Performance Management at Vitality Health Enterprises, Inc.1. What were theproblems with Vitality Health's old Performance Management System? What werethe root causes of those problems? Answer: Vitality HealthEnterprises was seeing a very high performance in the year 2007 with 5500employees in its HQ and 1500 in its global offices. However, the globaleconomic crisis in mid-2008 brought a relative stagnation to its growth andBeth Williams was made the CEO of Vitality Health Enterprises. Vitality beganto roll out its new business strategy in the first quarter of 2009 whichincluded organizing a committee to review the policies and processes fortracking the performance goals of all non-sales and non-executive employeesacross the entire company.

 The PerformanceManagement Evaluation Team (PMET) studied the evaluation and reward system forthe next four months and discovered that the present PMS system presentedproblems for the 2500 professional Staff Problem 1: The PMS aimed atanalyzing the employee's performance and give thirteen (13) different ratings.  Reason: This lead to managerial abuse as some managers were able toinfluence the employee's rating based on his interest. As the managers wantedto save their image in front of subordinates, they did not rate the employeesfairly fearing consequences. An analysis of the distribution of ratings showedthat maximum no of employees was rated as B or C (medium level) and very fewwere put in the top performer and bottom performer category. Concluding, thishappened because managers feared that giving a D or E level would offend theiremployees and that, giving A levels would also upset employees that deservedonly B or C levels.

The root of this problem could be found in the Managers'freedom to give whatever level they wanted to its employees' because theevaluating criteria was overly subjective.Problem 2: Performance Ratings were used to determine merit-based wageincrease and other rewards. Reason: Each position had a base level monthly salary calculation andperformance band rises. The base level monthly salary was modified upward alonga pay policy depending on the no of "job evaluation points".  Individual salaries were further modified bycompa-ratio based on individual performance in the company.

As the performancewasn't fairly evaluated it led to employee dissatisfaction and demotivation.Problem 3: There was a lack ofcorrelation between the job evaluation criteria and the goals that were set byVitality's strategy.Reason:  Managers seem to define its subordinates'levels according to their 'mood' and not to a rigorous and well definedcriteria - this prevents  the  company from  assessing  properly which  employees  are contributing  to  the development of the organization. 2.

Would an employee with superiorperformance year after year keep receiving higher and higher pay increases? Answer: With the help of Beth Williams, the Performance ManagementEvaluation Team was able to review the methods and policies of the company,through benchmarking, focus groups and interviews, in order to evaluate andreward the performance of their employees. Post this exercise, they realizedthat Vitality was using a system that in fact contributed to managerial abusesand dissatisfaction and demotivation among its employees.On top of all, this feeling of frustrationamong the employees was being worsened by the point system that Vitality usedto determine salaries and raises. When developing this system, Vitalityattributed each position a base level salary, that could be increased dependingon the number of job evaluation points of each employee and the currentposition in the structure hierarchy. These evaluation  points were  calculated  through the assessment  of  job characteristics  that  were defined as relevant for Vitality'sbusiness and strategy.

The salaries of each individual were then adjusted by acomparative ratio (compa-ratio) which reflected the performance evolution ofemployees over time and it usually ranged from 80% to 125%. This part of thesalary led to very unsatisfied workers due to the fact that this processallowed employees with consistently higher performances to receive smallerraises than their less productive colleagues (the increase in comparative ratiokept decreasing on the percentage basis as the employee climbed through therange).The current compensation structure did notgive sufficient concern to the overall performance since  there was  no  bonuses or  alternative  form of  reward/recognition. Thebenchmark compensation was set at 75th percentile with regard to theircompensation peer group, which made actual compensation figures go 7-8% higherthan the competition which ensured tenure would result in a high salaryirrespective of the overall performance.Hence, it was difficult to identify and reward top performers orterminate low performers and, the low turnover experienced by the firm wasamong productive scientists and product engineers even led some employeesleaving the company.

Thus, this system was not suitable and proper for a company likeVitality Health Enterprises as it wasn't paying its employees according totheir performance.3. What are the key features of VitalityHealth's revised program? Answer: As a solution to the problems identified by the PMET, in Juneof 2009 a new performance management system was implemented by PMET with thepurpose of accurate identification of high-performing employees, as well as thelow-performing ones. This would enable them allocate rewards in a better wayand, consequently, retain and attract top talent and incentivize low performersto put a bigger effort in their tasks, motivating improved performancethroughout the company. The features of this new method implemented included:      Revision1: Shift from an absolute ranking system to a relative one. In the former,the employee was evaluated based on his own performance in respect to objectivecriteria, without any kind of comparison with other workers.

On the other hand,relative method consisted of rating employees with respect to one another,comparing their performance with that of employees in similar positions androles.      Revision 2: Institution of a forceddistribution model of performance ranking that consisted of a rating systemthat required the managers to evaluate each individual, and rank them into oneof five categories (Top Achiever; Achiever; Low Achiever; Unacceptable; NotRated), each one constrained to meet a certain target in terms of percentage ofemployees. This forced the managers to differentiate employees based on theirperformance and, having fewer categories than the previous system, made iteasier to determine which category the employee fits in and would bringdisciplined rigor to the management process.       Revision3: Codification of responsibilities and measures for each job class inorder to have a straight evaluation, based on more objective criteria, andfurther clarify the ratings process.

Defining key duties in a more formal waymay enhance operational performance and improve internal controls byestablishing accountability for each specific task. Revision 4:Development of specific individual goals for each employee, which would beelaborated by managers in coordination with their individual workers and usedas a secondary assessment tool. This is likely to promote personal development,employee satisfaction, align personal goals with organizational objectivesleading to higher productivity that will have impact in the company results.      Revision5: Rating of managers based on their performance in five aspects: meeting staffingneeds, their effectiveness in training, development and employee relations,their clarity in communication, and their implementation of corporateinitiatives. This may incentivize and help managers to focus in some core areasthat are being neglected or to correct some management mistakes that impact thecompany performance.

      Revision 6: Evaluation starting in thebeginning of the calendar year at the same time as the annual goal-setting isdelivered to employees (same review cycle). This feature potentiates highereffectiveness in the measuring process of workers' effort and avoids in acertain extent the influence of external factors/events.      Revision 7: Besides salarycompensation, this new plan uses a system of performance-related short and long-termcash and equity bonuses and limited stock options to upper levels ofmanagement. Since increases in the value of a company and its stock are highlycorrelated with employees' dedication, attributing these bonuses will motivatethem to work harder so they can reap a greater return in the future.

On theother hand, it increases the complexity of the compensation systems, especiallyin fiscal terms.Vitality's new performance management system operated in a trialperiod for the two following years. Despite the best intentions of the new CEOBeth Williams, the outcome of the new system were not the most satisfactory,with employee surveys indicating that just over half of the affected employeespreferred the new system. Therefore, the system should be further improved,taking their concerns into consideration. 4. What problems under the old systemare solved or mitigated by the new system? Answer: The new system aimedat solving the problem of multiple ranks by including 5 new categories - Top Achiever;Achiever; Low Achiever; Unacceptable; Not Rated.

The introduction ofthese 5 categories was successful in showing a definite shift in thedistribution of rankings. This helped in curbing the initial problem of notidentifying top and bottom performers and grouping the employees together inthe mid band. The new system alsoaimed at adjusting the compensation. The new system unlike the previous onerelied on short and long term cash and equity bonuses. The aim was toincentivize the top performers to motivate them and make them stay back. Inaddition to cash incentives, the new program also had a stock option for uppermanagement and directors as an incentive to incorporate the new PerformanceManagement System.

5. What problems arise under the newsystem and what issues are still not resolved from the old system? Problem 1: This system could be controversial due to the competition itcreated, which may increase stress levels and result in an unpleasant workingatmosphere. Furthermore, it heightened the focus on individual performance anddid little for team building, which should have been highly encouraged in thiskind of corporate environment. As a further matter, this classification can becounter-productive if there is not an active talk between the employee and theevaluator, giving concrete feedback about what to do next year to get a betterranking.

Managers felt that the system of Forced distribution was too rigid. Ifan entire team performed well or poorly, the manager was still forced tonominate 'Top Achievers'. Besides, the reality is that not all employees will fitneatly into one of the categories and might end up in a category that does notreflect their true performance. The Not Rated category, which was for thoseemployees who could not receive an accurate rating as they were new to theorganisation, was too generic category and led to managers ranking all the"new" employees as Not Rated, neglecting their performance and privileging inthis way veteran employees.

Problem 2: There is a risk that employees' vision narrows and they losesight of 'the big picture'. They restrict their duties only to those which areinvolved in the their job description, neglecting others only because they arenot really rewarded. 6. Now that they are forced todistinguish, what will managers do? Answer: Managers felt that the system of Forced distribution was toorigid.

If an entire team performed well or poorly, the manager was still forcedto nominate 'Top Achievers'. Besides, the reality is that not all employeeswill fit neatly into one of the categories and might end up in a category thatdoes not reflect their true performance. The Not Rated category, which was forthose employees who could not receive an accurate rating as they were new tothe organisation, was too generic category and led to managers ranking all the"new" employees as Not Rated, neglecting their performance and privileging inthis way veteran employees.7.

When might relative performancemanagement systems be preferred? Answer: The system of forceddistribution in contrast to the absolute ranking system was adopted toeliminate the key problem of bulk employees receiving high ratings even whenthe department had failed miserably in meeting goals.  The aim of theintroduction of a relative is to distinguish the top- performers from thenon-performers among all employees. However, the new relative approach revealedto be too rigid and inappropriate and, therefore, some managers claim thatsometimes they cannot select the best ones and they are only selecting highperformers to satisfy the distribution curve defined by the HR department.8.

Why were managers lumping allemployees together before? Answer: The managers werelumping all the employees together as a result of 13 different ratings rangingfrom A to E. Few managers were able to influence the employee's rating based onhis interest. The managers were protective about their image in front of theirsubordinates resulting in unfair ratings fearing consequences. An analysisof  the distribution of ratings showedthat the maximum number of employees were grouped together under band B or C asa result of managers fearing a band of D or E would offend the employees andgiving a level of A for the fear of upsetting a sense of teamwork andegalitarianism within the R&D groups which led to dissatisfaction among thetop performing employees. Managers had the freedom of distributing the ratingsbetween the employees owing to the subjective evaluation criteria.

 All these reasonstogether contributed to the cause of managers lumping all employees together inthe former Performance Management System.9. Is pay more closely related toperformance under the new system? Answer: The new PMSincorporated a system of performance related short and long term equitybonuses. This also allows for limited stock options to the top management anddirections as an incentive to successfully implement the new PMS.  The incentives aremore related to performance than the base pay and appear to be a motivatingfactor for the employee. However, there should be a new system of performancepay out that does not include a confusing forced distribution but valuesindividual performance.

10. If you were part of the PerformanceManagement Evaluation Team, what changes would you recommend and why? How wouldyou implement these changes?   Answer:Recommendation 1: performance appraisal could be made through a list of keyattributes and respective degree of competence (Not a Strength, Sufficient, AStrength). Besides, HR department could use a performance coding thatcategorizes the employee's performance without giving them a label. Through thecolor maps, for example, company is able to define performance and compare itwith a potential one, in order to understand if employees require replacementor not.Recommendation 2: Create objective criteria to define each of the rating levelsfor each of the dimensions that are being evaluated, and at the same time makecomparison between employees.

The aim of the introduction of a relativeapproach was to force managers to differentiate the subordinates: allows thecompany to distinguish who are top- performers and non-performers among allemployees. However, the new relative approach revealed to be too rigid andinappropriate and, therefore, some managers claim that sometimes they cannotselect the best ones and they are only selecting high performers to satisfy thedistribution curve defined by the HR department. When using an objectiveapproach, managers exactly know in which category the employee fits into. Ifwell defined, these objective criteria, followed by a candidate comparison,will allow the performance evaluation to reflect who are the ones who should beretained and rewarded and the ones who need to be trained or fired.

Recommendation 3: As Vitality Health Enterprise aims at revising their newcorporate performance management system in conjunction with the corporatevision they should ensure that the corporate performance management is aligned.The common tool to align the PMS with the strategy is Kaplan and Norton'sBalanced Scorecard.The BSC framework consists of four elements –Financial, Customer, Internal Process and Learning Development. By cascadingthese perspectives to the performance review, managers and employee always feelwhat they are reviewing and conducting is a part of their job responsibility measuredthrough KPI.