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10 Min Read

Performance Management 2.0: Improving Your Employee Motivation Strategy

Alan Colquitt
Alan Colquitt Ph.D.

How do you address employees who aren’t performing? How do you use work goals to improve employee motivation, and decide what goal to work on? Are certain types of goals better than others for increasing motivation?

These are all excellent questions and I’ll get to them in a moment, but first, some context.

I joined 15Five’s Director of People Science, Courtney Bigony and Chief Culture Officer, Shane Metcalf, in a recent webinar where we addressed ratings and compensation as they relate to performance reviews. Our viewers asked excellent questions, but we were unable to answer all of them due to limited time. Below I briefly recap the key concepts we discussed and address all of the unanswered questions.

Webinar Recap

In my book, Next Generation Performance Management, I differentiate between Performance Management 1.0 (PM 1.0) and Performance Management 2.0 (PM 2.0). PM 1.0 is shorthand for last generation (traditional) performance management. Designed mainly for administrative reasons, PM 1.0 involves goal-setting at the beginning of the year, evaluating performance, and distributing rewards at the end of the year. The center of the universe for PM 1.0 is evaluation, ratings, and differentiation.

Contrast that with PM 2.0, which focuses on providing continuous direction, alignment, meaning, and purpose to employees. It’s focused on making progress towards goals and connecting work to a larger purpose. Although some companies are shifting towards the newer model, many continue to keep traditional practices such as performance ratings and tying ratings to compensation decisions.

Unfortunately, research shows that people cannot rate performance accurately, consistently, or fairly. Businesses can avoid these outdated practices and easily manage pay without ratings. Here’s how:

  1. Focus more on base pay and less on bonuses
  2. Use market-based adjustments to pay people at or above market rates
  3. Use team and organizational based incentives or other programs like profit sharing, gainsharing, employee ownership, or stock ownership

Q&A: Employee Motivation and Performance

Q) How do you address employees who aren’t performing? What if the context is too safe for the employee and there is almost no risk of getting fired?

One of the most important elements of PM 2.0 is not tolerating poor performance. Luckily, you don’t need a performance rating to tell you who isn’t performing. Instead, implement a performance improvement process to manage poor performers. This should be a distinct process from performance management and requires more documentation. If you have a lot of employees who aren’t performing, you may want to re-evaluate your screening and hiring processes.

Q) Why should we move from an annual review to a quarterly review? It makes rating performance more fair, but it requires more work.

If you keep ratings, the more ratings you have, the better because they are more fair and more reliable. This will require more time. Ideally, there would be no rating process at all and managers and direct reports would meet to review performance as often as it’s required by their work to discuss what’s working, what’s not, and how to make progress on work goals.

Q) How do you move towards this approach (PM 2.0) if you’re currently on an annual or semi-annual cycle? As a small HR team – this would take up an entire resource to manage performance for a 300 person workforce.

The amount of work depends on what you are changing from. If you are using a traditional performance management and pay for performance program, it will take some effort to redesign your process. I would start by creating a market-based compensation strategy for all jobs. You should also work with leaders and employees to regularly check-in to set and accomplish goals together.

Q) How do you scale the individual compensation approach as you grow?

Don’t adopt the individual pay-for-performance approach to begin with. When most companies scale, it’s common to hire professional compensation specialists who benchmark other companies, are trained in traditional theories of employee motivation, and introduce variable pay for performance plans.

There is no need to implement traditional pay-for-performance plans as a company grows. Find other ways to manage compensation and work with top compensation specialists to ensure market-based pay adjustments and organization based incentive program like profit sharing, gainsharing, employee ownership, or stock ownership.

Q) What should your employee motivation strategy be for sales reps who are typically more competitive and prefer pay differentiation?

Research shows that competition and differentiation aren’t good for people and organizations. Extremely high goals combined with economic incentives lead to unethical behavior, since tying rewards to goal achievement can create a “results at all costs” mentality. Additionally, people assume they will benefit from these programs, yet only 10-15% of them actually benefit. This is the nature of a fixed-pie and a zero-sum game mentality.

People want things that aren’t good for them—like fried chicken—all the time, but just because they want it doesn’t mean you should give it to them. Unfortunately, over time we’ve taught people to be competitive and want differentiation. We need to train people differently. If you lose competitive people in the process, so be it. You would lose them anyway and they probably aren’t your best long-term contributors. If people join for the money, they will leave for the money.

Q) Shouldn’t high performers receive public, tailored, individual rewards (including money & recognition)? Wouldn’t moving to team/organizational rewards only create issues in terms of unlocking discretionary effort?

This is an excerpt from, Next Generation Performance Management:

“I’m not suggesting you abandon all focus on money and rewards. Money attracts. You need competitive compensation to get people in the door. However, overemphasizing money and incentives can cause problems. Compensation is important for attracting people to a company and getting them to join. Organizations should look beyond financial rewards and investigate other ways to motivate by focusing on the work, career growth, as well as strengthening work relationships.”

Most people assume and believe that employee motivation will falter if there’s a disconnect between individual rewards from individual efforts. This isn’t true. Team incentives do motivate performance and if someone isn’t performing, managers still need to aggressively manage poor performance.

Q) Isn’t that a bit of bait-and-switch? (a) Join our company and if you perform well, you’ll earn a lot and (b) When the team wins, you win. Compensation is separate from performance. I feel a disconnection here.

Here’s the message I would send: Come and join our company. Your salary will be reviewed annually and we will give you regular pay increases so your salary is based on market rates. If you have specialized skills that are in demand, we will pay you above market rate and you will earn more by advancing quickly. We are also one company and we are all working together to disrupt the marketplace. When we do well, you will share in the fruits of those efforts. You will work on amazing projects with talented people and create products and services that make life better for people.

Q) Government and not-for-profit agencies don’t have profit sharing and are on limited budgets. What compensation strategy would you suggest?

Increase pay as much as you can and as regularly as possible, and provide a strong benefits package. Use purpose to attract and retain people. To increase employee motivation, focus on providing people interesting work that serves a greater good.

Q) What are examples of non-monetary employee motivation?

It is as simple as this: Something to do (work that serves a noble purpose and mastery), someone to love (a boss and teammates who care about you) and something to look forward to (employee growth and development and career advancement). Other examples of non-monetary employee motivation include:

  • Recognition and appreciation by peers, bosses, and management for doing something valuable and well
  • Interesting work that is challenging, valued by the organization and helps create value for customers
  • Working with colleagues you respect who share the same common goals of creating high value for the organization and its customers
  • Leveraging your top strengths in your role and day-to-day work
  • Employee growth and development opportunities
  • Frequent promotions and increased responsibility

Q) How do you use work goals to improve employee motivation? How do you decide what goal to work on? Are certain types of goals better than others for motivating people?

Classic research shows again and again that work goals are extremely effective at increasing employee engagement and performance. Goal setting starts with managers. Managers should first set the context by clearly explaining the larger purpose, goals, and objectives of their department and organization. Then, managers should work with their team members to discuss the individual goals that need to be accomplished to drive company initiatives forward.

Given how quickly things change in organizations today, goals can’t be etched in stone and need to be flexible, not fixed like contracts. In general, work goals need to provide direction, be specific enough and challenging, and research shows employees need to participate in the process of setting them. Employees also need to get feedback along the way to know what’s going well, where they can improve, and how they can make better progress on their work goals.

Q) I have serious reservations about the idea that the only differentiator for compensation are objective measures and behaviors. Not all jobs have objective and measurable skills. For example, with developers, two people can know the same language, but one could be a vastly superior coder. Doing something like creating tiers for the same job and promoting people is basically the same thing as paying for performance, you’re just using leveling to pull it off.

I agree. Not all jobs have objective measures that differentiate them. However, if they do, use them, especially if they translate into higher valuations in the market. If a Ph.D. gets more in the market than an MA, pay people more who have a Ph.D. People will perceive this to be a legitimate differentiating factor in the market, so they generally won’t be disappointed that a Ph.D. makes more money than they do. Creating tiers and promoting people is paying for performance, but it’s doing so over a longer time horizon, which is more fair, accurate, and improves employee motivation.

Alan Colquitt

Alan Colquitt is one of the world’s greatest experts in the field of HR and performance management. He is the author of the recently published book Next Generation Performance Management: The Triumph of Science over Myth and Superstition and has spent over 30 years helping organizations implement scientifically sound and effective people and organizational practices, including 5 years at Procter & Gamble and 27 years at Eli Lilly and Company. Alan has been named one of the 100 top HR influencers of 2017 by Engagedly. He received his bachelor’s degree in Psychology from Indiana University and his masters and Ph.D. in Industrial and Organizational Psychology from Wayne State University.