Companies experience many challenges with performance management, some of which are a factor of the external environment, and some are caused by internal issues. Diana Neelman provided some examples in a recent BLR webinar.

• A culture of entitlement minimizes the effectiveness of performance management. Believe it or not, many companies still reinforce an entitlement mentality by providing annual increases or bonuses that are not tied to company performance, or by providing pay actions that do not differentiate the top performers from the others. In a true pay-for-performance environment, performance needs to impact pay and HR actions in order to be effective.
  While this is a cultural shift that takes some time to change, it is possible; however, it requires a good deal of dedication from top management, HR, and other managers to be a success. Be aware that making this change may result in turnover, but often of employees you can afford to lose.
• Inconsistent implementation by managers leads to mistrust and disengagement. Managers need to be fully trained on the process and HR needs to monitor managers to ensure that the program is being used consistently and objectively. When managers use the process differently, it puts a good deal of stress on the system and can weaken it to the point of distrust by employees.
• Too many ratings do not challenge managers to identify the truly outstanding performers. By using fewer ratings, it forces management to differentiate the outstanding performers. Otherwise, where there may be an "exceeds" rating between the "outstanding" and "effective" ratings, managers may tend to initiate a rating creep and push people to the "exceeds" rating. This in effect makes the "exceeds" rating the equivalent of the "meets" rating and is less of a differentiator.
• Limited budgets make it difficult to differentiate between performance ratings. However, this is more easily accomplished when fewer performance levels are used. Nevertheless, distinctions should be made even if they are small.

See our related article on factors that can help your pay-for-performance program succeed.

For more information on successfully implementing a pay-for-performance program, order the webinar recording of "Pay for Performance: Keys to Engaging and Retaining Your Best Employees." To register for a future webinar, visit http://catalog.blr.com/audio.

Diana D. Neelman, CCP, is a Principal and Senior Consultant with Compensation Resources, Inc. (CRI) , in Upper Saddle River, New Jersey. With over 20 years of collective compensation and HR experience, Neelman is responsible for business development and project management in all areas of compensation, consulting to a variety of industries on salary administration, performance management, and incentive compensation, with a specific emphasis on executive and general compensation matters within not-for-profit organizations.