Performance Management

Arrow Electronics

Compensation and Performance Evaluation at Arrow Electronics

By SAURAV GUPTA (13HS60006) Introduction
The annual Employee Performance Review (EPR) process that has been installed three years was not giving the results desired by Steve Kaufman, CEO of Arrow Electricals. There was a growing dissatisfaction in the organization among employees as well as managers regarding the ineffective EPR, which was creating a great deal of turmoil within the organization. Kaufman is now faced with the challenge of ensuring uniform calibration across 60-70 different locations of the company, identify high potential employees and improve the overall performance of each employee.

Objectives of a Performance Review Process

Identifying HIgh POtentials (HIPOs)

Improving Performance

Objectives

Distributing Incentives

Managing Promotions

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Performance Management

Arrow Electronics

Identifying HIgh POtentials: It is important for every organization to build an efficient pipeline of high performing employees who are ready to take up the leadership positions and challenging jobs. Distributing Incentives: An exercise that a company has to follow every year is distribute incentives to each and every employee of the company based on their performance. Managing Promotions: All high performers may not have the skills and ability to perform well when they are promoted. Managing so many high performing people, to find the best one for a single coveted position is a part of Performance Review process. Improving Performance: Ultimate goal of any organization is growth, and to grow an organization performance of its employees should be increased year by year. Performance Review process targets this through feedback process.

Issues with Performance Review Process

There exist several issues with the existing Performance Review process that is making it in ineffective in achieving its main objectives. Same Performance Management process for employees in all hierarchies. Employees are rated on seven different characteristics on the scale of 1-5 with two points each on his improvement areas and strengths. Average of scores in seven traits gives an employees final score. This process is same for Sales Representatives, Assistant Managers, General Managers or CEO for that matter. Final rating achieved is used for Promotions, Incentives, Retention and Layoffs. This makes it inefficient as an employees performance might be suffering from many other factors, and even a good performing employee might also have received average rating because of various other factors. Same benchmarking criteria irrespective of domain. Performance Review criteria are same for employees in Sales, Operations, HR, Accounting, etc. whereas the goals of various functions might be different. Managers of organization do not understand the importance of exercise. There is a feeling among the managers that this exercise is a waste of time and do not give the results that it is required to. They are more comfortable with a conventional face-to-face conveyance of feedback regarding employees performance. As a result of this, they do not give the necessary time and efforts to make the exercise effective. Improvement in performance is difficult to achieve using this method. This method should, ideally, tell the employees about their weaker areas and encourage them to perform better. Above average performers receive additional incentives as a motivator. However, average or below average performers do not see the need for improvement in them but instead blame the supervisors and managers to give them low rating in the

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Performance Management

Arrow Electronics

process. This dissatisfaction leads them in search of better job, resulting in increased attrition. Manager biasness in rating of employees is persistent across all departments. Some managers rate the employees who they work closely as higher, or rate the employees who is about to quit as higher in order to give him a high raise to keep him in the job. This Performance Management process lacks Goal Setting. Employees are rated at the end of the year for their performance over the past year. There was no goal setting exercise, for each employee, which makes it difficult for the employees to know what is expected of him and perform accordingly. External industry factors are not taken into consideration. If Industry is booming, there might be too many jobs available for the employees in the market. This will increase attrition if the performance management process is not aligned to give higher returns to the employees at the end of the year.

Recommendation 1 Decoupling the Objectives

As one of the issues recognized is that too many objectives are tried to be achieved using a single performance method which is leading to various problems. My recommendation is to resolve this issue by decoupling the objectives and establishing different performance review methods for each of the objectives. Recommended Performance Review methods for each of the objectives is as follows: Distributing Incentives Distribution of Incentives should be based on rating objective evaluation of the performance of the individuals. Following steps can be followed: 1. Setting quantitative goals for the individuals on various characteristics based on business targets. 2. Quarterly review of the target achieved by individuals and give feedback on the improvement areas. 3. Yearly calculation of percentage of target achieved by the individuals and distribution of incentives on that basis. 4. Setting of goals for the next year. Managing Promotions Promoting an employee out of many good performing employees is a herculean task. Following factors could be given due weightage in its calculation: 360-degree feedback process should be contacted. When an employee is promoted, (s)he is to, generally, supervise people with whom (s)he was working till now. It is very necessary in such situation to consider the inputs of the peers during promotion of employee. 360-degree feedback process is an important tool to achieve that.

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Performance Management

Arrow Electronics

Past performance should be given importance. An employee when promoted should not only have performed well in the given year but should have consistently performed over past given years. Capabilities to take up the additional responsibilities should be tested by make him work closely with the supervisor. Identifying HIPOs People with skills and abilities to take up leadership positions in later stage of career should be identified at early stage in order to have an effective succession planning for the organization. Following methods can be adopted to achieve this: Psychometric test could be conducted in order to identify the leadership traits, growth enthusiasm and other personality characteristics. Managers input on how engaged the employee is with the business. Loyalty, commitment, taking initiative and one who builds internal good will should be selected. Interview with leadership teams could be arranged to understand the business and domain knowledge of the employees. Informal lunch with senior executives to understand the person on a personal level. Improving Performance Investing into the development of skills and abilities of the people in order to maximize profits and letting go people who are holding the organization back is an important part of Performance Management exercise. Following ways can be used to achieve this: Consistent low target achievers should be identified and cordially inform about the concerns of the organization. Invest in Training and Development of the employees to develop their competency in same and cross-functional domains. Cost-benefit analysis of laying off a low performers versus hiring of an employee should be done before following this exercise. It is better to lay-off the employees in order achieve high above average performers within the organization.

Advantages
Following are the advantages of this method: 1. Manager biasness is removed by this method. 2. Goal Setting is done by agreeing with employees. 3. Performance improvement is achieved with the help of this method.

Drawbacks
Following are the limitations of this method: 1. Too much time and effort consuming. Having different performance review methods for each of the objective would require additional efforts, time and also costs. 2. Incentives are based on delivering of results. Factors like shows initiative, good business judgments, etc. are not linked to incentive which may lead to demotivation regarding factors in couple of years. Saurav Gupta Page 4

Performance Management

Arrow Electronics

Recommendation 2 Aligning Business Goals with Individual Goals

One of the issues of current Performance Management process is that Goal setting is not done and external factors are not taken into considerations.

Organization Goals (Long Term) Organization Goals (Short Term) Business Unit Level Goals

Team Level Goals

Individual Goals

Steps for Performance Management using this method are: Based on the Organizational Goal, Individual Goal should be designed for each quarter and conveyed to the employees at the start of the year. Individuals should be rated based on the achievement of the goals on various factors. Benchmarking of the employees should be done on Team/Project level and also at Peer level on different factors to provide a fair and just rating. Benchmarking with Project level employees based on the factors i. Inspires Enthusiasm, Energy, Understanding, Loyalty for Company Goals ii. Shows Initiative iii. Builds Internal Good Will Benchmarking with Peers based on the factors i. Has Position Specific Knowledge ii. Delivers Results iii. Exercises Good Business Judgement Employees who are rated below some particular threshold level should be given Training in order to improve performance. This would also serve as an incentive to the people to stay with the organization in anticipation of future growth scope.

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Performance Management

Arrow Electronics

Advantages
Following are the advantages of this method: 1. External industry factors are taken into consideration as Business Goals are designed on that basis. 2. Aligns business goals with individual goals, which helps company achieve its objective. This also helps growth of individuals with the growth of organization. 3. Custom performance management for each of the employees.

Drawbacks
Following are the drawbacks of this method: 1. In some cases, it would be difficult to align business goals with appropriate individual goals. For example, in case of IT infrastructure manager. 2. Manager bias may persist in this case too.

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