Agile performance reviews and compensation

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What to do in a cross-functional team, when your organization is still using its existing approach to performance management and compensation.

This is one of the hardest topics to change in an organization, before you get yourself disappointed (in search of a silver bullet) — realise that there are things you can do in your cross-functional team. Things that do not require you to overthrow the whole organization’s system.

This topic is often categorized as ‘here be dragons’, if you are looking for the complete overhaul, you are going to need executive leadership (including CEO and your head of HR) to sponsor the change.

As an incremental approach — look for ways to small make changes, that help reduce friction between outdated systems and more modern ways of working. This topic strikes at the heart of an organization, it directly impacts everyone who is an employee (or part of the system).

Taking small steps is helpful for teams, be careful not to create a divide between teams and executive leadership. Executive leadership are actually meant to be a leadership team, with shared goals and outcomes. In some companies, executive leadership are compensated based on overall company performance (or at least as a percentage) compared to their own departments performance.

This is a start, quite often the wider organization is not aware of this. It may be a useful device to discuss with people looking for radical revolution to meet somewhere in the middle. You can start by looking at the company quarterly and annual reports to see how compensation works. This is also a good first step to discuss and how it can affect transparency, incentives, strategy and goals.

Understanding how your teams' goals contribute to the overall company strategy and goals is important and a way to combat local optimization to the point of reducing internal competition and instead enabling alignment towards common goals and outcomes that help the company over the department / division.

Have you been here before?

For anyone who has worked in an organization with individual performance reviews and incentives, you know there is a game people play to capture feedback on things they’ve done (‘achieved’) throughout the year in the hope that their manage will prioritize getting them a decent bonus (often the same or hopefully better than last year regardless of relative improvement).

This can end up with a last-minute flurry of grandstanding, over communicating and sharing praise (just as the reviews are being ‘locked in’).

Internal competition has always felt dangerous, if you are working for the same company, the customer only benefits if the company is doing well, not if one department or set of individuals do well and the rest do not. This is often where the analogy of a sports team comes into play.

Having an opaque system, only visible to leadership, creates a divide of workers and managers. It can feel like a game of roulette, where your manager decides where you land, compared to your peers.

When not working well, the process can be subjective or worse, based on the strength of your relationship with your manager. Do outcomes matter if your boss likes you? (sarcasm) This type of rating ends up being about individual contributions and often output related ‘things you did’ rather than outcomes realized as a group.

Having shared goals causes friction with an individualistic performance management process, it is hard to tell how one individual contributed to a shared goal compared to those in the team. This is even worse when the process and goals are annual and rely on feedback from others. The manager really needs to understand the work and the employees contributions, objectives and ideally, employees are coached by their manager continuously. This also means adjusting the goals over time to better calibrate the current reality vs something written 6–9 months ago that is no longer relevant. COVID was a prime example of this but you will on doubt think of your own recent examples where things changed drastically in your organization.

Recommended reading: an interesting book on this topic by Alfie Kohn (who also wrote ‘punished by rewards’)— No contest: the case against competition — Alfie Kohn 1986.

People end up resorting to strange, but expected behaviours, which prioritize the individual over the team — let alone the overall organization.

Note: moving to cross-functional teams that you intend to be empowered and aligned inevitably end up having incompatibility with an existing performance management system that pit individuals against each other.

Key questions people tend to ask

• individual goals vs team or team of teams etc.
• who performs the review, if the individual is in a cross-functional team
• if the individual does well but the team doesn’t realize the outcomes will the individual be unfarely penalized
• are individuals in a cross-functional team measured individually or against each other
• how does this work if the team is composed of different roles e.g. product vs engineering vs design.

Small steps

• have the team establish shared objectives and review the objectives periodically (e.g. every quarter)
• have individuals goals that focus on learning outcomes (individual learning / stretch objectives that allow the individual to demonstrate own leadership and learning behaviours), team outcomes (support the teams development e.g. helping others learn new skills / capabilities), community outcomes (e.g. contribute to a community of practice in multiple ways)
• as a team, talk about the individual contribution towards the goals / objectives, consider if this can be done in public rather than 1:1 or only in a system of record
• ensure that the line manager of each individual has a view of the feedback from the cross-functional team and an understanding of the cross-functional goals

On motivation

We know from research and books like Drive by Dan Pink, that the effects of extrinsic motivators have limited long term appeal on people, when compared to intrinsic motivators (mastery, autonomy and purpose) — what many people struggle with is how that works in the context of a team vs the individual.

We also know from Punished by Rewards by Alfie Kohn that punishment or reward can have an adverse effect on people — even when we have the best of intentions, by doing something good for people — the pat on the head type approach. Without thinking, topics like gamification, public praise, and just well meaning ‘good job’ type comments can really affect how people behave.

People are familiar with giving everyone a trophy for ‘participation’ where people are rewarded for not doing anything of note but taught that they deserve recognition anyway. What is lacking is people’s ability to thoughtfully praise the behaviour, as opposed to simply the results.

This is quite easy to say and in practice quite hard to do. Many people working in organizations, have annual performance reviews which incentivize people with financial incentives and promotions.

How do you feel your organization it setup to enable the individuals and teams for success?

Is your organization rewarding learning, behaviour and team focused outcomes or are they using an outdated model where individuals are pitted against each other and left to a chance process, where your managers influence plays a larger role in your future rewards than your actual contribution.

A more significant change is to drop stacked ranking (typically where parts or all the organization is mapped to a bell curve usually between a 3 or 5 rating scale. This is sometimes using 2 different dimensions around goals and behaviors but this is usually just a mechanism to differentiate compensation and promotion. Dropping of stacked ranking happened at Skype and eventually Microsoft (see Microsoft insider blogs from 2004/05).

The approach used was a study of the effect stacked ranking had on the organization and how the numerical approach just did not work — getting rid of or not compensating a certain percentage of the population puts potentially great people at risk. A simple example — if you have a team looking after the legacy systems that has technology that is hard to source in the industry and those people leave you put the whole company at risk. In extreme cases e.g. Jack Welch at GE famously did this with rank-and-yank where the bottom x percentage of the lowest population would get fired to ‘motivate’ others to work hard. If you have a high performing organization and everyone is doing a great job then you are getting rid of great people because of a flawed system. This encourages people to only do better than the bottom rather than aspire for something greater.

Changing the system

If the people responsible for changing these systems and processes are also participants in the system itself, what are the incentives for them to change how it works if they risk affecting their own compensation and incentives in the process. If it easy to be sceptical on these topics of course, many large companies have more complex / nuance reward recognition approaches when it comes to senior leadership where there are incentives are put in place to be spread over a longer period of time as a way of helping limit the focus on purely short term benefits. This is a great move in my mind given the existing system we find ourselves in but are those timelines long enough to encourage the types of long-term thinking and benefits we want out of an organization.

That is an interesting question and explored by W Edwards Deming in his work as well as a recent book Learning to Lead, Leading to Learn by Kate Anderson with contributions from Isao Yoshino from Toyota fame. In the book they talk about Toyota having a ‘100-year plan’ which is a document that gets updated every 5 years as a process to get the company to think, not only in the short term e.g. quarterly results but the medium and long term views as well. These long-term views way cause a nervous reaction to the ‘agile’ types who somehow are allergic to long term planning — I see this more about understanding vision, strategy, and purpose for the organization and what long term changes a company is to make to make meaningful change in the world.

Given that Toyota is traditionally thought of as a manufacturing company the time scales people work on are likely to be different to a pure services / digital product company, I find the important take away (much like in public office) that systems put in place to make changes that can only be measured in the short term tend to be the changes people make — in government 10–20+ year investments which will far exceed your average politicians tenure at the top and then the competition come in they are also likely to change what the previous ‘party’ did, it makes things that much harder.

Edit: I recent heard on a recent podcast with Joe Justice, Elon Musk plans on a 1,000 year horizon — that makes sense given the super ambitious goals his companies tend to aspire to, Joe talks about the granularity in the podcast and doesn’t have detailed plans out that far in advance.

The notion of a north start / moon shot can be powerful when it comes to enabling an organization to align on a common purpose and direction of travel. This type of mechanism is a way to get an organization aligned around common outcomes and is an opportunity for people to move away from individual performance and compensation incentives.

I would be a hypocrite if I said I did not enjoy the prospect of a bonus at the end of the year, but is the pain / effort and anxiety it causes people throughout the process and on ‘the day’ worth it? That is a question I ask myself regularly. Quite often people find out ‘what they got’ and do not have clarity why they did better or worse than a peer in the same team, if often feels a bit like a lucky draw at times. There’s little transparency and people feel that they are at the mercy or the organization in the process. This is along winded way to say that an annual bonus can also be a disconnected way of giving someone the pat on the head that someone else thinks that they deserve, quite often without understanding how the rewards relates to the behaviour or outcomes. A great manager will often do a far better job of delivering this message but even with the best of intent it is a strange experience.

What is more motivating than finding out your colleague got a great bonus when you are the one who was helping them improve all year? Is the organization rewarding the results, the behaviour, the team — there are many possible variables and this is even less obvious in a cross-functional team with multi-discipline colleagues working together some different skillsets e.g. how do you value a SW engineer vs. a product manager vs. a product designer.

So what is the answer?

• There are a number of options to explore that will not end up looking like a silver bullet
• This is the most challenging part of changing behaviour and ultimately culture in an organization looking to become more ‘agile’

Is it even possible?

Can you really change your performance management and get the results we all aspire for, quite likely no — it is just one of a number of elements that are needed to put the systems in place to change how people work and how they measure and improve. If we look at Beyond Budgeting for example they tie performance management into a wider context of targets, forecasts, resource allocation, performance evaluation, rewards, coordination — looking at one in isolation is detrimental.

• I encourage you to investigate Beyond Budgeting and what they have been doing there for many years 25+ in some cases, they have case studies, books and lots of great literature that is helpful but not overly prescriptive!

On reward

There’s three ways to reward people (shamelessly taken from a chat I had with Chris Matts)

1. you give someone a bonus (private — once off / discretionary)
2. you give someone a pay rise (private — cumulative)
3. you promote someone to the next rank (public)

Think about the 3 types, yes, they are all possible in a good year. If you want to signal to your organization that behaviour is what you value most for the organization — you should choose to reward behaviour — since that is public, you should be looking to promote the people who best stand for the behaviour the organization wants. If you are trying to change culture and ways of working — this is a highly effective way to signal this to the organization. Behave how the company likes and you will be rewarded.

Sometimes you will need to keep people happy that do not behave in way that you’d like to make public and let them know their results are being rewarded but not their behaviour — then a pay rise is most likely the choice.

Finally, if you cannot promote someone due to quotes but want to at least express in private that someone is showing the right behaviours then pay rise is a nice way to do this as it keeps year on year so every pay rise you get will be on top of the last one.

Then those you may be rewarding with only a bonus (the results reward type), they may choose to stay and adapt their behaviour based on what is being recognized or they may choose to look for another role internally or externally.

So as a leader / manager considering options, there are levers you might want to think about.

I am in favour of ideas like profit sharing, you might think of me as a hippie. I find it hard to have shared goals and outcomes, yet not shared performance and compensation. You can read up on the alternative options to compensation in Beyond Budgeting and other such books like Corporate Rebels and Radical Enterprise

So what steps can be taken?

• what ever you do, pilot it and don’t do a big bang / monolithic change, use feedback from employees to drive how the approach / process works
• think about what you are trying to signal with your system
• for existing processes, more frequent gives people an opportunity to more closely align with goals vs outcomes vs ability to adapt
• a monolithic set of annual goals for individuals and teams is a strait jacket for an adaptive culture
• don’t rely on a tool or some expensive large consulting firm to do all of this for you, you should actively learn and participate in meetups / communities, read up on the latest trends etc but don’t fool yourself into thinking just because other companies are doing something that ‘we should too’
• every company has its own unique identity, values and culture so copying someone else’s approach is at risk of being rejected by the organization for something that is inflicted on people rather than based on the organizations context

The holy grail

It is easy to blame leadership for everything these days, but the employees outnumber the leadership / management by a good amount. So, whilst you cannot radically change the way an organization works by yourself, it is possible to make progress to make your team or department's lives a little more enjoyable when it comes to performance management.

If you really want to turn things up to 11 (Spinal tap reference), you are going to need complete leadership by in and sponsorship. If you don’t have that, it is incredibly unlikely to go very far, this is because they are part of the same system as you are (in most cases) so unless the changes benefit the organization and the executives it is really going to be extremely difficult to change.

What other approaches / systems / resources have you seen work well?

Some interesting resources
- https://deming.org/dr-deming-called-for-the-elimination-of-the-annual-performance-appraisal/
- https://deming.org/deming-on-management-performance-appraisal/
- https://www.youtube.com/watch?v=2F1rhik2_X0
- https://www.alfiekohn.org/punished-rewards/
- https://www.danpink.com/books/drive/
- https://kbjanderson.com/learning-to-lead/
- https://www.bcg.com/publications/2020/budgeting-in-an-age-of-uncertainty
- https://bbrt.org/wp-content/uploads/bb_principles.pdf
- https://hbr.org/2016/10/the-performance-management-revolution