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Rewards and Performance Evaluations

January 14, 2009

I just read a great article by Joel Spolsky, Thanks, No Thanks, at Inc.com. Spolsky examines the question of rewarding an employee for exceptional performance and finds it to be much more difficult than you would think at first blush.

There is a real dilemma to rewarding employees. If you don’t reward exceptional performance, you risk losing the employee, but if you do, pretty much everyone will be unhappy. The employee is likely to think the reward is smaller than he or she considers fair, and peers are likely to think it is too large or undeserved compared to their own performance. (That’s one reason companies tend to keep salaries and bonuses confidential).

There is a similar problem when it comes to performance evaluation. Most companies (at least the large ones) like to assign every employee a rating (you know, categories like: exceeds objectives, meets objectives, meets some objectives, and the dreaded needs improvement). However, unlike salaries and bonuses, when you rate employees, by definition you give them enough information to know where they stand.

For those in the top category there’s no problem, they are almost always happy. Those in the bottom category get a strong message, though it should be a message that is no surprise (if you are doing your job as a manager).

The problem is for everyone in between; at best their rating is a no-op, at worst, it is a strong de-motivator. Quite possibly, they will come away with the idea that they should have been rated higher. It’s also likely they will have no clear idea of how to improve their rating (you can give them all sorts of suggestions, but they will know they’ve got to claw their way past at least some of the folks in the higher categories, so just doing better is not a guarantee of a higher rating).

To make things worse, most companies severely restrict the number of people you can put in that top category. Therefore, as many as 90% of your team may live in limbo between the top and bottom.

I discussed this problem in one of the most troublesome to write chapters in Managing Writers. This chapter was previewed in a four part posting (The full chapter begins here, but Part 4 is where I discuss the pathologies of rating and ranking; beware that this particular chapter was significantly re-written between the preview and the book, but the section on problems with rating and ranking is still pertinent).

However, don’t expect too much from the book or from Spolsky’s excellent article; the truth is that rewarding employees, whether through bonuses or the normal PE process, is one of those intractable problems that you really can’t fully solve. You will sometimes over-reward and sometimes under-reward (there is no “perfect” reward; read Spolsky’s article if you don’t believe that), and whichever you do, you will make someone unhappy. The best you can do is strive for fairness and avoid placing too much emphasis on external rewards; you will be much better off in the long run if your team is internally motivated.

Shameless plug: the Performance Evaluation chapter in Managing Writers goes into this topic in depth and is much improved over the previewed version.

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