Performance management is undergoing a revolution. Businesses around the world are adopting more flexible systems for appraising their employees. This new trend has likely left you a bit unsettled: "Should I follow this trend?" "If so, what approach is right for my company?" "How do I align my pay strategies with a less structured performance appraisal process?" "What are the performance metrics I should be managing?" In VisionLink's report, Pay and the Demise of Performance Management, we answer those questions...and many more. You will also learn about compensation issues that are impacted by a more fluid performance appraisal system and what adjustments you should make to your pay strategy as a result.

1. .
The Reinvention of
Performance
Management
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Pay Strategies You Will Need for the Revolution

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If you have been paying attention, you know that an
increasing number of businesses worldwide are abandoning
long-standing performance management systems and
philosophies in an attempt to address the constantly shifting
climate of talent acquisition, development and retention. A
recent Harvard Business Review article summarizes the
reason for this trend:
…the biggest limitation of annual reviews—and,
we have observed, the main reason more and more
companies are dropping them—is this: With their
heavy emphasis on financial rewards and punishments
and their end-of-year structure, they hold people
accountable for past behavior at the expense of improving
current performance and grooming talent for the future,
both of which are critical for organizations’ long-term
survival. In contrast, regular conversations about
performance and development change the focus to
building the workforce your organization needs to be
competitive both today and years from now. Business
researcher Josh Bersin estimates that about 70% of
multinational companies are moving toward this model,
even if they haven’t arrived quite yet.

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The tension between the traditional and newer
approaches stems from a long-running dispute about
managing people: Do you “get what you get” when you
hire your employees? Should you focus mainly on
motivating the strong ones with money and getting rid
of the weak ones? Or are employees malleable? Can
you change the way they
perform through effective
coaching and management
and intrinsic rewards such
as personal growth and a
sense of progress on the
job?
With traditional appraisals,
the pendulum had swung
too far toward the former,
more transactional view
of performance, which
became hard to support
in an era of low inflation
and tiny merit-pay
budgets. Those who still hold that view are railing
against the recent emphasis on improvement and
growth over accountability. But the new perspective is
unlikely to be a flash in the pan because…it is being
driven by business needs, not imposed by HR. (“The
Performance Management Revolution,” HBR, October
2016, Peter Cappelli and Anna Tavis)
This trend is making the need for a strategic approach to
compensation planning more urgent than ever. In
VisionLink’s work with client companies throughout the
United States and beyond, business leaders inevitably want
to know how to marry their pay approach—especially
incentives—to whatever performance management system
they have adopted. Over the years, many have even hoped
we can actually help them engineer the right kind of
performance appraisal system and then link it to the rewards
strategy we design for them.
Regular
conversations
about performance
and development
change the focus
to building the
workforce your
organization needs
to be competitive
both today and
years
from now.

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We have resisted that role in part because we haven’t been
fans of the philosophies and practices driving most employee
evaluation systems. As indicated by the HBR authors just
quoted, the focus of most performance appraisal programs is
to look backwards more than forward—while our philosophy
is to use compensation as a means of linking the owner’s and
employee’s vision of the future (hence, the name
VisionLink). If that can be achieved in a meaningful way, the
organization ends up with a unified financial vision for
growing the business. Such organizations nurture a
partnership environment wherein the wealth multiple of all
stake holders is tied to the company’s success—not solely
for the sake of wealth building as an end to itself but rather as
a channel to fulfilling the contribution aspirations of both
owners and employees, which rely on financial means for
their realization.
So, what happens with a
company’s pay philosophy and
strategy in an environment
where organizations are pulling
back on formal appraisals and
detailed metrics for evaluating
employee performance? To
answer that, let’s return to the
HBR article just quoted and
focus on the three business
reasons it gives for eliminating
performance appraisals (as
historically applied). After each excerpt, we’ll explore the pay
implications of the abandonment imperative the authors
discuss.
Business leaders
inevitably want to
know how to marry
their pay approach
to whatever
performance
management system
they have adopted.

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The Return of People Development
Companies are under
competitive pressure to
upgrade their talent
management efforts. This
is especially true at
consulting and other
professional services
firms, where knowledge
work is the offering— and
where inexperienced
college grads are turned
into skilled advisers through structured training. Such
firms are doubling down on development, often by
putting their employees (who are deeply motivated by
the potential for learning and advancement) in charge
of their own growth. This approach requires rich
feedback from supervisors—a need that’s better met
by frequent, informal check-ins than by annual reviews.
Pay Implications
This imperative reinforces the need for organizations
to view and build compensation strategies in a Total
Rewards framework and not as an isolated effort.
A Total Rewards approach
means an organization
pays attention to four,
interdependent employee
engagement elements—
and makes sure they remain
in balance. It ensures that
an employee’s intrinsic drive
is not stifled by factors that
inhibit the autonomy,
mastery and purpose
elements authors like Daniel Pink point to as the
primary forces motivating performance. Intrinsic
forces are critical in an environment where higher self-
monitoring is being used to manage the performance
Companies are
under competitive
pressure to
upgrade their
talent
management
efforts.

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of your workforce. The four parts of a Total Rewards
strategy include:
Compelling Future. This means the company paints a
clear and persuasive picture of where the organization
is headed and why it’s meaningful. More importantly,
it communicates why a given
employee (in the context of
his or her role and unique
abilities) is critical to the
fulfillment of that vision. And
with the rise of millennials in
the workforce, more and
more employees want to
know that the company’s
success has meaning
beyond driving profits. This
addresses the purpose
element upon which intrinsic
motivation relies.
Positive Work Environment. For intrinsic motivators to
be unleashed, employees need to feel as though they
are working within the realm of their unique abilities,
that other team members have complimentary
capacities, that they are sufficiently empowered to
produce the outcomes for which they have
responsibility and that they share the values of the
organization. They also want to know that their role
has strategic purpose—and they are clear on what that
is. This produces the autonomy component essential
to motivation.
Personal and Professional Development. Self-
management and motivation are fueled when
employees feel as though they work in an environment
that is accelerating their ability to improve. This usually
happens when the combination of resources to which
an employee is exposed within the organization
creates a unique learning experience—one that allows
For intrinsic
motivators to be
unleashed,
employees need
to feel as though
they are working
within the realm of
their unique
abilities.

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him or her to excel. This enables the mastery factor to
take hold that intrinsic motivation feeds upon.
Financial Rewards. Organizations that understand the
need to focus on people
development see financial
rewards through a different
lens than those that
don’t. They do away with the
concept of incentives and
turn instead to a value
creation and value sharing
model. They first decide how
value creation will be defined
in their organization and
then articulate a philosophy
about how and with whom it
will be shared.
Value-sharing gives shape and definition to the wealth
multiplier opportunity that is the natural outgrowth of
organizational success. It fulfills a kind of continuity
role in the Total Rewards make up by putting a
financially codifying exclamation point on the
relationship. In essence, a value-sharing philosophy
sends the following message to success-oriented
employees: “We
consider you to be an
essential growth
partner in this company
and we have
confidence in your
ability to help us
achieve the future
business we’ve
envisioned. As a result,
we want you to be clear
about the financial
nature of our partnership and what it will mean to you as
we achieve sustained success.” This speaks to all
three motivational areas—purpose, autonomy and
Value-sharing
gives shape and
definition to
the wealth
multiplier
opportunity that is
the natural
outgrowth of
organizational
success.

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mastery—and allows employees to see how their role
in the company will help them fulfill their contribution
aspirations.
The Need for Agility
When rapid innovation is a source of competitive
advantage, as it is now in many companies and
industries, that means future needs are continually
changing. Because organizations won’t necessarily
want employees to keep doing the same things, it
doesn’t make sense to hang on to a system that’s built
mainly to assess and hold people accountable for past
or current practices. As Susan Peters, GE’s head of
human resources, has pointed out, businesses no
longer have clear annual cycles. Projects are short-
term and tend to change along the way, so employees’
goals and tasks can’t be plotted out a year in advance
with much accuracy.
Pay Implications
An environment of constant change and innovation
requires a pay strategy that is flexible and
adaptable. However, this doesn’t mean the core
compensation plans that an organization puts in place
have to be redesigned every few months. What it
means is that a company needs a comprehensive

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rewards approach that is effectively aligned with the
organization’s business model and strategy and is
managed in an operational construct that facilitates
change and modification. It also means business
leaders look at
compensation as they
would an investment
portfolio made up of
various asset classes
that have to be
properly allocated and
monitored. When you
set up an investment
portfolio correctly, you don’t add and subtract asset
groups or investments every time the economy shifts.
Instead, you rebalance and shift the “weight” given to
certain classes of investments to reflect changing
conditions. Compensation is no different.
In the realm of pay, this kind of approach requires an
operational structure that allows the compensation
“investment portfolio” to be monitored
effectively. That’s why we recommend companies
build a Total Compensation Structure (TCS). A TCS is
a framework you create for managing and analyzing all
of the components of pay and benefits you are
offering. Ideally, it includes an integrated “dashboard”
that gives you an “all in one place” view of every
employee tier, what plans
they’re eligible for and at
what level. This allows you
to evaluate the whole value
proposition as opposed to
each individual component
in isolation. Within this
framework, it is easier to
make decisions and
adjustments in specific pay
plans because you can
measure each against its
A company needs
a comprehensive
rewards approach
that is effectively
aligned with the
organization’s
business model
and strategy.

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impact on the whole rewards picture—and in the
context of change and innovation currently at play in
your business.
The Centrality of Teamwork
Moving away from forced ranking and from appraisals’
focus on individual accountability makes it easier to
foster teamwork. This has become especially clear at
retail companies like Sears and Gap—perhaps the
most surprising early innovators in
appraisals. Sophisticated customer service now
requires frontline and back-office employees to work
together to keep shelves stocked and manage
customer flow, and traditional systems don’t enhance
performance at the team level or help track
collaboration.
Gap supervisors still give workers end-of-year
assessments, but only to summarize performance
discussions that happen throughout the year and to set
pay increases accordingly. Employees still have goals,
but as at other companies, the goals are short-term (in
this case, quarterly).
Pay Implications
A teamwork environment requires organizations to
execute what one HBR author called a “promise-

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based” operational and management style. In such an
environment, different departments or teams within a
company take on either a
customer or supplier role,
depending on the needs of
each during a given
period. For example, at
times finance may be the
supplier and sales the
customer when the latter
needs to formulate special
pricing for a specific buyer
or market. At other times,
the roles are reversed when
finance needs certain
performance projections or revenue data from the
sales team. Then finance becomes the customer and
sales the supplier.
This kind of dynamic requires an organization to
ensure that the payout potential of its value-sharing
plans (such as annual bonuses and long-term
incentive plans) is tied to a combination of
company, team or department, and individual
performance. Those factors have to be “weighted”
in a way that is compatible with the employee’s
ability to impact each area—but some percentage
should be allocated to every category. This is how you
align pay with an organizational performance model
that is driven by
the centrality of
teamwork. When
some element
of an employee’s
pay is always
dependent upon
the performance
of the “whole”—
on either a
company-wide or
department
A teamwork
environment
requires
organizations to
execute a
“promise-based”
operational and
management style.

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basis—there is continuity between compensation and
operations. That kind of continuity breeds trust, which
in turn accelerates execution and performance.
So what can we conclude from this analysis so far? The
demise of performance management—at least as it used to
be applied—is simply a reaction to the pace at which
the talent landscape is changing. It’s an acknowledgment of
an empowered workforce and the need for companies to
adapt to a new way of managing their talent if they want to
attract, develop and retain the best people. All of this is
requiring business leaders to think more strategically and
creatively than ever before about the value proposition they
construct for their workforce.
It’s an exciting time but not one for
the faint-hearted. Those who
choose to ignore these trends will
likely find themselves first falling
behind, then fading away. For
those who embrace “the new
frontier,” the possibilities for
accelerated growth are really
limitless. However, this new
direction is not nirvana. It is
fraught with pitfalls and hurdles.
So let’s talk about the challenges
the demise of performance
management has wrought and the
role pay should have in addressing
them.
Problems Still to Be Solved
The trend of ever increasing numbers of businesses
adopting new ways of managing the performance of
their people carries in its wake a bushel of difficulties
and complications. So for this new direction to success,
those potential obstacles have to be anticipated and
effectively addressed—especially as it relates to pay for
performance issues. The same Harvard Business Review
All of this is
requiring business
leaders to think
more strategically
and creatively than
ever before about
the value
proposition they
construct for their
workforce.

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article quoted earlier identifies what some of those
challenges include:
Aligning Individual and Company Goals
…how do you coordinate individual priorities with the
goals for the whole enterprise, especially when the
business objectives are short-term and must rapidly
adapt to market shifts? It’s a new kind of problem to
solve, and the jury is still out on how to respond.
Rewarding Performance
Appraisals gave managers a clear-cut way of tying
rewards to individual contributions. Companies
changing their systems are trying to figure out how
their new practices will affect the pay-for-
performance model, which none of them have explicitly
abandoned.
…it will be interesting to see whether most supervisors
end up reviewing the feedback they’ve given each
employee over the year before determining merit
increases…If so, might they produce something like an
annual appraisal score—even though it’s more
carefully considered? And could that subtly undermine
development by shifting managers’ focus back to
accountability?

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Identifying Poor Performers
…given how reluctant most managers are to single out
failing employees, we can’t assume that getting rid of
appraisals will make those tough calls any easier. And
all the companies we’ve observed still have
“performance improvement plans” for employees
identified as needing support. Such plans remain
universally problematic, too, partly because many
issues that cause poor performance can’t be solved by
management intervention. (“The Performance
Management Revolution,” HBR, October 2016, Peter
Cappelli and Anna Tavis)
The article discusses other
“hurdles”—such as avoiding
legal troubles and managing
the feedback “firehouse”—but
you get the picture. The
byproduct of change is new
challenges. Change and
challenge are progress
companions; you can’t have
one without the other.
But although they are
inescapable, the issues created
by the new performance
management trends are forcing
companies to figure out
how they can still engender
a performance culture that will
attract, develop and retain the
kind of talent they need to
sustain success.
A Performance Framework
The most effective way to address the fallout associated with
the demise of performance management is to construct a
performance framework. An organization’s performance
framework should address three related dimensions: The
The new
performance
management trends
are forcing
companies to figure
out how they can still
engender a
performance culture
that will attract,
develop and retain
the kind of talent they
need to sustain
success.

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Business Framework, The Compensation Framework and
the Talent Framework. These parts are separate but
interdependent. They work together as a kind of
performance “connective tissue” making sure that each area
of focus is constructed to enhance and not diminish the
others. Any organization expecting to adopt a more fluid
approach to performance management, while still sustaining
or improving results, must ensure that each element of the
overall framework is working properly and is effectively linked
with its reliant partners. So let’s examine what is required in
each of these three areas.
Business Framework
In this first category, enterprise leaders must envision the
future company, define its revenue engine and standards
and then identify the roles needed to execute its strategy and
business model. That analysis should include the following:
1. Define the company’s growth expectations
(vision). Here company leadership wants to clearly
express key outcomes that need to be achieved in the
future in quantifiable terms. A financial model that looks
at a three to ten-year horizon in terms of base, target (or

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budget) and superior levels of growth is recommended.
The model should also project what happens to
shareholder value at each level of performance.
2. Define the business model and strategy. This step
involves a clear articulation of two separate but related
issues. The business model is how the company drives
revenue and makes money. Its strategy is how it
competes in the marketplace with that model. Business
leaders need to identify where the leverage points are in
each and how they can be maximized. This should help
determine the growth opportunities that will lead to
fulfillment of the financial vision modeled in step one.
3. Identify roles and expectations. With the first two
elements established, the company should next think
about the specific skill sets
that will be needed to drive
the business model and
strategy. Those skill sets
define the kinds of roles
and expectations that are
associated with the outcomes
the company must achieve if
the “future company” is to be
realized. Expectations should
be articulated in the form
“success” criteria that relate to
the fulfillment of each role.
Compensation Framework
With the business framework in place, the compensation
framework is more naturally constructed. The pay structure
should help align roles and expectations with the business
vision, model and strategy by framing the financial
partnership that will exist between ownership and the
workforce. It should include the following:
Expectations
should be
articulated in the
form “success”
criteria that
relate to the
fulfillment of
each role.

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1. Identify a Pay Philosophy. This is a written statement
that acts as a kind of compensation “constitution”
for the business. It
should define what
the company is
willing to “pay for”—
and presupposes the
organization has
defined what value
creation means in
that business, so it
can also articulate its
belief about how and
with whom it should
be shared. The pay philosophy is also where a company
addresses whether it’s going to adopt an expansive or
selective approach to structuring rewards for key
producers. Expansive essentially means everyone will be
treated the same. A selective approach recognizes there
are key producers and contributors in the organization
who should be treated different from others in terms of
earnings potential and the level of participation in value
sharing.
2. Engineer Pay Strategies that Reflect the
Philosophy. This means a company will pay attention to
both its salary structure and value sharing—and strive to
achieve an effective balance between the
two. Likewise, it will build both
short and long-term incentive
plans (value sharing
arrangements) that reflect the
kind of financial partnership it
believes it should build with its
people. To do so, it must pay
attention to both the structural
and the mindset impact of their
plans. Structure addresses
who should be in the plan, what
kind of plan it should be, how
much it should pay out and so
forth. Mindset has to do with
A company needs
to pay attention to
both its salary
structure and
value sharing—
and strive to
achieve an
effective balance
between the two.

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whether or not a plan will build a greater sense of
stewardship about ownership priorities and whether it will
enable a higher level of commitment and engagement on
the part of employees.
3. Adopt a Total Rewards Approach. This simply means
that an organization recognizes that there must be more
to its value proposition than financial rewards. The
components of a Total Rewards approach were identified
earlier.
Talent Framework
The final piece in our performance framework is talent. This
level of planning has to do with identifying existing key
producers and then pinpointing potential talent gaps. It also
includes communicating expectations and rewards to both
your current cadre of talent and those you are recruiting—
then marketing a compelling future to those people.
1. Identify Key Producers. These are individuals who are
most responsible for helping the company consistently
achieve the “success” standards it has identified (see

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business framework). A business
needs to be able to recognize the
difference between this kind of
contributor and the rest of its
workforce. It should also be able
to identify the skill sets of those in
this category and how they
compare with the expertise
needed to achieve the growth
goals the company spelled out in
its business framework.
2. Identify Talent “Gaps.” Step one should make it easier
to identify where the company falls short in the skills
needed to reach organizational performance standards
and goals. That gap should then drive the recruiting
strategy the business adopts for seeking new talent.
3. Communicate Expectations. Individuals that are
capable of driving the performance of the company
want there to be high expectations that are
well-defined. Expectations are—or at least should
be—reinforced in the way people are paid. When
there is a clear link between company vision,
business model and
strategy, roles and
expectations and
rewards, “line of
sight” exists. This
simply means
those elements are
mutually reinforcing
and work together
to create a unified
vision of what the
target is, who is responsible for its completion and how he
or she will be rewarded when those expectations have
been fulfilled.
4. Communicate Rewards. In the context just described,
pay strategies form the capstone that defines the financial
Individuals that
are capable
of driving the
performance of
the company
want high
expectations that
are well-defined.

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partnership with the company’s
key people. As a result,
compensation must be both
effectively engineered and
clearly communicated. That
communication should include a
statement of the company’s pay
philosophy, an articulation of the
specific program(s) being
introduced and a projection of the
total rewards value a producer can receive from the
business over an extended period of time. This is not a
matter, however, of simply walking employees through
their compensation package. It’s about marketing a future
to each individual employee—especially key producers.
When all of this occurs, employees get a magnified view
of the value proposition they are being offered through
their partnership with the organization. A new employee,
for example, is no longer being told they are being hired
to fulfill a $175,000 salaried position. Rather, she is there
to fulfill an important role and as such will participate in a
financial “partnership” that is worth $1.7 million (for
example) over the next five years through the combination
of rewards for which she is eligible (salary, annual and
long-term value sharing plans, traditional and executive
401(k) plans, flexible benefits, etc.).
Any company that is serious about transitioning away from
traditional performance
management systems and
practices will need a
framework such as the
one just described. That
way, the performance
intent and focus of the
business, its pay systems
and its talent will be
aligned. The result is a
more unified financial
vision for growing the
business in which
Compensation
must be both
effectively
engineered
and clearly
communicated.

21. 21 | P a g e
employees are encouraged and trained to adopt a
stewardship mindset. They take ownership of their
performance and progress because line of sight has been
created—which carries with it an inherent accountability.
In Conclusion
So where does this leave us? Well…it leaves us with some
decisions to make and some questions to answer, does it
not? Are we going to follow the current trend away from
formal performance management systems and chart new
territory or stick with our current system? If we do adopt a
new approach, are we prepared to address the difficulties
and challenges that kind of change will bring? Can our
compensation strategy be adapted to a new performance
management system or will it require significant remodeling?
Do we have a leadership team that can both embrace and
drive a new system if we go down that road? Can we (you
fill in the blank for your company)?
More questions certainly could be raised. Hopefully, you get
the picture. As with all things in enterprise, we are left with
much to consider.
That said, if you lead a business, you recognize that there
really isn’t a choice here. Standing still is the same as
retreating, and ignoring inevitable tides of change is
tantamount to competitive surrender. The only real
alternative is to embrace and prepare for “new and improved”
methodologies and philosophies—be they performance
management related or otherwise.

22. 22 | P a g e
Therefore, as it relates to the
employee appraisal and evaluation
subject at hand, here are five steps
I suggest you take as a result of the
issues we’ve been considering.
1. Define what your experience
has been with performance
management to date and
determine what your
philosophy will be going
forward.
2. Form a team that will work together to identify your
company’s performance framework. This will be
valuable whether or not you follow a new employee
appraisal process.
3. Make a list of the pay for performance challenges you
anticipate if you adopt a more flexible performance
management system. Begin identifying strategies to
deal with each one.
4. Create a written compensation philosophy statement.
This too will serve you well regardless of the
performance management approach you take. Click
here for guidance.
5. Build a Total Compensation Structure that will
allow you to evaluate your current pay strategy and
manage it going forward. This too will inherent
value whether or not your performance management
approach changes. Click here for guidance.
The future is an exciting place to those who prepare for it.
So, begin preparing.
Standing still is
the same as
retreating, and
ignoring inevitable
tides of change is
tantamount to
competitive
surrender.

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Ready to Speak to a Compensation Specialist?
If you would like to speak with a pay expert about your
business goals and pay strategy, call us at 1-888-703-0080.
About the Author
Ken Gibson
Senior Vice President,
The VisionLink Advisory Group
Ken has been consulting with middle-
market private and public companies on
executive compensation and benefits
issues for over 30 years. In addition, he
has authored numerous articles and white papers addressing
compensation and rewards topics that modern businesses
face. Ken also conducts monthly webinars for business
leaders on compensation best practices. His client work
centers on the development of compensation and rewards
strategies that drive performance and transform employees
into growth partners. He is one of VisionLink’s five principals.
7700 Irvine Center Drive, Suite 930 ● Irvine, CA 92618
888-703-0080 ● www.vladvisors.com ● www.phantomstockonline.com