Moving away from annual performance ratings
For those companies that are moving away from annual performance reviews, what are the challenges that managers face? For example, how are merit increases and salary planning is done when performance ratings are not included in the calculation?
We should not completely move away from annual performance rating. The process should always start with a budget considering an increase in wages to avoid the risk to face unpredicted costs. Merit increases are based on the employee ability to achieve results, not on his/her position. This will support an underpaid employee to get a reward, on the other side an underperforming employee will not receive a merit increase. Merit increases must be transparent and reliable (who is taking the decision?), so employees need regular performance reviews to understand if the are hitting their goals and in case to adapt the performance.
To perform a salary plan you need to take into accounts different factors: market adjustments, living and labor costs, turnover and merit increases, again you need a performance review to consider this.
Annual Performance Rating is obviously very important for any organization and it should be included in the system. Based on performance appraisals, increment, hike in salary, bonus, incentives, promotion is decided. It's not just for managers, any employee in an organization whether at a lower post or topmost position, they should get increment only based on their performance. The management decides the budget after the year end closing balance sheet, based on that the amount is utilized for perks to employees on the basis of their performance review.
You can move away completely. Go for continious performance management. Using constant feedback. Preferably also not only by direct manager but by peers, project members etc. Salary increase can be old school on the base salary or what I like more only increasing the variable pay. But this is complex and holistic stuff.For the first part feedback by peers that should not only be from the org. chart but from all project that you’re working on. Variable pay is another part, is it pay or extra vacation days or additional funds for your pension... I guess bottom line is think of transforming HR and not only changing one part because it’s hip.