Companies need to get the most out of all their employees without making them feel exploited. A good appraisal system could be crucial, says Nora Stein.
In a recession, when times are tough, management quite naturally turns to firefighting. It is tempting to cut and slash and look for short-term remedies. There is often another way, however, and one which is being adopted by many of Britain's more successful businesses. These companies are keeping sight of the long term by finding better ways of using existing resources. And for many of them, especially those in the growing service sector, resources equals people. "In a recession," says the managing director of one big service company, "when you have cut away as much fat as you can without damaging the business, the only way to improve performance is to get more out of the people you have - without making them feel exploited and resentful." The key to that, he adds, is a good appraisal system.
Large numbers of senior managers have been thinking about appraisal in a new way in the 1990s, and with good reason. "Culture change" is more than a mere buzz phrase of the decade. Huge organisations have been privatised, or otherwise exposed to commercial pressures for the first time. In many more it has been found that large parts of the business are almost wholly unaware of the most urgent corporate needs, as perceived by senior management. That discovery can itself be a step forward, since it then becomes possible to start focusing everyone in the organisation on the same broad objectives.
Recognition of a problem is not the same as a cure, however. Businesses which have approached the need for culture change by introducing performance-related pay have not always obtained the desired result. PRP schemes that are introduced too rapidly, or with fuzzy performance criteria, can have disastrous results - both divisive and expensive. On the other hand, underpinning PRP with a robust appraisal scheme, which provides a solid basis for judgements about performance, should also help to engender a sense of achievement among employees. In addition, a good scheme will help to recruit and retain the kind of people that a company needs.
Even companies which have taken appraisal seriously for years have lately been revising their methods. This is confirmed in a survey of 20 companies carried out by Kinsley Lord for "Staff Appraisal in the Civil Service", a report by the Comptroller and Auditor General, National Audit Office (HMSO No 174). Businesses in the private sector have been moving away from the heavily top-down, mechanistic type of scheme. They have also been thinking again about the traditional five-box rating scale (A-E), which has been seen to have two main failings. First, differences between the ratings are not always sufficiently clear. Second, judgements all too often tend to be based on instinct at best - and prejudice at worst. A further objection is that there is a widespread reluctance to use the middle box (C), which is considered to carry a stigma. A predominance of As and Bs seldom reflects a true picture of an organisation's performance.
A better approach is to use a performance "agreement" or "contract". This is a succinct document, created by the employee and agreed with his or her boss, which sets out the employee's proposed contribution to the business plan. It is an agenda which can be referred to during the year and modified if necessary, and it serves as the basis of the appraisal judgement. The question for both parties is no longer: "Was this an A, B, C, D or E performance?" It is simply: "Has the plan been met?"
The formula confers many benefits. It turns the appraisal into a dialogue. Most important, such a scheme creates winners: if the business plan is realistic, most employees will "meet contract". And the company itself will gain accordingly.
In January this year Barclays' domestic banking operation began full implementation of a new appraisal scheme which links pay to performance for the first time. The fact that the parent group was simultaneously undergoing a major restructuring and that the recession had affected Barclays' bottom line did nothing to delay its introduction. On the contrary. "In a climate like this," says group managing director and deputy chairman Andrew Buxton, "the pressures mean we must be more professional than ever before. Our good managers expect to be rewarded for doing well. The other side of the coin, of course, is that the non-performers will be less well rewarded."
That "other side" represents a substantial change for Barclays. In the past the annual salary increase - incorporating cost-of-living allowances, bonuses and profit sharing - went to virtually every manager. Today, says Buxton, "in such a tough climate it didn't seem very fair".
The new scheme, known as Managing by Contract, took two years to get up and running. Although the focus was always on performance-related pay, the bank soon realised that its appraisal procedures were not strong enough to support sophisticated pay decisions. It therefore used consultants to help define the criteria of good performance, and to develop a scheme which managers regarded as fair and which top management believed would drive the business in the right direction.