Organization Development

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Performance Improvement, vol. 53, no. 8, September 2014 ©2014 International Society for Performance Improvement Published online in Wiley Online Library (wileyonlinelibrary.com) • DOI: 10.1002/pfi.21432

EVALUATION AND REWARD SYSTEMS: THE KEY SHAPERS OF ORGANIZATION CULTURE

William F. Roth, PhD

Evaluation and reward processes, more so than communication, access to information, problem

solving, work design, and training shape an organization’s culture and employee’s attitudes.

The three most popular evaluation systems—MBO, BARS, and the 360 degree—encourage

competition and even conflict by emphasizing individual performance. This emphasis is made

stronger when the bell-shaped density curve is used to categorize employees so that the weakest

can be terminated. The evaluation and reward process should, instead, encourage cooperation.

MANY PROCESSES CONTRIBUTE to the shaping of an organization’s culture. They include planning—who controls it, who provides the input, and who makes the decisions. They include communication and access to information—who is allowed to talk to whom, can employees go directly to the source for desired informa- tion, or must they seek it through hierarchical channels. They include work design—who shapes organizational roles, departmental responsibilities, individual jobs, and how much input are workers allowed to provide. They include training—who decides what training modules should be offered, how they are offered, and who receives training.

While all of these processes help shape organizational culture, the evaluation and reward system has the great- est influence on how employee efforts to help maintain or improve the bottom line are evaluated and who receives what types of reward and how much of it.

EVALUATION AND REWARD AS KEY Why does the evaluation and reward process have the greatest effect? If communication and access to infor- mation are not flowing smoothly, the process itself is at fault and should be redesigned. People are natural-born communicators. The major problem is found not in the individual employee but in the involved linkages.

If one focuses on problem solving, decision making, and planning processes that are not producing the desired results, improving the communication and access to information process might help. But how are employees encouraged to make the necessary efforts when they are already overworked and when the environment and chal- lenges are constantly shifting?

If work design is the issue, the increasingly obvious answer is to have the people actually doing the jobs involved in redesigning them. They do not need training in problem-solving skills, and they do not need better access to information. What they need is the opportu- nity to meet the challenge and the incentive to address it effectively.

Finally, if training is not producing the desired results, it is not usually because the trainers lack professional skills but because the model used emphasizes the wrong things. Training traditionally is something done to employees who have little say as to what they need. When the training is based on a desire to improve ongoing in-house systems, those best qualified to identify needs and to provide the training are actually the employees themselves. But how do we encourage employees to take up the challenge?

The answer to all of these questions has to do with the evaluation and reward process, the one organizational process capable of encouraging positive change in all of

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the others. Pat Carrigan, famous for her turnaround of the Bay City, Michigan, General Motors component parts plant, said in Tom Peters’s film The Leadership Alliance , “People do what they are rewarded for doing” (Peters, 1988). If employees are rewarded for improving the communication and access to information process, the planning and problem-solving process, the organization approach to work design, and the organization’s approach to training, they will do so. It is that simple.

Problem solved, right? Well, actually, not quite. It turns out that most evaluation and reward systems are anti- thetical to the shifts we are talking about. And because evaluation and reward is what most often dictates the success of all other processes, until we get it straightened out, little else will change.

INTERNATIONAL PAPER FALLS VICTIM TO THE BELL-SHAPED DENSITY CURVE The challenge, first of all, is to get beyond the belief that has so long been a cornerstone of U.S. management the- ory: that employees should be forced to compete for raises and promotions and that such an atmosphere causes them to work harder.

My first job in the corporate world was with the International Paper Company (IP) in the late 1980s. Rebuilt European and Japanese economies had discovered the United States’ vulnerability in the world marketplace: the quality of its products. Because we were the only player left on the block following World War II, someone was always ready to buy; consequently the emphasis was on getting products out of the door with a focus on quan- tity rather than quality. When European and Japanese industries began taking advantage of this weakness, U.S. companies rapidly mounted quality improvement efforts to counter the threat.

The first meeting I attended at IP corporate head- quarters featured a speech by then CEO John Georges, announcing the creation of a quality improvement department. The emphasis in his speech was on team- work. Teams would be formed to identify weaknesses in products and in manufacturing and support processes and to suggest ways to correct them. Teamwork was the key; the entire corporation would quickly become one well-integrated team.

Later that day I attended a session sponsored by the human resources department for new employees in which our benefits were explained. When the presenter finished, he added, “Oh, and by the way, IP, as you know, has adopted the Hay System for evaluation because it is built around the bell-shaped density curve concept” (Roth & Ferguson, 1994). The curve provides a clear-cut means for

making decisions concerning who should get raises, who should get promotions, and who should be fired.

Based on this system all employees would fall into one of three categories after their periodic evaluation. Approximately 20% in each department would be ranked as superior performers, 60% as average, and the remain- ing 20% would end up in the weak performer category. All supervisors would be required to break their work- force down this way, 20–60–20. “And oh, by the way, if an employee remains in the weak category for two evalua- tions in a row, that person will be terminated.”

So, on the same day that I heard the CEO of IP strongly emphasize the need for cooperation and teamwork, I was also told that in reality the corporate culture was dog-eat- dog. Quite obviously, any employee who ended up in the weak category would do anything possible to claw his or her way out. If that person succeeded, according to the rules, another person would have to take his or her place, encouraging those in the average category to do whatever was necessary not to drop into the pit. “And oh, by the way,” the presenter added as a final note, “one of the traits that will be surveyed during your all critical evaluation will be your ability to work as part of a team, your ability to cooperate.”

With the Hay System in place at IP, we were being forced to compete to show that we could work most effec- tively as team members and that we were the most coop- erative employees in our department. Enough said? The way IP’s evaluation system was set up obviously thwarted any attempt to generate fruitful cooperation. Sharing what we knew would make us vulnerable in a struggle for survival where there had to be losers.

The challenge, first of all, is to get beyond the belief that has so long been a cornerstone of U.S. management theory: that employees should be forced to compete for raises and promotions and that such an atmosphere causes them to work harder.

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are: management by objective (MBO), the behaviorally anchored rating system (BARS), and the multi-rating assessment or 360-degree evaluation. MBO was designed in the mid-1900s by Peter Drucker, one of the founding fathers of modern management theory. His desire was to ensure that the work-related objectives of each employee supported those of his or her boss and of the organization as a whole (Roth, 2009 ).

Once a year, or every six months, employees would meet with their bosses to discuss and decide on objectives for the following period. At the end of that period, they would sit down to discuss how much had been achieved. Raises and promotions are based largely on the results of this discussion.

MBO has shown serious drawbacks in recent times. First, the rate of change in both an organization’s internal and external environments continues to accelerate. As a result, an agreed-on objective might become obsolete within several months—or several weeks or even days. So, what happens next? Does the employee meet again with the boss to redo it, then again two months later, then again? Or does the employee just muddle through and try to explain what happened during the next formal meeting?

The second serious drawback is that although team- work is increasingly important, the MBO focuses entirely on defining and achieving individual objectives. And what if my objectives conflict with your objectives, and what if there is a shortage of a resource required by both of us? Do I grab as much as I can to ensure my raise and not worry about you? But, then, how do you react?

With a BARS approach, a range of categories is estab- lished for employees to fit into—excellent, good, and fair (Lloyd, 2009). This range is used to evaluate performance in different areas of a job such as performance involving technical skills, performance involving personal skills, or performance involving accounting skills. A brief com- ment is included for each rating. One weakness of this approach is that the categories are very general. Another is that the comments made, to be of real value, should be comprehensive and discussed at length with the employee. If an evaluator is responsible for 15 or 20 employee discussions, this will consume a lot of time.

When a company uses the multi-rating assessment or 360-degree evaluation, everybody an employee interacts with evaluates that person and reports. Then the evalua- tions are consolidated and given to the employee with no names attached (Lloyd, 2009). This approach is used so that no aspect of job performance is left out. The major drawback, once again, is the amount of time required, each employee being responsible for evaluating at least one boss and five or six co-workers, involving several

POSITIVE OR NEGATIVE ENERGY? In today’s corporate world there are still many who believe that competition and even conflict in the workplace gen- erates more productivity than cooperation. Conflict being competition without rules, without some sort of referee whose decisions all players must accept. They are wrong. A simple model exists to prove this. It has to do with the amount of energy an employee expends in the workplace and how it is expended.

We all have a limited amount of energy. How we ration that energy is obviously critical to our success. Two types of expenditures are possible in the workplace— positive and negative. Positive energy expenditures include those focused on performing our duties effectively, on improv- ing the way we work, and on improving the tools and techniques we use.

It is also a well-accepted reality that the greater the amount of input from those who will be affected by any decision we make, the more comprehensive the outcome will be. Stakeholders will better understand the change and, having provided input, will be part owners. Finally, synergies will occur. Additional energy not possessed by any of the participants will be generated through their interaction.

Negative energy is energy expended to stop other employees from making contributions. It is energy expended on stealing ideas. It is energy spent on guarding against such attacks. It is energy spent on listening to the grapevine and learning what somebody might be up to so that a preemptive strike can be staged. The worker’s use of energy in this manner, if successful, will decrease tar- geted productivity. At the same time, however, due to the limited amount of overall energy available, it will cut into the amount of positive energy at the attacker’s disposal and the amount available for progressive efforts. Synergy is also less likely to occur because employees will be wary of each other and will fear being taken advantage of.

PUSHING IN THE WRONG DIRECTION According to this logic, organizations that have a coop- erative culture enjoy an advantage. More positive energy is available for the pursuit of the organization’s objec- tives. Less negative energy is wasted on defensive tactics. As previously mentioned, the organizational process most responsible for shaping the organization’s culture is evaluation and reward. So, how do we shape this pro- cess to encourage cooperation? Let us start with where most companies are today, a place not that different from where IP was so many years ago.

The actual evaluation process has grown increas- ingly sophisticated. Three major popular approaches

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All three of these evaluation systems have crippling flaws. All three help create a competitive environment by individualizing what is required in order to improve performance.

reports. Another drawback, even more so than with the BARS method, is the issue of accuracy. Do I interact with this person enough to accurately judge his or her per- formance? A further drawback is the syndrome of Who said that? The 360-degree approach allows employees to take shots at people they do not like or are competing with when no retaliation is possible. This misuse leads to suspicion as people waste time trying to figure out Who said that?

AND THE WORST IS YET TO COME All three of these evaluation systems have crippling flaws. All three help create a competitive environment by indi- vidualizing what is required in order to improve perfor- mance. Even if one of the suggested requirements is to learn to function more effectively as a team member, the competition does not disappear. The employee must now compete against those he or she should be cooperating with for the pay raise or promotion.

The worst part is that once the evaluation is completed, those making the decisions must find some way to com- pare ratings. A new scale must be developed to decide who gets the highest raise. Do all those who are rated superior in all phases of their job get it? Or do all those who are judged superior in 50% of their ratings? But what if everybody in the office rates everybody as superior when there is not enough money in the budget to give everyone the highest raise?

To deal with these issues a large number of companies have adopted the bell-shaped density curve approach the author became familiar with at IP. Its purpose is to encourage employees to work harder, using fear as a moti- vator. Its purpose is also to get rid of weaker workers with policies like “two times and you’re out.” But this leads to rising tensions as employees jockey for position. In addi-

tion, replacements must be hired, and these new people need training that often costs more than has been saved by getting rid of an employee.

One suggested alternative is to flatten the curve so that fewer employees end up on the upper and lower ends. However, this approach obviously fails to support the initial purpose of the evaluation process—to encourage improved productivity.

The only people who might truly benefit from use of the bell-shaped curve approach are managers who want or need to be in total control. It increases their power. They decide who falls into which category. The game becomes “please the manager, no matter what or who has to be sacrificed.” The bell-shaped curve does not stand alone in this respect. Just about every evaluation system the author has had experience with creates the same competitive environment where fear is the motivator and managers reign supreme. The word evaluate in the world of business means to compare an employee against some- thing. In the workplace that something is almost always other employees.

WHEN WINNING IS ALL A great number of managers, though they might under- stand the superior rewards of cooperation, actually want their employees to compete. They have been programmed to believe this way by academia, by a society that applauds winners, and by a mind-set left over from laissez-faire economics even though these mind-sets have proven time and again to have negative consequences. Willingly or not, these managers are at least partially victims of ado- lescent arrest , a psychological phenomenon that describes individuals who never outgrow a need to win, no matter what the situation and no matter what the consequences for others (Roth, 2005).

All species go through a stage labeled adolescence. It is a testing stage where the young compete against each other to discover their strengths and weaknesses and where they fit into their peer group. Eventually, most of us progress to another stage where we realize that as individuals we can gain more by working together than by beating everybody we interact with.

Adolescent arrest occurs when a person fails to make this transition. The individual is never able to overcome the need to win, be it by talking louder and longer or by working more hours to make sure a promotion or raise is won. The problem is that those trapped in ado- lescent arrest tend to win because they are willing to expend their energy in whatever way necessary. They also see peers as pawns rather than as partners, the goal being to leave them behind. Such an attitude, of course,

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breeds resentment so that the amount of negative energy expended on all sides increases.

START WITH THE REWARD SYSTEM How, then, do we evaluate employee productivity and reward it in a way that encourages cooperation rather than competition? To begin with, we skip over evalua- tion and go directly to the reward part of the process. If a reward system is put into place that encourages employee cooperation throughout the organization, an atmosphere of positive energy will be generated.

One approach that achieves this is the three-tiered sys- tem (Roth, 2000). On the individual level, each employee at first receives a relatively small salary. Periodic raises are based on the number of years employed. On the second level, workers become members of a team and are rewarded for their cooperative efforts, a percentage of the profits generated by the team being split among members. Two basic types of teams exist in the normal workplace—product teams and support teams. Product teams include workers who design and manufacture a physical item or service as well as those involved directly in selling and delivering the good or service. Product teams are traditionally profit centers and have a bottom line. The number of smartphones produced and sold, the number of therapy sessions provided, the number of banking services provided, and the number of haircuts delivered can easily be counted and the amount of money generated easily calculated.

The major challenge with this model is to find a way to reward support teams that do not have a bottom line. Such teams as marketing, accounting, human resources, finance, and research and development are traditionally treated as cost centers. The solution is to turn them into profit centers as well. This can be accomplished by adopting an approach designed by Jamshid Gharajedaghi while at the Wharton School, University of Pennsylvania. It is called “the multidimen- sional, modular design” (Gharajedaghi, 1984). Support function teams will sell their services to product teams rather than simply providing them. According to the model, product teams will also be allowed to purchase the involved support service from an outside source, thus forcing the in-house unit to do what is necessary to remain competitive. At the same time the in-house unit will be allowed to sell its service to other companies so long as no conflict of interest arises.

So, now we have a salary on the individual level as well as a profit-sharing arrangement on the team level that encourages employees on each team to cooperate and to work together to increase the amount of money generated

and shared. At the third level of the model a portion of all profits generated will be put into a common pot and dis- tributed periodically as a companywide bonus. This part of the individual reward will purposely be larger than the profit-sharing portion to keep employees focused on the productivity of the company as a whole rather than solely on that of their team.

The only other issue is that the top-level management team should not generate an individualized bottom line as the result of its activities. Therefore, it cannot par- ticipate in the profit-sharing scheme. However, top-level managers can participate in the companywide bonus program and their base-level salaries can be higher.

EMPLOYEES TAKE OVER EVALUATION One company that tried this approach was the start-up Bridgeport Paper, a paper distributor trying to penetrate the Philadelphia area market (Roth, 2000). The workforce was involved in designing the team model. Employees decided that each team should comprise an outside sales person, an inside sales person, secretarial support people, warehouse people who did the loading and unloading, and truck drivers.

Once the reward system was spelled out and accepted by all, attention turned to designing the employee per- formance evaluation process. Nobody had previously worked in a company without an evaluation process, so it seemed the natural next step.

Such processes allow a review of the employee’s per- formance. They facilitate the setting of future employee objectives that support those of the organization. They influence pay raises and promotions. They provide proof when an employee is being disciplined or fired.

MBO, BARS, and the multi-rating assessment approaches were all discussed as alternatives. None, how- ever, seemed to fit with the new reward system. Finally, it was realized that a formal employee evaluation was not necessary. Because the performance of each team member would now affect how much the others made, employees would be constantly evaluating each other and would constantly be seeking to improve the performance of their peers—not on a once-a-year or an every-six- months basis, but daily.

The new reward system took the pay-raise issue out of the hands of managers. Such raises were now either automatic or were tied to productivity. Concerning pro- motions, employees working in the involved area were encouraged to decide who should move up when an opening occurred, the rationale being that they knew better the expertise of the candidates and would pick the person most capable of benefiting the whole. Disciplinary

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issues were taken out of the hands of managers and left to team members who dealt with them directly; if you came in drunk or stoned, for example, you were affecting the reward shares of others as well as your own.

SO, THERE IT IS In summary, the evaluation and reward process of an organization does more to shape its culture than any other thing. In most present-day companies such pro- cesses continue to encourage competition or conflict when they should encourage cooperation. Companies using the bell-shaped density curve model as a means of driving increased productivity are headed in the wrong direction. This model creates a defensive climate; energy that could be used to help improve productivity is instead wasted on defensive maneuvering. To move in the right direction, companies should focus on the reward part of the process rather than the evaluation part. Setting up a reward system that encourages coop- eration is not that difficult. Once the reward is truly tied to team productivity, the evaluation of individual efforts takes care of itself as team members themselves become the evaluators.

References

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Lloyd , K. ( 2009 ). Performance appraisals and phrases for dum- mies . Hoboken, NJ : Wiley .

Peters , T. ( 1988 ). The leadership alliance (DVD). Cambridge, MA : Enterprise Media .

Roth , W. ( 2000 ). Getting beyond the myth of the bell-shaped density curve . National Productivity Review , 19 ( 2 ), 29 – 32 .

Roth , W. ( 2005 ). Ethics in the workplace: A systems perspective . Upper Saddle River, NJ : Pearson Prentice Hall .

Roth , W. ( 2009 ). Is management by objective obsolete ? Global Business and Organizational Excellence , 28 ( 4 ), 36 – 43 .

Roth , W. , & Ferguson , D. ( 1994 , September). The end of per- formance appraisals ? Quality Digest , 14 ( 9 ) 52 – 57 .