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Performance appraisal, salary increases

Q

I'm not very happy with the way raises are handled. It used to be that I
was given a rating (1-4) by my supervisor and then my raise was based upon
that and the available funds in the raise pool. Nowadays, I no longer get a
rating, just a "pass/fail." And then my raise appears to be based primarily
on compa-ratios.

I find it strange that we now have a system where employees are not given
quantitative feedback on their performance and raises are not based on
merit, but on some ratio that they have no control over. The level of
performance seems to be a nonfactor in this new scheme.

I feel this system does not provide a good way to motivate or reward
employees. Why can't we go back to the previous system, where employees got
a rating and raises were based on merit and available funds?

Answered on September 11, 1996

A

There are two issues involved in this question: performance appraisal and
salary increases. Obviously, the two issues are intertwined. I will try to
address each issue separately and then explain how the two work together.

First, let's look at the reasons that UCAR, or other institutions, appraise
employees' performance. This is a time-consuming process that few people
enjoy. So why do we go through it? Many organizations have begun to
reexamine the goals of performance management systems. Historically,
performance appraisals have been used primarily to determine annual pay
increases. Broader goals such as employee development, improving
performance, team building, or providing effective feedback to employees
are probably more valuable in an effective performance management system
than just determining salary increases.

When the primary goal of an appraisal system is to determine annual
increases, it is common to see multilevel quantitative rating scales. The
four-level rating in our previous appraisal system is fairly typical,
although I have seen rating scales with seven or more levels.

A general problem with multiple levels is the need to justify the
difference between each level. Objective measures and ratings can be very
difficult to achieve in any appraisal system, and in institutions with
groups of high-performing employees, the separation between various levels
of performance may be artificial. Thus the trend is to reduce, or
eliminate, the number of rating levels in appraisal systems. If the primary
goal of an evaluation system is not to determine pay increases, then the
use of multilevel rating scales may be unnecessary or even counterproductive.

Our performance management system was modified a couple of years ago to
focus more on coaching and developmental planning. When evaluating each
employee's performance of key activities, supervisors identify suggested
changes or improvements. Goals and actions for the upcoming year are
developed to encourage the employee's continued professional growth. Other
than a determination that performance meets job requirements, no overall
rating is necessary to accomplish these goals; therefore, there is no need
for multiple levels.

As to pay determination, UCAR is committed to recognizing sustained
performance in annual salary increases. While there is no quantitative
scale, the performance appraisal provides detail on each employee's
performance. Directors and managers establish increases based on employee
performance and compa-ratio. Linking pay to performance seems to make some
sense, so why do we "complicate" things by introducing compa-ratio?

The compa-ratio is simply the ratio between an employee's pay and the
midpoint of the salary range for the employee's job. The midpoint is tied
to the median paid by similar employers. It reflects the pay for fully
competent employees doing comparable jobs.

Compa-ratios indicate where the employee is paid within our pay range (and,
on a global basis, where they are paid within their fields). In an ideal
pay-for-performance system, higher-performing employees would move to
higher compa-ratios and lower-performing employees to lower compa-ratios.
By reviewing compa-ratios, a manager can determine the relative pay level
of employees in different salary ranges.

UCAR, like all other institutions, must work with limited resources in
determining pay increases. For the June 1996 increases, we worked with a
3.7% salary increase budget. This is a fairly competitive number--the range
for most other institutions for the same period was 3.5% to 4.0%. When
determining increases, managers consider relative performance levels,
current compa-ratios, and the available budget.

For employees with similar performance levels, the manager will allocate
greater increases to those with the lower compa-ratios to bring them closer
in line with those with higher compa-ratios. Conversely, for employees with
similar compa-ratios, relative performance will be the overriding factor in
determining salary increases.

In the past year we completed our job evaluation program. This program
realigned many of our jobs to the market and changed the compa-ratio for
many employees. This caused some higher-performing employees to have
lower-than-normal compa-ratios and some lower performers to have higher
compa-ratios. As a result, compa-ratios had a greater impact on this year's
salary increases than would be normal. While compa-ratios will always be
important in determining salary increases, I would expect to see the
balance shift toward performance as our system matures.

Does this system provide a way to motivate employees? It is arguable that
no pay-increase system really motivates employees. People are motivated by
many factors, most of them internal. Our system is designed to recognize
sustained individual performance. Over time, higher performers will move to
higher pay levels as measured by compa-ratios.

Can we go back to the old system? We don't plan to. Is the new system
perfect? No, but there is no perfect performance or pay system. We believe
it is a way to meet the goals of the performance appraisal process and
recognize sustained performance with differentiation in pay.

Bob Roesch, Manager, UCAR Compensation and Benefits