek employment elsewhere and are unsatisfied with their current employment, and will also not likely be committed to the goals of the company if they are seeking to leave.  Since the goal is to retain top talent, it is necessary to focus on ways to engage employees and ensure that they feel valued and appreciated for their contributions to the organization, or these may be the employees that are lost to competitor companies or who learn to disengage in their current jobs because they are not recognized appropriately for their performance.

Question set 3.

From the case information, explain how the Old system aligned with company goals? Why might this be important to the Plans effectiveness?  

The old performance management review system sought to align with the company goals of becoming a more agile and competitive organization by cutting costs, reducing inefficiencies, and tracking employee performance.  Additionally, the old system aligned with the organization’s goals by trying to find ways to retain their top talent, but fell short in part because it focused only on financial pay.  Neely (2007) discussed the importance of internal motivation with jobs that have a complex and knowledge learning nature, such as those of product engineers, where the use of financial rewards as incentive for motivation is not recommended as the sole way to recognize employees for their contributions (p. 444).  In addition to financial rewards, Neely (2007) recommended fostering an environment for such employees where they are supported in meaningful work that they have responsibility for outcomes, hold accountability to mutually agreed-upon goals, and have open lines of communication with managers and teams of co-workers (p. 443).  Internal motivation for R&D employees is inspired by being engaged in meaningful work and by understanding how their performance contributes to the big picture of success of the organization.

It is important to align performance plans with a company’s strategic goals so that employees’ work contributions fit into the big picture of the organization’s overall success.  Without tying into the company’s strategic goals, it becomes difficult to elicit buy-in from employees and managers to any performance plan, and without their buy-in, managers and employees can undermine the system, which is what happened at Vitality, rendering it ineffective.  Managers only selected one or two ratings out of 13 to assign to most of the employees, which disallowed the possibility of identifying the strong from the weak performers.  As a result management did not have the opportunity to leverage any strategies with the high and low performing employees to cultivate the employees’ growth and improvement for the betterment of the organization’s future success.  With no visibility of the true talent or underperformers in the company, it is difficult to know where to focus your attention in attracting, recruiting, and retaining talent, and managing out the underperforming employees.

Question set 4.

How well do you think a forced distribution rating provision in the New system achieves objective and equitable performance assessments? And, do you recommend its use at Vitality Health? Why or why not?

 In designing a performance rating system for Vitality that aligns with their goals and that is well-received by its employees and managers, it is important to understand what motivates R&D employees to perform well.  While some employees are motivated by pay increases, others may need a combination of pay and other forms of compensation and opportunities in order to perform at their best.  According to Suff, Reilly, and Cox (2007), research scientists and product engineers, who contribute to an organization by creating products and solutions and solving problems, fit into an employee category who are satisfied by a combination of financial and non-financial compensation. Non-financial compensation can take the form of training and research opportunities to stay on top of what is current in their field.  It is also critical to understand how R&D employees work and the nature of the work that they do, which is less measurable and more complex than sales number metrics in the work of salespeople.

Question set 5.

How does the New system impact Job Satisfaction and Commitment? What are the major shortfalls of the New system?

One of the major shortfalls of the new system is that a forced distribution system puts the focus on the performance the individual employee rather than on team performance, which works contrary to the goals of Vitality Health to motivate their R&D team to create new products.  This could also lead to individuals being rewarded even though their departments may not have reached goals and deadlines that they were accountable for.  Andersen (2012) cited an example that shows in forced ranking, even if most of the team were top performers, only some of the team would be allowed a top ranking, which is not only detrimental to motivation, but drives individuals against each other as they vie for a top ranking, leading employees to not support their co-workers and does not promote success for the team.  This creates a culture within the company where employees focus on competing against each other instead of working together to compete as an organization against other companies, and is detrimental to the success of the organization (Allen, 2012).

An additional shortcoming according to Lipman (2012) is that the majority of employees are fit into the “average” category to indicate that they are meeting expectations, which in an adult mindset is equivalent to a “C” rating, which can be demotivating.

Another shortfall of the new system is the way that it was implemented. There was a management comment that asked where the training for using the new system was as it was confusing and overwhelming to adopt the new forced rating system.  If proper training had been provided, there would have been opportunity to elicit buy-in from the managers who put it into practice, which would be critical to the successful understanding and adoption of the new system by Vitality Health (Marty, 2019).

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Managers were able with the new system to save higher rankings for other employees by automatically assigning a non-ranking to any employee who had been there less than 1 year, which both did not allow for recognition of high performing new employees in the first year, or did not motivate new employees to contribute for the 1^st year.  Since a new employee received a non-ranking regardless of performance, it had the same result as not being held accountable for performance in year one. 

References

• Allen, F.  (2012).  The terrible management technique that cost Microsoft its creativity.  Retrieved from https://www.forbes.com/sites/frederickallen/2012/07/03/the-terrible-management-technique-that-cost-microsoft-its-creativity/#9d94031e03ac
• Andersen, E.  (2012).  The management approach guaranteed to wreck your best people.  Retrieved from https://www.forbes.com/sites/erikaandersen/2012/07/06/the-management-approach-guaranteed-to-wreck-your-best-people/#2a7d0b325743
• Lipman, V. (2012). The pros and cons of forced rankings: A manager’s perspective.  Retrieved by https://www.forbes.com/sites/victorlipman/2012/07/19/the-pros-and-cons-of-forced-rankings-a-managers-perspective/#5b3d2fc470b6
• Marty, J. (2019). Vitality health: A better corporate management health system to retain topo talent.  Retrieved by http://chloemarty.com/johnmarty/vitality-health.pdf
• Neely, A.  (2007).  Business performance management, 2^nd ed.  Cambridge University Press, NY.
• Pulakos, E., Mueller-Hanson, R., O’Leary, R., & Meyrowitz, M. (2004).  Building a high-performance culture: A fresh look at performance management.  Retrieved from https://www.shrm.org/foundation/ourwork/initiatives/resources-from-past-initiatives/Documents/Building%20a%20High%20Performance%20Culture.pdf
• Suff, P., Reilly, P. & Cox, A.  (2007). Paying for performance: new trends in performance-related pay.  Retrieved from https://www.employment-studies.co.uk/system/files/resources/files/mp78.pdf