HBR Case Study On Vitality Health Enterprises, Inc.
Performance Management System
Virality Health is at risk of losing highly talented research scientists and employees because of a performance management system created by the CEO, Beth Williams. Beth charged the New V.P. of Human Resources, James Hoffman, to validate her revised performance management system for the next board meeting. The cost of Research & Development (R&D) was increasing, and James feared that the “chain of success was allowing employees to relax, leading to a culture of ineffective performance management.” Innovation was slowing down in the R&D department because they have been demotivated by a performance system that let the employees think they were average. The R&D department was able to maintain the following consistent costs verses gross profits: for 2009, the R&D cost was 28%, 27% in 2010, and 27% expected in 2011; R&D costs versus total revenues are 34.5% in 2009, 33% in 2010, and 33% expected in 2011. The rising cost in R&D is elastic with the revenues and may not be the main concern; the main concern was retaining the highly talented employees and enabling them to be innovative.
Vitality Health’s old performance management system rated employees against their job which made it difficult to identify and reward top performers, and equally difficult to identify and terminate low performers. The managers were hesitant to evaluate their employees properly with an accurate performance appraisal. Beth dramatically changed the performance evaluation’s rating system to a ranking system, in which managers were supposed to judge their employees against their coworkers within a team. Such a system created an organizational environment within R&D that disengaged the highly talented research scientists and employees, and allowed those highly talented employees to leave the company.
The revised system should be further revised; since James is working on a limited time frame, however, he should consider the following recommendations: managers are properly trained to conduct coaching and counseling, ensure the employees’ roles are aligned with the organization’s goals, create a development program such as a dual-career ladder, develop a succession planning and workforce planning program, and effectively communicate the company’s key values. There are five recommendation which will help retain highly talented employees. One recommendation is to effectively communicate and emphasize the company’s key values; this would help create a structured corporate culture to match the organization’s values. The second recommendation is to provide regular feedback and coaching employees; this will help managers provide clear direction for the average employees. The third recommendation is for the employees’ roles need to be aligned with the organizational goals, which will help reinforce the alignment with the company’s mission, vision, and values. The fourth recommendation is to develop a succession planning and workforce planning program; this will help the organization’s talent management supply chain. The fifth recommendation is to provide an employee development program; this will assist employees with their career planning.
The problems with the old performance management system were: difficult to identify high performers and reward those high performers, difficult to identify poor performers and terminate poor performers, and different managers scored easier than other managers. The potential problems with the revised performance management system were: collusion between employees and managers, highly talented employees might quit, the system may not appear fair, and a decrease in teamwork and cooperation.
Application of Talent Management Concepts
The primary concept is the development of an effective performance management system. The secondary concepts needed to develop a successful performance management system are succession planning and workforce planning programs, coaching, training (learning) and development programs.
Overview & Recommendations
The old performance management presented a 13-level rating system (i.e. A to E, including pluses and minuses) in which managers were worried about offending their employees that resulted in their managers not objectively evaluating employee performance. The old system did not distinguish between performers and non-performers as most of the employees received ratings of Cs or Bs. Managers rarely gave As because they worried about upsetting “a sense of teamwork” resulting in high-performers feeling “slighted”. The old system did not incentivize high-performers because they would get the same pay as less-productive coworkers. Low-performing employees were not dealt with properly. The old system also had an added stressor in which a pay policy was used to determine an employee’s raise via salary calculations and performance-based raises. The problems that led the company to revise the system was the inability to identify and reward their top-performers and the lack of identifying low-performers in order to coach them and provide them direction.
The revised system resolved a couple of issues, low-performing employees were easier to identify, and the rating system was eliminated. Some key features of their revised system are as follows: implemented a targeted and forced distribution model, connected compensation to performance standards, new emphasis is to manage people, and performance is compared to planned objectives. Four potential problems with a target/forced distribution performance management system are a decrease in teamwork and cooperation as the model compares an employee performance to other employees, talented people might leave, the possibility of managers being in cahoots with employees, and the model may not appear to be fair or equitable.
The revised system has caused permeated morale problems as it is designed to put teammates against each other and place their managers in a position to judge their employees versus each other within a team. This system is the opposite of what teamwork is designed to achieve; teamwork is designed to cover each other’s weaknesses, not expose a team member’s weaknesses by being judges by their direct manager. The managers also did not receive proper training on the new system as an email was sent out, which Beth has dictated the new performance and compensation systems to be implemented without proper testing or validity of the program. It is counterproductive to implement a plan which picks winners and losers, and it added an unwarranted impact of subjecting managers to improperly measure their employees’ performance appraisals that do not justify a ranking system.
The ranking system was not properly given the nature for teamwork in R&D, a ranking system is more proper in a sales environment. For example, a team can have multiple high performers, but the manager can only pick a maximum of 14 percent of their staff to be rated as a top achiever and leaving 75 percent of the team members to believe that they are not top achievers and only achievers. This leaves the rest of the employees thinking they are just average which created an adverse impact on morale and work performance. The employees were not engaged because the system disincentivized objective performance reviews. Proper performance management is objective and should be aligned with the organization’s objectives, not the organization’s subjective plan.
These employees were subjected to thinking they were average in a critical department for innovation, the R&D department. The adverse impact of the program disengaged the highly talented scientists, who are the backbone of the organization in an evolving and emerging market. There is no apparent succession or workforce planning in place, which is a recipe for a decrease in the highly talented R&D department. The new VP of HR, James Hoffman, was put into a peculiar position by Beth to validate the current system to the board with a limited time frame. Beth basically insinuated that he should validate the system. James’ findings and evaluation of the system might put Beth in a bad light in front of the board of directors.
The first recommendation is to provide constructive feedback to the employees by conducting regular coaching sessions. These sessions can help underperformers and average performers to gain constructive feedback to improve their performance. These sessions can also provide constructive feedback for high performers to prevent them from being complacent as there is always room to grow, especially in the R&D department as the market demands innovation to be competitive. The challenge of coaching is that the managers seem to be conflict avoidant. To overcome this, the managers need to be trained properly on how to provide constructive feedback.
The second recommendation is to consider developing a succession planning and workforce planning program. This will allow the company to ensure their talent management supply-chain is efficient and effective. By having a plan to replace key employees is critical in the retention of highly talented employees. The challenges with succession planning are whether or not to tell an employee they are in the plan. If an employee is told they are included in the plan, this can be a good retention strategy, but then the disadvantage here is the employee might have unrealistic expectations, especially if the plan changes and they are no longer in the plan. If an employee is not told they are in the plan, high performers may leave the company and leave them unsure of their future in the organization, but the advantage here is that this allows managers flexibility in the succession planning as business needs change.
The third recommendation is to provide employees training (learning) and development programs with a dual-career ladder. The dual-career ladder includes managerial and technical programs to help develop the company’s current talent. By offering two pathways to opportunities could enhance employee commitment and increase employee engagement. These programs will help with the employee-employer relationship and help the employee better understand how their job is aligned and contributes to the organization’s overall mission. Offering skill development could enhance the employee’s performance, satisfaction, and self-efficiency. Investing in training and development programs can enhance employee commitment and increase morale by increasing knowledge, skills, experience, and expertise should translate to an increase in employee self-efficiency, self-esteem, and employer commitment (Mello, 2015, p.188). The barriers to training and development are the costs of the programs.
The fourth recommendation is to communicate and emphasize the company’s key values. The employees need to emphasize the company’s key values will help with the structure of the organizational culture. Effectively communicating the company’s key values will help in creating an environment where employees know what values are embraced in the organization. The barrier to this is that the organization needs to first identify what the key values of the company are.
The fifth recommendation is to align employees’ roles with the organizational objectives and reinforce organizational goals. This will help the employees’ role to be aligned with the organization’s vision, mission, and values. The employees’ roles should be aligned with the overall objectives and goals of the company. Aligning and reinforcing the organization’s goals and objectives will give employees clear direction as to where the company is going. If the company is headed in a particular direction in their objective, and this is not properly communicated down to the employees, then the alignment of their roles is not aligned. The main barrier to aligning with and reinforcing organizational goals is the company needs to first understand their own identity and properly translate their vision, mission, and values.
Both the old rating system and the revised ranking system had many weaknesses. The old performance management system did not properly identify high performers and low performers. The revised system was able to identify low performers but did not objectively identify the high performers. The revised system forced the distribution system was improper as it caused morale issues and demotivated highly talented performers. For example, you can have a team with excellent and highly talented employees and they meet and exceeded their goals, but on 14% of the team could be formally acknowledged as “top achievers” and the remaining team members receive formal acknowledgment based on their performance review that they are just an “achiever”.
Mello, Jeffery A. (2015). Strategic Human Resource Management. Stamford, CT. Cengage Learning.