I recently had a guest post over at Fistful of Talent on Pay for Performance as part of their Don’t Feed the Vendors Series. If the comments are any indication, I definitely hit a nerve and sparked some debate on this topic.

Here’s the post courtesy of Fistful of Talent:

It’s that time of year. Performance reviews. Comp adjustments. Fear and loathing for so many. It got me thinking about the problems that show up in the merit increase process, and how they often have a deeper cause.

Darcy Dees does a nice job covering the definition of the topic in her November post over at Compensation Café. I don’t need to tell you there are several approaches to the subject of pay for performance. Best practices would say there are multiple factors that impact pay for performance – upgrading skill levels, company and departmental performance, team goals etc. In this post I’m only talking about the merit based portion of an overall pay for performance program, specifically, using overall appraisal scores to drive merit increases.

Why? Because that’s the reality of what many organizations are using as the foundation of their pay for performance program. When that happens and the scenario below unfolds you’d better believe the problem isn’t with your merit increase program, but with the performance management process.

Here’s the scenario: Your company has been doing fine despite the economy, and you’re running a P4P program that’s based on merit increases. The employees are aware that pay increases are supposed to be linked to performance. In their minds the annual review is the basis.

Now what do you do about Richard? According to his performance history, he’s a very solid performer. Appraisal data shows 4/5s across the board for the last three years. No concerns raised by his manager logged anywhere. But Richard is sitting across from you, pretty vocal about the fact that he got shafted on his raise: 1.5% – the same as everyone else. There might be a reasonable explanation, but most of the time there isn’t, and there really is a gap. Based on the data, you’re inclined to agree with him.

Herein lies the problem in this all too common scenario: if you don’t actually do the performance management part, the “merit based pay” doesn’t work. Shocker, I know.

So what happened? Why did Richard get a good review, but get royally… overlooked when it came time for the raise? One of three things happened here:

Explanation 1. The manager was assigning increases based on their own personal preferences/mood that day. A pretty subjective approach, with no link to performance and more akin to playing favorites.

Explanation 2. The manager doesn’t like the pressure of assigning increases and decided to split the pot evenly across the team – Richard got what everyone else got. That’s not pay for performance either, unless of course all team members are equal performers. And we all know how often THAT happens in real life. So if you’re going to let managers evenly spread the raises, that’s cool, just stop calling it pay for performance. It’s not even close.

Explanation 3. Richard isn’t really a super high performer, and shouldn’t have earned a 4/5 on his review to begin with. But his manager was too weak to let him know that he was average, leading to grade creep in the appraisal process, and a major disconnect on his raise.

So, the manager was unwilling to deal with performance, but when Richard gets his next check he’s going to come to HR and dump the problem in your lap. So when this blows up the merit increase process gets blamed. But where was the problem really?

1. The first failure was the manager not dealing with performance all year long with regular feedback and coaching.
2. The second was not addressing performance issues honestly and objectively in the appraisal process. Yup, still not willing to have the tough conversations.
3. Managers up the approval chain in the appraisal process weren’t doing their jobs. They didn’t read it, or if they did, they just rubber stamped it.

Richard ends up with a raw deal not only on his merit increase, but when it comes to development and feedback too. He’s not a mind reader, but he’s being told in one instance “you’re a 4/5″, and in another… “You are not really that great and we won’t tell you why.” Nice, shaft the guy when it really counts, and don’t bother to help him improve or grow.

Cue the broken record, but I’ve said it at least a million times to anyone who will listen, performance management is not a once a year deal. It needs to be a day to day priority. If a manager isn’t plugged in with their employees and truly coaching them and dealing with issues immediately, there’s no way that any performance appraisal reflects reality, or that the employee is going to understand, let alone happily accept their merit increase.

The end result is that your employees get the short end. I’m positive I don’t need to tell you that does zilch for employee engagement or retention, or establishing a culture that strives for high performance. But these factors were pretty much the rationale for implementing a pay for performance program in the first place – right?

Issues in P4P are often like diagnosing an illness – you can’t stop at the symptoms, you need to work out the cause and treat it. You have to be bold enough, and brave enough to tackle this beast and fight for the integrity of your talent management programs.

You up for it?