Should the Annual Appraisal Ritual be Overhauled?

Many asset management companies use the annual appraisal system to review staff performance and help employees set goals for the upcoming year. At the same time, it is often used as a basis to calculate a salary raise. However, some are concerned that this yearly ritual may discourage staff and jeopardize relationships.

In an interview with Financial Times’ Ignites Asia, Dr. Anna Tsui, Assistant Dean (Teaching and Learning) and Senior Lecturer of Department of Management at The Chinese University of Hong Kong Business School, says linking the results of an annual appraisal with salary decisions via a so-called “forced distribution” performance evaluation method can be problematic.

Assessment by “forced distribution” requires managers to assign ratings to their employees. Typically, managers will divide their staff into three categories: The top 20 percent get A ratings and raises; the middle 70 percent receive B ratings and get a lower pay raise; and the bottom 10 percent get a C grade with no raises or bonus.

Dr. Tsui believes the emphasis during the annual appraisal should be on how to improve employees’ performance and identify their training and development needs rather than salary discussions. But instead, companies very often link the results of the annual appraisal to a future increment in salaries, so the discussions naturally veer to the territory where employees try to prove their superior performance over their colleagues.

In some cases, employees would argue they have met the goals set out for the past year and deserve an incremental increase. However, managers, who are subject to a limited budget, are often unable to offer pay increases to all who deserve them, and can thus be forced to give lower ratings to some employees who deserve higher ones.

Dr. Tsui says this often changes the whole context of the appraisal from evaluating and incentivizing improved performance to negotiations over a pay raise, where some employees inevitably end up feeling dissatisfied rather than incentivized.

She suggests companies to delink the annual appraisal process from salary or reward discussions and instead, adopt two separate review systems.

Dr. Tsui says the annual appraisal should solely focus on giving feedback and identifying areas for performance improvements, while a second system should be used for the purpose of negotiating salary increases based on budgets, profit and individual sales results if appropriate… Read More

Source: Financial Times – Ignites Asia
Date published: 23 March, 2016