It’s the end of the year. Meaning, sleigh bells are ringing – as are cash registers – with tremendous frequency.
You might be wondering, what does this have to do with your organisation?
Well, historically, the need to shell out heaps of cash during the holidays often makes the annual bonus a welcome December fixture for employees.
This part of the year can be an ideal time to reward top performers, and interestingly, many companies will combine a performance review, salary review and the annual bonus all in one sitting.
At first glance, it makes sense — and seems efficient. Instead of breaking up these various processes into a bunch of singular tasks that end up scattering schedules and taking up a lot of time, why not bunch it together?
Of course, there’s plenty of merit to that line of thinking. However, there’s another, equally valid, notion that bulking these tasks together comes at considerable risk. Emotionally, it can be a lot for employees, HR, and management to handle.
Furthermore, employees tend to wait for their appraisals, salary adjustments, and annual bonuses before deciding their next career move. January could then result in a mass exodus throughout the organisation, depending on the results of the bulk practices.
Below, we’ll delve deeper into the varying nuances of end-of-year bonuses and performance reviews, as well as the pitfalls of combining the process.
The Human Element of Performance Reviews
Your team works hard year in and year out. By the time the holidays come around, they might require a little boost to let them know just how crucial they are to the company.
There’s plenty of research backing the value of providing these reviews. Specifically, according to studies, 76% of surveyed senior managers claimed that their company offers employees year-end bonus pay. Of those respondents, 48% stated that their company either plans to increase or maintain the same level of bonuses.
Adequate bonuses improve employee retention, boost morale, and generally shows employees that the quality of their performance means something. Still, there’s more of a personal impact this can have on your team.
One survey shows that 52% of workers who expect a year-end bonus plan on adding this money to their long-term savings. While 47% will put that compensation towards a vacation in the new year. Also, 46% of employees surveyed intend to use their bonus pay for paying off debt.
So, when you provide an annual bonus or present a performance review that suggests a pay raise is on the way, it directly and positively impacts your employees’ quality of life.
Yes, as an employer, manager, or HR professional, you want your staff to be happy outside of productivity reasons. Still, there’s plenty of proof showing that quality of life improves workplace performance. Plus, for employees to perform at their best, they need to feel respected. They must know that what they do at work matters towards the company’s bottom line and overall progress.
Conversely, employees who feel underappreciated could hurt your organisation because they won’t give a committed effort.
Also, during the introduction of this article, we hinted at the idea that people need extra funds around this time of the year, due to gift-giving and dinner planning, etc. Thus, making the extra cash very much appreciated.
Why Bulk Reviews and Bonuses Can Be Detrimental
First, let’s look at the reality of giving performance reviews at the end of the year.
While reviews are definitely valuable and a necessity in most cases, by year’s end, managers are generally at their wit’s end. That fact, in and of itself, drastically decreases the chance that these reviews will be of any value to both leadership and employees alike.
Now, we’re not saying your managers won’t put their best foot forward. However, workplace burnout adversely affects performance and productivity — even when talent is putting forth a high level of effort.
One way to burn out your managers is through the piling on of performance reviews at the end of a hectic year before their holiday. It feels like an impossible task, plus, they also have the stress of planning for their own personal year-end activities. Expecting them to weigh performance and apply it to compensation accurately can be a monumental and unfair ask during this time of the year.
Then, on the other end of the spectrum is your employees. With their performance review being directly tied to compensation and bonuses, they won’t hear the actual truth of the feedback. They’ll be far more concerned with how their ratings coincide with what kind of raise or bonus is coming down the pipeline.
The whole point of performance reviews, supposedly, is to give the individuals on your team a clear illustration of where they stand. Ideally, your employees should be able to revel in the positives and aim to improve upon the aspects on which they’ve been constructively criticised. Unfortunately, the timing of the combination of reviews with end-of-year bonuses might lead to poor execution from managers and unreceptive employees.
Then, as discussed in the introduction, there’s the issue of employees using reviews as a gauge to decide whether they’re sticking with the company. Therefore, on top of being disruptive and ineffective, these reviews and pay appraisals can lead to an abundance of turnover.
Culturally and morale-wise, growing turnover rates are bad for any organisation. Also, with the significant costs associated with one employee’s departure, multiple staff members leaving in a short period will be financially catastrophic.
None of this is to say that this bulk practice is automatically bad for your company. There’s no need to fix what isn’t broken. If you find this methodology is efficient and beneficial to both your team, then – by all means – continue. This set of cons is only here to provide a different perspective on the matter.
Conversely, you might realise that these negative factors have been taking a toll on your company. In which case, read below for a series of potential solutions.
Decoupling Annual Performance Reviews from Compensation
Before examining these solutions, let's first discuss one fundamental issue with providing a transparent review only once a year.
Shouldn’t employees always know how they’re perceived by their managers? Doesn’t it seem counterintuitive to either launch an onslaught of criticisms or heap praise only once a year?
If we’re being honest, it seems like a sure-fire way to make both parties anxious and uncomfortable.
Unsurprisingly, recent studies have shown that 90% of employees prefer their mistakes and learning opportunities to be addressed when they happen. This approach generally means no surprises. And when it comes time for those year-end salary and bonus discussion, employees will have a clear idea of what’s coming their way. With constant feedback being provided, as opposed to a consolidated annual critique, employees won’t base their entire future on those results.
Providing continual and transparent feedback throughout the year, encouraging managers to meet with employees for informal performance related conversations allows them to improve at a quicker rate, hence generating superior results. An increase in productivity will also provide a concrete reason to offer a salary increase and bonus.
For example, General Electric did away with formal annual reviews for its 300,000-plus employees. The corporate giant decided touchpoint discussions between managers and employees about goal progress were more valuable than the more traditional evaluations.
General Electric replaced performance scores or rankings with PD@GE. It’s an app that was designed to help employees, managers, and teammates share feedback for ongoing improvement. Valuing real time feedback meant GE invested in a system that allowed them to evaluate performance as a stream of events and information, instead of an individual result or single event.
Another problem worth mentioning is that the beginning-of-year performance goals rarely align with end-of-year expectations. As a result, quarterly goals have given employees a clearer picture of company expectations. This should be a two way conversation; in order to ensure employees can deliver the best result, they need to be informed of what is expected of them in order for the company to achieve its goals.
Define the Approach the Best Fits your Organisation
Providing reviews consistently throughout the year will help performance and alignment. Define the frequency and select the system that work best for your organisation, but try to avoid offering these only yearly.
The reason why it’s easier to tie salary increases and bonuses to the yearly performance review is because end-of-year bonuses, salary increases and appraisals are also a way to show appreciation to employees on a personal level.
Linking rewards to reviews connects the what to the why. And, it makes sense as performance should inform compensation adjustments. However, when grouping the two together, there’s potential for misfires, poor execution, turnover, and employees plainly not paying attention to the feedback. Decoupling these processes could reduce these risks.
In regards to salary increases, why should these happen only once a year or only at a specific moment? It might help with budgeting, admin and performance ratings. But haven’t we overcome bigger hurdles? If a pay increase is the result of good performance, are we saying good performance happens only once a year? And can the manager actually recall and evaluate a whole year’s performance? More frequent reviews, should also allow for less static, flexible and asynchronous increases.
Bonuses are also tied to performance but, unlike pay rises, they are more simple to administer. Whilst pay rises are (usually) permanent, bonuses have a degree of flexibility in the way they can be structured and paid out, as well as being tied to the employee’s and/or the company’s performance. It is common to offer roles that directly impact revenue, such as Sales, more frequent bonuses. This ties compensation directly to the returns the company receives. Whilst it may not be as easy to link other roles to the business’s income, the frequency aspect can still be borrowed.
Offering variable pay could positively impact your rewards strategy, company culture and overall performance. Whether you offer, individual, team or company bonuses, or a combination of the three, rewarding employees more frequently means tying the impact of their work directly to their financial incentive.
DON'Ts – Summarised:
- Don’t make employees loathe appraisals;
- Don’t make employees wait for the yearly bonus to decide their next career move;
- Don’t have managers delay feedback;
- Don't rush to quantify a year's worth of contributions in one figure;
DOs – Summarised:
- Define a framework that fits naturally the work cycle of your company;
- Offer monthly or quarterly reviews to tie rewards to contributions;
- Reward and recognise good work as and when it happens;
- Deliver appraisals more frequently (to ensure employees and managers are more accustomed to delivering and receiving them);
How are you approaching performance reviews and compensations adjustments at your company? What worked for you and what didn't? We'd be curious to know and learn from your experience. Drop me a note on Twitter @Lauren31v or share it with the folks @HumaansHQ.
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