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A Better Performance Management System

Performance Management

2021 is referred to as the Year of the Resignation, with workers leaving companies for different opportunities and companies finding it difficult to find skilled employees.  Companies are hearing that they need to be employers of choice, with emphasis on these areas:

  • Unsatisfactory Leadership (#1 reason for leaving is relationship with one’s boss)
  • Career Satisfaction
  • Misalignment of Company’s and Employee’s Philosophy and Goals
  • Salary
  • Work Flexibility

Companies identify ranking systems as a cause for employee angst, and some employers have eliminated ranking systems.  My experience is that without some form of ranking, there are managers who believe that all of their employees “walk on water” and other managers who recognize that their group is similar to most other groups.  Regarding rankings and salaries, the most common complaints I have heard through my three careers are, “The company does not value my work,” and “I am underpaid.” My formal education includes a joint-MS/BS in Physics from MIT.  I enjoy solving problems.  I first tackled this ranking/salary problem as a Division Manager for a 50-person engineering services division for a small company in the DC area.  We had to reduce personnel churn to keep our customers happy.  After implementing this system, I needed to scale it to use at a large company where I led a 600-person engineering team.  The same system, with more rigor, reduced annual attrition from the metropolitan area average of 21% to 7%.  

What is this system?  How do you avoid pitting people against each other that is perceived with forced rankings?  Simple—the merit review system is based on paying people according to their value to the company.  Someone who is underpaid gets a more significant raise, someone paid about right gets a median raise (the next blog will cover a variant on this), and someone overpaid gets no increase.  How does it work?

We start by ranking everyone by discipline (e.g., senior programmer, senior electrical engineer, senior systems engineer) in each pay level from top to bottom.  There is usually enough cross-team work for managers of each team to be aware of some people from other teams, allowing ranking across groups.   We also do a straight salary ranking.  An example is shown below for senior programmers.  (Note: Quartile 1 is top quarter, 4 is bottom quarter, etc.)

Name Value to Company Value 

Quartile

Salary 

Rank

Salary 

Quartile

Delta (Salary quartile-Value quartile)
George Washington 1 1 8 4 3
John Adams 8 4 7 4 0
Thomas Jefferson 2 1 6 3 2
James Madison 7 4 5 3 -1
James Monroe 3 2 4 2 0
John Q. Adams 6 3 3 2 -1
Andrew Jackson 4 2 2 1 -1
Martin Van Buren 5 3 1 1 -2

 

Merit reviews are based on the delta, the difference between their salary quartile and their value quartile.  A delta of 3 indicates that the person is significantly underpaid, and a -2 indicates overpaying.  Assuming that the company has determined that they will grant an average increase of 4.5%, the below table is an example of ranges for raises based on the delta.  (The next blog will talk about tweaks to this table that we performed to drive undesired attrition from people in the top two value quartiles to the lower quartiles.)

Salary Quartile (across)

Value Quartile (down)

1 2 3 4
1 4-5% 5-7% 7-9% 12-15%
2 2-4% 4-5% 5-7% 7-9%
3 0% 2-4% 4-5% 5-7%
4 0% 0% 2-4% 4-5%

(Note:  Since the difference is a zero-sum calculation, where positive and negative differences will exactly balance, the average increase across all the cells in the above table is the target 4.5%.  The 12-15% is 13.5% average, created by three cells with 0% increases.)

As part of the annual performance review, we did tell employees what their quartiles were.  The conversation tended to focus on how they could increase their value to the company to get more significant salary increases.  Also, people who were overpaid were more accepting of no raise when they realized that it provided more job security in the event of a workforce reduction.  When we had to reduce staff, we looked at the most overpaid employees.  This also had the benefit of continuing to retain a workforce that matched with the jobs available, as not all jobs require someone in the top value quartile, just as not all jobs can be performed by someone in the fourth quartile.  

Stay tuned for future blogs that will cover the retention data from using this merit review system, tweaks to move undesired attrition to the lower value quartiles, how to handle employee challenges to the value rankings, and how to conduct the merit review (and promotion) conversation.  

Please reach out to me at markneuhausen@gmail.com if you have questions or desire assistance in implementing a system such as this.  As a TAO Executive in Residence (EIR), my assistance is included in your company’s TAO membership.


Mark Neuhausen is leveraging his experience from two careers, one in government contracting and the other in IT, in his third career; helping people and solving problems by mentoring, advising, connecting, and educating companies/teams/people in all aspects of business, with a focus on technology.

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