The missing link between daily performance and appraisals

Workplace performance is a pretty subjective thing on a day-to-day basis. Why do companies believe they can objectively rank every employee's performance over 365 days?

I grew up in a small town in outback Australia.

We all had pretty low socio-economic statuses and limited job opportunities.

So I escaped to Sydney after school. Four years later I graduated with a First-Class Honours degree in Statistics and Pure Mathematics.

Then I spent around seven years working in mergers & acquisitions at Gresham, Goldman Sachs and J.P. Morgan.

And now I'm very proud to be the CEO of Howamigoing, a London-based tech company on a mission to prevent 1 million people from having painful performance review processes.

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This journey from big open spaces to big city lights has exposed an unfair practice amongst companies of all sizes.

It's the practice of taking a finite output (company profitability) and allocating it amongst people based on an almost infinite number of inputs (employee performance).

It's also known as performance-based pay, the engine behind the performance review.

Performance-based pay is not a bad thing. The problem is the lack of transparency around how it's actually calculated, and that employees are told it's their performance that determines their pay when it's actually the company's performance that matters.

So, leaning on my Mathematics degree, I'm going to explain the situation using some simple maths.

This will give you a water-tight pitch to your manager in case your "performance" in 2019 doesn't land you the pay you expected.

Part I: An employee is not a machine :-)

We are humans. You don't need a university degree to figure that out.

But we do need reminding that as humans, we have faults. Lots of them.

But more importantly, we have thoughts, feelings and stories unique to us.

And every day, we bring our unique thoughts, feelings and stories to work.

They collide with the unique thoughts, feelings and stories of our colleagues.

This makes our "performance" in the workplace a little unpredictable.

Part II: We have good days and bad days.

Such that, on any given day, you could describe your work as either:

(1) Above average,
(2) Average, or
(3) Below average

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Over the course of a month, you could simplify this a little more and say that you either had "a good month" or "a bad month" (just like a company does with its financial reporting).

Putting aside for the moment that "a good month" to you might be "a bad month" to your manager, this is a simple but fairly realistic model for how to view your performance.

And in Statistics, this is what we call a random variable.

It's just like tossing a coin, except for some months of the year (e.g. Summer) the probabilities of having a good month vs a bad month may not be 50:50!

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Part III: But! You get graded by the year when it comes to pay.

Let's assume you work twelve months in the year.

So then, with at least two outcomes each month (a good month or bad month), there are 2x2x2x2x2x2x2x2x2x2x2x2 = 4,096 possible combinations of your performance in 2019.

(Just like if you tossed a coin twelve times, there are this many possible head-tail combinations.)

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But I'm going to simplify this even more.

Thanks to a human phenomena called Recency Bias, we tend to pay more attention to things that happened in the near past vs things that happened a longer time ago.

This means that when you have your performance-based pay discussion in December, your manager will focus more on what you did in H2 vs what you did in H1.

(Hell I can't even remember what I had for lunch two weeks ago let alone a whole month of work from one of my employees eleven months ago.)

So in our most simplified scenario of your performance in 2019, there are six-months' worth i.e. 64 possible performance combinations.

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Part IV: Here comes the manager magic!

Now, when I speak to managers, they tell me that their appraisal process ensures an employee's annual performance is accurately captured in their compensation decision.

They say:

"Julian, we have a tried and tested 5 point scale. Everyone knows it and it works."

They continue with:

"Employees are given a score of 1 to 5 by their manager based on their performance throughout the year."

And then:

"We can only give so many 4s and 5s across the business so the department heads then gather and create a bell-curve to scale people up or down."

Finishing with this little nugget of gold:

"Well, except if the business had a tough year, then we can't afford to give anybody a pay rise. Then we need to adjust the scores and reframe our performance feedback."

It looks something like this:

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Now here's the manager magic.

There are (at least) 64 possible performance outcomes for you this year.

But only five pay rise outcomes.

In Algebra, this is what we call a surjective function.

Stay with me here.

This just means that for every pay rise outcome, there is at least one performance outcome. But this performance outcome isn't unique for that pay rise outcome.

In other words, there is no formula a manager can use to objectively determine your pay rise based on a year's worth of your work.
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So usually what happens is this decision tree for your manager:

1) "Do I care if this employee leaves the business?"

2) (If yes) "Do I think they'll leave the business if they don't get a pay rise?"

3) (If yes) "Do we have enough budget to give them a pay rise?"

4) (If no) "Shit."

Part V: Let's just work as a team, please?

Companies can't give a pay rise if they haven't made enough profit. And the amount of profit comes down to teamwork (excluding sole traders).

So let's just cut the bullshit and behave like the advanced thinking species we claim to be.

If a company has done well enough this year and generated enough profit to give any staff a pay rise, then the spoils should be shared proportionately across all staff based on relative salaries.

If someone has earned a promotion, then sure, they deserve a higher pay rise to coincide with the added responsibility. With greater risk should come greater reward.

If someone has been underperforming, i.e. a majority of their team believe they are not meeting the basic responsibilities of their job description, then that's a different discussion entirely and I won't tackle that here. These people shouldn't be hearing this news for the first time at year end.

This approach avoids teammates competing with each other over the same pool of cash, the size of which is determined by market forces and budgets, not an individual's performance.

In Statistics, that's what we call a fair game.

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Part VI: Putting this into practice this year.

Let's fast-forward a few months. You're in your year-end discussion with your manager.

If they say: "We won't be giving you a pay rise this year."

Then you say: "Did anybody get a pay rise?"

If their answer is "No" then don't be hard on yourself. Sounds like a tough year for the business (was this communicated to you at all?).

If their answer is "Yes" then respond with:

"How was it determined who received a pay rise and who didn't?"

"...Because on any given day I could have a good day, an average day or a bad day. Or, put more simply, for any given month I could have a good month or a bad month. The same as you, we're both human :-). And if you add up all the possible combinations of good and bad months, well there are at least 64 combos in the last six months. For the whole year there are 4,096. So I'd like to know where I came out in 2019 on the scale of 1 to 4,096. That way we can better pin point where it was along the line that I didn't contribute to the company's profit this year but where other people did."