How do I get rid of ratings but keep bonuses?

The “no more ratings” argument seems to be winning. Which is fantastic. Those organisations who have moved to ratings-free conversations show no signs of wanting to go back and the numbers following these pioneers are swelling.

But there’s a thorny dilemma that many of us are wrestling with. How do I get rid of ratings and yet still pay out an annual bonus? The argument goes …. “Our annual performance management system is completely useless, but at least it gives us a fair and transparent way of handing out the cash” (I’m paraphrasing). And this causes us grief. We believe we must have a number to demonstrate objectivity and so we hang onto our gradings (and all the other trappings of an annual performance cycle) to enable to us to make these payments.

Let’s just pause to reflect on the absurdity of this angst.

• We know that ratings don’t work. They prevent great performance conversations, they suffer from rater bias and they reduce what should be on-going and fluid into an annual event.
• We know from all the companies who have progressed beyond this 1980’s construct that a ratings-free environment leads to much better conversations and reduced frustrations from managers and employees.
• We know that performance ratings are a numerical expression of a subjective judgement from the line manager (occasionally supplemented with some painful calibration or a mythical distribution curve).
• Yet, when we consider removing ratings and replacing with that same line manager’s judgement in the form their view of the bonus award, we worry about appearing arbitrary.
• So, we resist a new approach that would save time, manager and employee frustration, improve the quality of performance conversations, etc – just to retain a pretence at objectivity.

Crazy huh?

So, let’s assume that you’re going for it, you’re going to remove ratings, but you also want to (or have to) hang onto your bonus scheme or performance related pay – what can you do?

You’ve basically got 3 options – and they’re not mutually exclusive.

1. Continuous Assessment

You can opt for a continuous assessment process, akin to the way schools have moved from a one-off test or exam at the end of the year to periodic grading throughout the year. This seems to work well for those organisations that have frequent and regular performance periods and consistent performance data – sales organisations, for example, or that are project based – such as consultancy firms. By assessing regularly, they avoid the need for a grading at the end of the year and can distribute the bonus based on the average performance across the year or at the end of each of the sales/performance periods. For many companies however, this can be seen as even more onerous than the once a year performance assessment, so not for everyone.

2. Contribution Calibration

You can opt for end of year “Contribution Calibration” where line managers come together to agree who deserves what in terms of their bonus. Instead of a traditional calibration bun-fight where managers wrangle over who gets what grade, they discuss how much each individual has contributed and how much bonus they should receive, relative to each other. There are some real upsides to this approach. You get some good quality conversations about your people and provide challenge to those managers who use the bonus as a means of abdicating their development responsibilities. It’s also a useful way of building in conversations about individuals’ relative worth in terms of the market (helpful for fast growing tech companies where pay levels fluctuate rapidly). The sessions can also factor in discussion around alternative ways in which the individual might want to be rewarded such as promotion or stretch opportunities. It can, however, be seen as unfair and lacking transparency by those in receipt of the outcome if quality conversations haven’t taken place throughout the year. (But, to be fair, that’s the same as what we’ve got now!)

3. Line Manager Discretion

You can simply go for line manager discretion and allow managers total freedom as to what they give to their people, within a capped budget or framework. This is the option that most companies who get rid of ratings seem to favour. If you have had regular feedback between the manager and his/her people throughout the year, and the bonus is simply an extension of those discussions and is therefore expected, this approach can work. If you don’t have those conversations, the bonus can seem to be unfair and arbitrary – and can lead to accusations of favouritism and potentially, discrimination. But again, this is pretty much what you risk today and whilst we retain a system that focuses on one major feedback conversation, it’s really tough to get frequent check-ins going to any great effect.

In truth, there is no fool-proof way of getting rid of ratings and keeping individual performance bonuses. But the worst thing we can do is allow our need to administer the distribution of money to dictate our approach to getting the best from our people. The positive impact of removing ratings has got to be a goal worthy of some experimentation on how to distribute your bonus through different means? The companies who are doing it already are not lamenting the days of “Meets Expectations” so why not give it a try?

A final point – the progressive companies are asking a different question. They’ve already moved on from the 1980’s concept of putting people into performance boxes and are questioning whether their bonus schemes are really working for them. Or whether a combination of paying their people well and recognising effort and excellence through timely rewards that are personalised and thoughtful might not be a more compelling alternative. Maybe that feels like too big a leap right now – but worth keeping in mind?