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2.1.2 Should Pay Depend on Performance Evaluations?
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From the course by University of Minnesota
Managing Employee Compensation
356 ratings
University of Minnesota
356 ratings
Course 4 of 5 in the Specialization Human Resource Management: HR for People Managers
From the lesson
Pay for Performance
This module covers employee performance evaluations, raises and promotions, short-term incentives (like commissions), and long-term incentives (like stock options).
Meet the Instructors
Alan BensonAssistant Professor
Carlson School of Management, Department of Work and Organizations
Mike DavisSenior Lecturer
Carlson School of Management, Department of Work and Organizations
Welcome back.
In this video, we're going to be asking the question,
should pay even depend on performance evaluations?
That is, should our pay be determined by something that looks like this?
That is, imagine you have a meeting with your boss, and the boss comes in and
says, I think that you were very reliable,
you did very high quality work, but you didn't generate as much new business and
you didn't exhibit as much leadership as we would have wanted.
Then, in that case, can we really have a conversation that'll be both developmental
but at the same tie those different elements to the way we pay employees?
And that's a big question.
That's because performance evaluations really have two main purposes.
One is kind of the big bucket of developmental purposes.
That is, we want the boss to be engaged with employees, to have a learning
conversation with them, regarding how they can do better in the future,
how they can better align their efforts and
their objectives to the goals of the organization.
And so it really serves a very important developmental purpose, certainly for
the employees and for the organization as a whole.
But of course, the second purpose of these performance evaluations
is that we're potentially also tying them to raises and
bonuses, to option grants, and so on, so all these different pay elements.
But even for organizations that say we don't tie evaluations to pay,
it often times will still be tied to things like promotions, which so
implicitly make those evaluations about pay.
Also, when we're seeing if people are eligible for potentially job changes or
lateral transfers within an organization, or when we need to perhaps engage
in layoffs, or we might be terminating employees, then we might be referring to
those performance evaluations to try to establish some criteria for
who gets laid off or who gets terminated or who gets promoted or so on.
And we think about those as generally being in this bigger bucket of judgment
purposes.
And the problem is is that when a performance evaluation becomes about
judgment, becomes about or tied to things like raises or promotions or
terminations or so on,
it's really hard to also use that same conversation for development as well.
That is, we think about the purposes of development and
judgment to be in conflict with each other.
And indeed, when we think about, again, a developmental conversation,
developmental performance evaluation would require the manager
to be very candid about their suggestions and
the employee to be very receptive to have the right kind of learning conversation.
But on the other hand, if those scores are being tied to things like pay or
promotion or terminations, then it leads the managers to want to be evasive.
They don't want to give employees bad ratings that
could potentially affect their pay or their career.
And likewise, employees are going to want to be defensive as well.
And that's going to make these purposes of having a candid, open developmental
conversation very difficult to balance with the more judgmental purposes, like
pay, that we might also want to include when we are using performance evaluations.
Another challenge is also different evaluation biases.
We're all human, and when we're trying to rate employees,
we kind of bring all of those behavioral biases and baggage with us.
And so the first two I want to discuss are the halo and the horn bias.
The halo bias is our bias to look at somebody who's great in one dimension,
and to allow that to bleed over into other dimensions.
So for example, Bob is great with people and so I think he's pretty good with
numbers, even though these things could be completely uncorrelated.
The horn bias is kind of the halo bias's cousin.
So for example, Bob is terrible with numbers, and so I
let that bleed over to my bad evaluation of his people skills as well.
And we are able see in the laboratory and when we do research with firms
that people actually do allow the halo and the horn bias to affect their evaluations.
The second set of biases I want to talk about have to do with timing.
So the primacy bias and the recency bias.
The primacy bias kind of goes back to this idea, first impressions matter a lot.
That is, when someone does something well initially in our first interaction
with them, we tend to look at all of our future interactions in a favorable light.
The recency see bias is the flip side.
We tend to remember the last thing that happened.
I think if, for example, a job interview went well,
then probably the most important moment is that very first interaction,
where you have that primacy bias, that first impression.
Maybe the second most important moment is that very last impression,
the very last thing that happened within that conversation.
And if you have those two, then you have both the primacy and
the recency bias working for you.
And the same thing can be said in performance evaluations as well.
Our most recent interactions,
perhaps that are done very close to the actual performance evaluation themselves,
are going to be very salient in the rater's mind.
And also the very first interaction with that person could be
very salient in that person's mind and could color all their future evaluations.
And the last set of biases I want to discuss are the spillover and
the anchoring bias.
The spillover bias has to do with the bias that we have that our ratings from
previous years or previous evaluations can spill over into our current evaluations.
So for example, if I rated somebody as a five out of five in the prior year,
then that five of five rating,
I might allow it to spill over into my current evaluation as well.
And very closely related to that is the anchoring bias.
The anchoring bias means that when we have some sort of number in our head,
we tend to anchor from that number and then only make small adjustment
as we see appropriate, as opposed to rethinking those items independently.
And the anchoring bias cause is prior to the root of that spillover bias, where we
only adjust from a prior year's or a prior measurement period's evaluations.
And it's also related, of course, to the halo and the horn bias.
Whereas we think and we get anchored on those very high,
very low ratings, but then we only make small adjustments from there.
Another concern about performance evaluations are the so-called evaluations
death spiral, and
this can be especially salient when we're tying performance evaluations to pay.
So the first step is ratings inflation.
So there are several cases about companies that try to implement performance
evaluations and tie them to pay, and managers, in an effort to avoid conflict,
would try to rate their employees as highly as possible.
That way they avoid conflict and
they maintain a good working relationship with their subordinates.
But after this ratings inflation, ratings start to lose their meaning.
That is, everyone comes to see the highest ratings as an entitlement.
And when the organization is trying to tap the very top performers for
something like a promotion, then it becomes very hard to tell,
because everybody has a very high rating.
And so the second step is that those ratings start to lose meaning.
And then third, because everybody thinks that they're getting this message that
they're doing their job well, the purpose of development also declines.
And so in kind of the final stage is that as performance declines because
the development declines, pay rises more quickly than is sustainable,
because ratings inflation is causing people to become eligible for
very large pay increases.
And so how are we going to combat these biases and this death spiral?
That's going to be the subject of our next video,
when we talk about designing effective performance evaluations.
Thanks, and see you next time.
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