Timing of Performance Appraisals and Pay Actions
The timing of performance appraisals and pay actions is a topic that has been debated in most organizations. The most common approaches are to schedule performance appraisals and pay actions either on the anniversary date of each individual’s last pay action/appraisal or to do them all on the same (focal) date. A third option is to do the performance appraisal at one time and to make the pay action effective at another time.?
Each of these approaches has advantages and disadvantages:?
If it is suggested that everything be done on the same date, there will be responses such as “if we asked managers to do performance appraisals and pay action recommendations at the same time, we would have a revolution… and we would have to shut the place down for two weeks, because the managers would not be able to do their jobs. Besides, reviews should be personalized. People shouldn’t be treated like parts on an assembly line. Using anniversary dates gives the manager a reason to talk to the employee about their performance.” Opponents of the focal-date approach say managers with large spans of control will not be able to do timely and high-quality appraisals. Supporters of the approach counter that no one can be intimately familiar with the performance of more than seven or more subordinates and therefore the issue is the reporting structure.
If appraisals and pay recommendations are to be spread throughout the year, there will be responses such as “how can we coordinate pay actions with our budgeting process and tie them to our performance when they are spread out during the year… pay decisions should be made when all the facts are known about how well we did and what resources are available. Besides, those with dates early in the year will do well and those near the end will be given short shrift.” Another issue that arises with the use of this approach is the difficulty of ensuring equivalent criteria are used by managers throughout the year and that employees do not remain below the pay range minimum as a result of the structure being adjusted during the year.
If it is suggested that performance appraisals be done at a different time than pay actions there can be both supportive and opposing views: “doing the appraisals all at the same time is too much of a workload for managers… but all pay actions should be effective at the same time during budgeting” or “separating appraisals and pay actions destroys the very thing we are seeking—creating a strong connection between pay and performance in the mind of employees.”
As with most decisions relating to employees, the views about the best approach are varied and held with strong convictions..
Strengths and Advantages
As already suggested, both approaches have potential strengths and advantages. Figures 1 and 2 list the advantages/strengths and the conditions that are conducive to using both approaches.?
Deciding On An Approach
The most desirable approach depends on the context within which it will be used and on the organization’s priorities. Organizations must decide based on those considerations—and the same approach may not be used for all of an organization’s employees. Direct sales personnel and executives are typically tied to annual results. They also have a significant portion of direct pay in the form of incentives. This argues for the focal date approach. But it is a more complicated decision for other employees. Depending on the type of employee, the nature of the work performed and the work cycle, different approaches may be selected. Two special circumstances: 1. when employees perform project work, or 2. when they are covered by a step structure.
Employees engaged in project work: Engineers and other professionals often work in a project mode, with its completion dates differing from the administrative cycle governing appraisals and pay actions. This poses a challenge that cannot be completely dealt with by selecting either a focal or anniversary date. If employees are a part of significant project incentive plans, the organization may decide to do the annual appraisals and base pay actions on a date coinciding with the fiscal year and budget cycle. However, they may time project incentive awards to dates on which results on the project can be accurately assessed. If employees do not participate in incentives, their rewards for performance are typically determined using merit pay systems. In this case, it is necessary to assess overall performance on one or more projects.
Employees covered by step-rate base pay administration systems: Public sector employees and employees who are covered by a collective bargaining agreement are often covered by a base pay system that progresses the pay rate between predetermined steps, based on longevity, performance or a combination of time and contribution. However, a step structure is typically adjusted at one time, coinciding with the fiscal year, while employees receive step increases on their anniversary dates. This approach often results in employees not appreciating the magnitude of their total pay adjustment for the year. For example, if the step-rate structure is adjusted by 1.5 percent in January and an employee receives a 2.5 percent step adjustment in August, that employee may not realize that their actual increase is 4.0 percent for the year. That is substantially more than budgets for most private-sector organizations. The author is aware of several public-sector organizations with individual pay rates well above market rates (due to individual longevity), facing employee complaints in January that their adjustment is “smaller than the averages they hear about.” This unfortunate scenario is easily rectified by timing the step structure adjustment and the step increase so that they coincide.
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Changing Approaches
If an organization decides to change approaches, there are different challenges that arise, depending on what the previous and the new approaches are.
Changing From Focal To Anniversary Date: This change is rare. Over decades of consulting experience many organizations have changed from anniversary to focal date but I have never had an organization that wishes to return to the anniversary approach. However, this change may be deemed desirable according to changing conditions. The mechanics of making this change while ensuring employees are fairly treated is straightforward. Once the next review date for each employee is determined, a pro-rata factor is calculated and applied to the next adjustment. An employee who receives the next review three months after the old focal date would receive 3/12 of the adjustment that would have been granted under the system. The changeover actually benefits employees, who will receive the compounding on the earlier increase.
Changing From Anniversary To Focal Date: This is the most common change and there are two options that present themselves. One is to provide all employees with a proportionate adjustment at the time the focal date is set. This will provide equivalent increases annually. For example, an employee who was reviewed one month prior to the new focal date would receive an increase equal to 1/12 of what the normal increase would have been. An employee who was reviewed 11 months prior to the new focal date would get 11/12. Subsequent increases would then occur on the focal date and be the full annualized amount. Another option is to delay review for employees who have received reviews and adjustments recently (say during the last three months) until the focal date following the first one. At that time their increase would be annualized on a pro-rata basis. An employee who had been adjusted three months before the first focal date would receive 15/12 of the normal amount on the second focal date. This latter option is slightly less advantageous to employees and if employee reactions are a major consideration, it is probably safer to go with the first.
Separating Appraisals and Pay Actions
Behavioral research has provided support to having performance appraisals and pay actions coincide in their timing. If pay is to motivate performance, it must be seen to be correlated with performance. Separating the two is ill-advised. Some have argued that it is “emotional overload” to talk about performance and pay consequences at the same time. However, research indicates that employees find discussing performance without tying it to consequences makes the appraisal a non-event. The bottom line of the appraisal—reward process is employee motivation, satisfaction and future performance. Separating the pieces of that process is not a step in the right direction.
Conclusion
The timing of pay actions will have a profound impact on their effectiveness and acceptance. They should be communicated and made effective at a time when it is possible to connect them to the performance of the organization and of the individual. They should also be timed in a manner that is consistent with the culture and with the business planning/budgeting cycle. Focal date reviews and pay adjustments are used in the vast majority of organizations for these reasons. This is not to say they could not be timed differently. But if they are there should be a compelling business reason for doing so.
by: Robert J. Greene, PhD
CEO at Reward $ystems, Inc., a Consulting Principal at Pontifex and a faculty member for DePaul University in their MSHR and MBA programs. Greene speaks and teaches globally on human resource management. His consulting practice is focused on helping organizations succeed through people. Greene has written 4 books and hundreds of articles about human resource management throughout his career.