Performance Management at Vitality Health Enterprises

PERFORMANCE MANAGEMENT AT VITALITY HEALTH ENTERPRISES, INC.

Written Report

Ana Antunes #2599

25-11-15

Andreia Pires #2795

2336 – Human Resources’ Management – TA Prof. Rita Campos Cunha Prof. Isabel Albuquerque

Henrique Vieira #2941 João Monteiro #2772 Marta Menéres #2756 Michela Paolicelli #2869

2336 – Human Resources’ Management S1.T2 – 2015/16

1. What were the problems with Vitality’s old Performance Management System? What were the root causes of those problems? In 2009, during the economic crisis, Vitality discovered some problems related with its performance management system. The company started to review its business strategy and, in particular, the current system of performance appraisal and management. This system, which ran until 2009, had some problems and some of them were identified by a committee, Performance Management Evaluation Team (PMET), which was assigned by the new CEO, Beth Williams, in order to evaluate it and suggest changes to this system. This system had the primary goal of evaluating performance of employees and to reward the ones who deserved it. In turn, the goal of rewarding employees’ performance is to motivate them to continue doing a good job. However, as we will explain, the system was not able to achieve this. Actually, the company registered a low employee turnover rate which was mainly a turnover of top-performers scientists and engineers who did not want to remain working in the company because they were underpaid and their effort was not recognized. Obviously, it is not of the interest of the company to keep away hard-working employees and to have a reputation of not treating them well. So, why did this happen? What were the problems of this performance management system? The system was characterized as having too much rating levels (from A to E including pluses and minuses). Also, the PMET found that some managers were able to influence the rate of employees according to what were their own interests. Managers didn’t want to have a bad image among their subordinates and so they didn’t give the fair rating level because they feared the consequences. When analysing the distribution of the rating levels attributed in 2009 (related to 2008 performance), we can see that the majority of the employees is evaluated as being of B or C level and a very little percentage of them is evaluated as top-performer or non-performer (low frequency of the levels A, D and E). Concluding, this happened because managers feared that giving a D or E level would offend their employees and that, by giving A levels, it would also upset employees that deserved only B or C levels. The root of this problem can be found in the Managers’ freedom to give whatever level they wanted to its employees’ because the evaluating criteria is overly subjective. When giving almost to everyone B and C levels, the company is not able to distinguish topperformers and non-performers among the entire group of employees. So, a major consequence of this method is that employees feel demotivated. If they do a good job, their performance is not distinguished from average performing employees and so this policy does not incentivize

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employees to perform according to the goals defined by their managers. Besides feeling demotivated, top-employees have the incentive of leaving the company and move to another one that really values their work, and so, Vitality is not able to retain the best ones. Furthermore, as the method does not allow to distinguish non-performers from the others, it is almost impossible for Vitality to fire the ones that have a performance which does not meet its goals. Finally, another possible problem of this system was the lack of correlation between the job evaluation criteria and the goals that were set by Vitality’s strategy. Managers seem to define its subordinates’ levels according to their ‘mood’ and not to a rigorous and well defined criteria - this prevents the company from assessing properly which employees are contributing to the development of the organization.

2. Is pay related to performance under the old system? With the help of Beth Williams, the Performance Management Evaluation Team was able to review the methods and policies of the company, through benchmarking, focus groups and interviews, in order to evaluate and reward the performance of their employees. After doing so, they realized that Vitality was using a system that in fact contributed to managerial abuses and dissatisfaction among its staff. On top of all, this feeling of frustration among the employees was being worsened by the point system that Vitality used to determine salaries and raises. When developing this system, Vitality attributed each position a base level salary, that could be increased depending on the number of job evaluation points of each employee and the current position in the structure hierarchy. These evaluation points were calculated through the assessment of job characteristics that were defined as relevant for Vitality’s business and strategy. The salaries of each individual were then adjusted by a comparative ratio which reflected the performance evolution of employees over time and it usually ranged from 80% to 125%. This part of the salary led to very unsatisfied workers due to the fact that this process allowed employees with consistently higher performances to receive smaller raises than their less productive colleagues (the increase in comparative ratio kept decreasing on the percentage basis as the employee climbed through the range). The current compensation structure did not give sufficient concern to the overall performance since there was no bonuses or alternative form of reward/recognition. The benchmark compensation was set at 75th percentile with regard to their compensation peer group, which made actual compensation figures go 7-8% higher than the competition. This ensured tenure

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would result in high salary regardless of overall performance. As a result, it was difficult to identify and reward top performers or terminate low performers and hence, the low turnover experienced by the firm was among productive scientists and product engineers and even led some employees to leave the company. So, we are able to conclude that this system was not suitable and proper for a company like Vitality and that, in fact, it was not paying the staff according to their performance.

3. What are the features of the new system? In order to solve the problems that were already mentioned, in June of 2009 a new performance management system was implemented by PMET with the purpose of identifying in a more accurate way the high-performing employees, as well as the low-performers. This way, they would be able to allocate rewards in a better way and, consequently, retain and attract top talent and incentivise low performers to put a bigger effort in their tasks, motivating improved performance throughout the company. The new features of this new method implemented included: 

Shift from an absolute ranking system to a relative one. In the first one, the employee is evaluated based on his own performance in respect to objective criteria, without any kind of comparison with other workers. On the other hand, relative method consists in rating employees with respect to one another, comparing their performance with that of employees in similar positions and roles.

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Institution of a forced distribution model of performance ranking that consists on a rating system that requires the managers to evaluate each individual, and rank them into one of five categories (Top Achiever; Achiever; Low Achiever; Unacceptable; Not Rated), each one constrained to meet a certain target in terms of percentage of employees. This forced the managers to differentiate employees based on their performance and, having fewer categories than the previous system, should make it easier to determine in which category the employee fits in and should bring disciplined rigor to the management process. This system can be controversial due to the competition it creates, which may increase stress levels and result in an unpleasant working atmosphere. Furthermore, it heightens the focus on individual performance and does little for team building, which should be highly encouraged in this kind of corporate environment. As a further matter, this classification can be counter-productive if there is not an active talk between the employee and the evaluator, giving concrete feedback about what to do next year to get a better ranking. Moreover,

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whether an entire team performs well or poorly, the manager is still forced to nominate ‘Top Achievers’. Besides, the reality is that not all employees will fit neatly into one of the categories and might end up in a category that does not reflect their true performance. The Not Rated category, which is for those employees that can not receive an accurate rating because of their recent entrance into the company, is a too generic category and leads manager to some abuses. They used to rank all “new” employees as Not Rated, neglecting their performance and privileging in this way veteran employees. 

Codification of responsibilities and measures for each job class in order to have a straight evaluation, based in more objective criteria, and further clarify the ratings process. Defining key duties in a more formal way may enhance operational performance and improve internal controls by establishing accountability for each specific task. On the other hand, there is a risk that employees’ vision narrows and they lose sight of ‘the big picture’. They restrict their duties only to those which are involved in the their job description, neglecting others only because they are not really rewarded.

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Development of specific individual goals for each employee, which would be elaborated by managers in coordination with their individual workers and used as a secondary assessment tool. This is likely to promote personal development, employee satisfaction, align personal goals with organizational objectives leading to higher productivity that will have impact in the company results.

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Rating of managers based in their performance in five aspects: meeting staffing needs, their effectiveness in training, development and employee relations, their clarity in communication, and their implementation of corporate initiatives. This may incentivize and help managers to focus in some core areas that are being neglected or to correct some management mistakes that impact the company performance.

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Evaluation starting in the the beginning of the calendar year at the same time as the annual goal-setting is delivered to employees (same review cycle). This feature potentiates higher effectiveness in the measuring process of workers’ effort and avoids in a certain extent the influence of external factors/events.

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Besides salary compensation, this new plan uses a system of performance-related short and long-term cash and equity bonuses and limited stock options to upper levels of management. Since increases in the value of a company and its stock are highly correlated with employees’ dedication, attributing these bonuses will motivate them to work harder so they can reap a greater return in the future. On the other hand, it increases the complexity of the compensation systems, especially in fiscal terms. 4

2336 – Human Resources’ Management S1.T2 – 2015/16

Vitality’s new performance management system operated in a trial period for the two following years. Despite the best intentions of the new CEO Beth Williams, the outcome of the new system were not the most satisfactory, with employee surveys indicating that just over half of the affected employees preferred the new system. Therefore, the system should be further improved, taking their concerns into consideration.

4. What can be done to improve the system? Although the new Performance Management System has made important steps forward, compared to the previous one, it presents still some concerns and generates discontents among employees and managers. For this reason, some actions are needed and looking at employees’ feedback we are able to understand which areas require substantial improvements. First of all, performance appraisal and evaluation should not be made so close to compensations and rewards decisions. If they are so close, employees feel more that their evaluation will affect its salary and so they will not be so honest and open in the evaluation process, affecting it. Also, with this defensive attitude from the subordinates, it is more difficult for managers to convince them to be trained because if they cooperate and agree that they need to be coached, they are confessing that their work did not meet the goals. The codification of responsibilities and duties, promoted by the new system, is an effective measure but it could be also risky, as mentioned above. The employee's performance review has to include also tasks that are outside the job description of employees and the reward system should be connected to the output and not only to responsibilities. Furthermore, review cycle in the company has to be different for performance evaluation and yearly goal-setting: it is necessary that performance reviews occur more frequently in order to put stronger emphasis on employees development and to understand if there are any improvement in employee’s performance or not. Moreover, if reviews of all employees occur all in the same month, it is very likely that managers do not put much effort in doing that. For this reason, the company should foster performance’s review regularly and in different times. Also by enforcing goal alignment with the organizational strategy in a real time, the company could constantly measure employees’ performance and identify risk areas when goals aren’t being met as quickly as the organization would like. The company should also increase rating accuracy. The new performance management system is good in differentiation but it seems ineffective because of the labels. Instead of defining employees within a certain category, performance appraisal could be made through a list of key

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attributes and respective degree of competence (Not a Strength, Sufficient, A Strength). Besides, HR department could use a performance coding that categorizes the employee's performance without giving them a label. Through the colour maps, for example, company is able to define performance and compare it with a potential one, in order to understand if employees require replacement or not. Thus, another possible recommendation is to create an objective criteria to define each of the rating levels for each of the dimensions that are being evaluated, and at the same time make comparison between employees. The aim of the introduction of a relative approach was to force managers to differentiate the subordinates: allows the company to distinguish who are topperformers and non-performers among all employees. However, the new relative approach revealed to be too rigid and inappropriate and, therefore, some managers claim that sometimes they cannot select the best ones and they are only selecting high performers to satisfy the distribution curve defined by the HR department. When using an objective approach, managers exactly know in which category the employee fits into. If well defined, these objective criteria, followed by a candidate comparison, will allow the performance evaluation to reflect who are the ones to retain and reward and the ones to train or fire. An important aspect refers to the communication between HR and operational levels. When managers continue to submit uniform rankings, they do not follow the HR guideline and HR is forced to change rankings to fit the distribution curve. This does not really make sense and it means that there is lack of communication between two sides. A comment of one of the manager is explicative: “I will play your ranking game but I have got to play theirs too”. There is not a meeting point. On the contrary, a good performance management system must fit well within the company and should be developed, taking care about the interest of all (company, HR, employees, managers.). Other comments such as “Where was the training on all these changes?...Can someone explain me what’s supposed to be happening?”, confirm that the communication is actually weak. For this reason, Human Resources’ department should build a bridge with the management staff and enforce communication for example by explaining them all the measures and conducting surveys before implementing one, in order to understand all the needs and requests. In conclusion, HR department should adopt tools for developing talent within the company and give incentives, bonus and financial reward not only to the ‘top talents’ but also to the bulk of other employees that show a good performance and, in some cases, train those who didn’t meet performance expectations, instead of work aggressively to weed them out.

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