Steve Kaufman has a real dilemma…how can he build an annual performance appraisal process that will produce staff evaluation reports that accurately reflect the performance of the company and get his managers to actually use the system. The performance appraisal system problems that Mr. Kaufman outlines in the case are definitely not unique. Most companies struggle with building a system that enables them to evaluate performance and also provides them a way to systematically rate employees so that they can determine annual raises and bonuses.
In my years in business, I have had the displeasure of experiencing the worst of the performance appraisal systems. My least favorite of the systems are the forced rating systems. It is this exact type system that Steve Kaufmann forced upon his staff during the second round of the performance appraisal system. That is the exact same system we had at PSE&G. This system truly is the de-motivating system I can ever imagine designing. By saying that a large majority of staff have to fall into the “meeting expectations” category means that you ultimately have to give the same rating to a weak performer and an average to slightly above average employee. If employees didn’t talk, that would be fine. But they do. How de-motivating was it to my better performer to find out she had the same rating as one that wasn’t very good at doing his job? Completely. And, what about the true stars in small departments? Can they get the best rating? No, they can’t. That’s because only the larger departments were awarded the coveted “1” ratings. So, a true star only had the ability to get a 2. Thank God the true stars were intrinsically rather than extrinsically motivated.
A complicating factor to the employee turnover problem is that his company has a great percentage of self described “mercenary” sales people. These folks are very extrinsically focused. My favorite quote from the book was “yeah—I’m the most loyal guy money can buy.” Steve seemed to incorrectly believe that if he could just steer clear of the W-2 hoppers, his turnover problem would go away.
So where did he go wrong? I think that big part of his problem was relying so heavily on commissions as a way to motivate employees. Having 60% to 80% of your salary based on sales commissions, it is no wonder that the sales force were mercenary in nature. Another big issue is Steve Kaufman’s focus on hiring folks right out of college and trying to mentor them into being dedicated. All they succeeded in doing was As the only 25 out of the 325 college “tries” actually stayed with the company for more than 2 years, it’s clear that that strategy didn’t work. An attribution error on the part of Arrow’s management was that the new recruits would use their fellow college graduates as a benchmark with respect to salary. They in fact just elevated their feelings about their own capabilities and upped their benchmark to compare themselves to “distribution industry veterans”.
So what do I think Steve Kaufman should have done?
- Focused on “hiring” a different class of new recruits. He could have easily cross-trained and then moved people from other parts of the company into the sales position. These people could have been the “new” face of the sales team and worked to slowly transform the culture from mercenary to just motivated. By doing this, he would not only mollify the discontent among the “non-educated” staff that was put off by Arrow hiring “IROC’s” at a salary that seemed out of line with their experience levels.
- Build an appraisal system that did not impact compensation—it might have been possible for him to have learned from SAS’ success