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For the past 11 years we and our partners have conducted a study of metrics in the distribution center. While the focus in the past has been on the key metrics used by managers, this past year (and again in 2015), we expanded the study to look at those factors impacting overall performance. Clearly, one of these factors is how HR rewards performance. There are three basic approaches we studied:
Behavior-based Performance appraisals reward employees who exhibit the desired behavior in their actions according to the expectations of the firm. For example, if the firm is focused on relational strategies, then the behavior to build relationships is rewarded. If the focus is on innovation, then the behavior of seeking innovative solutions is rewarded.
Developmental-focused Performance appraisals focus on rewarding employees who are seeking to develop and increase their skills according to the goals of the firm. This requires training, either internally or externally. This is generally tied to investment from the firm, which could be difficult to measure its true benefit.
Results-based Performance appraisals reward employees solely on results. The results are the results. Either it works or doesn’t work; all that matters is the numbers.
Each of these approaches to managing employees was analyzed to see which yielded the best financial performance. What did we find? Not all approaches yield the same results. In fact, those firms adopting a results-based approach had no significant financial benefits at all. Those using a developmental-focused approach experienced lower firm profitability and market share compared to their competitors. Intuitively this makes some sense; employees were given an opportunity to improve in areas other than their actual job. However, firms should be careful not to neglect developing new skills in their employees. Many times, new skills are required to change the behavior of employees to match the strategic goals of the firm, which can have a long-term positive effect on financial performance. Accordingly, those firms adopting a behavior-based approach fared better; financial performance was positively related to this approach. And, as a bonus, the annual workforce turnover was lower than would be expected.
HR management matters. It will be hard to solve the talent crisis. Attracting the right talent is just one piece of the puzzle. You also have to keep them when they get in the door. Using the right performance approach can help.
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