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Employee Performance and Salary Appraisal

I’ve managed (small and large) teams for some well known companies (including a couple of my own companies.) And through this experience, I’ve learned that mixing “Performance and Appraisals” is like mixing “Drinking and Driving.” In layman’s terms, it’s a stupid idea.

Drink n Drive

Sounds strange? May I suggest the following video from Daniel Pink, which takes a peak into what motivates individuals and what actually leads to poor performance.

I’m sure you’ve heard these stories before and deep down even agree with it. Yet, everyday we go out of our way to measure the performance of individuals and teams in our organization to decide their salary appraisal at the end of the year.

I’ve yet to meet a single individual how understands how to effectively measure performance. For a creative, problem solving field like software product development, how do you even measure such a thing? Remember output (code, features, bugs, products, etc.) is a lame measure of performance. Outcome and Impact is what matters. But that is hard to measure, so we simply measure what we can, output. And in most cases, output that someone else decided on your behalf.

Unfortunately this a very broadly used management philosophy that kills employee’s motivation everyday. To make matters worse, the employee feedback process is also tightly coupled with the appraisal process.

Why just drink and drive, let’s drink, smoke and fly!

At the beginning of my career, many times my manager would give me some feedback during the appraisal process and this would be the first time I was hearing about it. Indeed an excellent way to motivate and improve employees!

And I still remember the horrors of “Goal/Target setting” at the beginning of the year. My salary appraisal would be based on how well I met my targets. And guess what, I flunked every single time. I’m the only unfortunate person who does not possess a third-eye to see the future and decide what targets would be important. I kept blaming myself until I read Goals Gone Wild.

So what’s the alternative?

Its simple: Don’t mix performance, feedback and salary appraisals. This is what I’ve successfully implemented in a few companies.

So how does it work?

If someone is not performing, they are simply not meant for the job at hand. We can help them by mentoring and guiding them. We can let them select a different project. But after the best of our efforts, if they can’t cut it, they should leave. Its best for both; the organization and the individual. I really mean the last sentence.

At some companies, I was responsible for firing the largest number of employees in the history of the company. By now you must have made up your mind that I’m this evil guy who goes around firing people. Here is the best part, most of the guys I fired, still keep in touch with me and look up to me for advice. I’m really happy seeing them grow in their new organizations. In our organization, they were stagnating and probably feeling an inferiority-complex by high performances around them. So it was best for them to leave and find a place where they can really shine.

In fact, on many highly collaborative teams (like Agile teams) poor performances can’t find a place to hide. They very quickly realize they can’t survive in such an environment. Even before anyone does anything, they are gone.

So once we’ve got rid of the employees who don’t fit into the team/organization from a performance point of view. We are left with a bunch of high performers. Remember there will always be a range in terms of performance. But the range should be too small to be worried about it.

Given that we have a team of high performers, we set up a 360 degree feedback process in the teams, which ensures that every individual is constantly getting feedback to improve. Nothing discussed in a feedback meeting with your reporting manager should be a surprise. It should be something that was discussed on the shop-floor with folks working closing with you on the floor. I call this the “Rule of least Surprise“.

Lastly we need to handle salary appraisals. To me there are 2 parts to salary appraisals:

  1. Market Correction – inflation, job market, demand, etc. decides this portion.
  2. Profit your product/service is making – Out of the profit, a pre-determined percentage is fixed, which would be shared with the employees. Each team decides how they want to split this percentage amongst themselves. Some teams I’ve worked with, rate each other and then based on the rating the percentages for each person is decided. Some teams just want to equally distribute the profit. Note: The distribution is based on a percentage of their current salary. Which means not everyone gets the same net amount. Employees with higher current salary will get larger amount.

One thing I learned early in my career, when it comes to vitamin M, no matter what you do, you can never make everyone (sometimes none) happy. So instead of you deciding the numbers, fix the high-level numbers based on a transparent process and let the employees take care of how they are going to split the amount.

Last, but the most important learning for me has been around tying salaries with product/service’s profit. This goes a long way in empowering the team to take total ownership and responsibility of what they are working on.

  • Scott McKay

    If you’re doing goal-setting once per year, you’re doing it wrong.

    If you’re only giving/getting feedback during appraisals and performance reviews,
    you’re doing it wrong.

    If you’re tying salaries only to the profit of that product/service, the effect you get it is to
    cause people to flee from speculative projects that might be winners — just not this year.
    Or you’ll punish people for being assigned to projects that don’t pan out for reasons
    unrelated to their performance. Or you’ll create an organization where people will
    flock only to the most profitable projects.

    The highest performing people I’ve seen get 10x more done than other people. They
    are rare enough that you can’t build a team from them. Some people go through their
    entire careers without meeting people like this. The idea that you can compress the
    performance range so that it’s only the highest performers is naive, and furthermore
    it’s short-sighted in that it doesn’t groom junior people into becoming high performers.

    Quite honestly, this whole post is really just breathtakingly wrong-headed.

    • http://blogs.agilefaqs.com Naresh Jain

      Thanks for the honest feedback Scott.

      I’ve seen people work on speculative projects even if they know it would not make profits this year. They are driven by the vision/purpose of the project more than the incremental salary they would take home. This also pushed them to apply Lean-Startup principles to make sure they are heading in the right direction instead of just taking off into one’s own fantasy land.

      Not every product a company releases is a cash cow. Not every project a company has is exciting and cutting edge. All products and companies go through an adaptive change cycle (http://www.youtube.com/watch?v=NN5a6DoNUYg.) My experience is that high-performers understand this and are willing to get outside their comfort zone and try something else. There by giving others an opportunity. Sometimes a little mentoring can help. Given this is the context, we put an explicit policy that team members need to rotate off the product with 2-3 years. This ensure fresh blood/ideas are getting into the product and also avoids the flocking problem you mentioned.

      100% agree that high performers are at least 10x more productive than the rest. They are certainly rare, but they are out there. One needs to invest the time and effort to find them. As you said, finding 1 such person is better than having 15 average guys.

      Based on my experience, I disagree that junior people cannot be high performing. The energy and quest they bring to the company can actually drive experienced people. They are free from any conditioning or pre-conceived notions. They can do a lot of heavy weight lifting on projects. So in their own ways, they are high-performers and contribute to the team/product’s success.


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