Category Archives: Employee compensation

Grading Employees Fails the Grade

The traditional method of employee “performance reviews” has not only lost its effectiveness (if it ever was), it has become counterproductive.

I don’t know about you, but for me it made no difference whether I was the “reviewer” or the “reviewee,” the ritual of the annual job “performance review” always struck me as akin to evaluating the past and appraising the future based on the ruminations of a demented soothsayer. In short, they were, at best, a waste of time and most often they did more harm than good.

That is unfortunate because “performance meetings” between a manager and a subordinate can be a powerful tool for cooperative relationship-building, Review2increasing morale, instilling motivation, rewarding effort and ultimately, enhancing performance. No matter what the level of the job or responsibility, everyone wants honest feedback on his or her performance.

Yet, employees for the most part look upon a looming “annual performance review” with trepidation; they’re unsure how the boss views their effort and work. And the truth is that most managers see conducting the annual performance review of each employee as a burdensome chore, rather than an opportunity to communicate and build a deeper level of trust and respect with the subordinate. These dichotomous feelings of both the employee and the manager materialize for the simple reason that the traditional concept of the annual performance review is fatally flawed.

Rethinking the Employee Review

The artificial and sometimes awkward annual sit-down with the boss to have one’s job performance “rated” with such clear and defining terms as “outstanding,” “above average,” “satisfactory” or “needs improvement,” has been used to assess the performance of employees for generations. But it has outlived its usefulness – if it ever had one.

One specific weakness of the grading approach is that the subordinate’s future is dependent on the caprice of the boss. It is a two-way street as well, because often the one doing the rating seeks to avoid direct conflict with the employee and does not want to “hurt their feelings,” so there is a tendency to “over-rate” the performance of the employee. And that disingenuousness on the part of the manager can end up causing even greater problems.

These negative dynamics inherent in the traditional performance review system only leads to confusion and frustration for all participants. When the employee feels the assessment of the boss was unfair or inaccurate, there is little or no recourse and this directly impacts their morale and effort. When the manager is less than candid about performance –especially if it has been poor – it makes it difficult to take corrective action in the future. There is no question that this system is inefficient, ineffective and hangs on only because it is ingrained in the long-established corporate HR mindset.

Beginning to Recognize that Grading is Failing

The good news is that companies are beginning to recognize the weaknesses in the traditional performance rating exercise. The bad news is that they don’t seem to know how to fix it. This conundrum was brought home in a Wall Street Journal article. The Journal article aptly pointed out, “As companies reinvent management by slashing layers of hierarchy or freeing workers to set their own schedules, performance ratings with labels like “on target” stubbornly hang on.” The article pointed to a long list of some of the largest companies – Gap Inc., Adobe Systems, Intel Corp. and Microsoft – that recognize the weaknesses inherent in the traditional performance review process, but seem stymied in their efforts to create a better system. The problem is that these and other companies are locked into the past and are trying to patch fixes on an intrinsically bad system, when an entirely different approach is needed.

There is a Better Plan that can Make the Grade

How would you like to be in a school that not only conducted open-book testing, but also allowed you to grade your own test? Schools that have experimented with this approach have discovered that students given this freedom and responsibility were not only more serious about the effort, but ended up learning more. A variation of this approach was used for performance rating by one company I know and the results were amazing.

What the company did was to turn the “performance review” upside down by conveying the responsibility for assessing the performance of the employee to the employee. Not only did the employees end up more involved in the process, they established higher standards of performance and were more demanding on themselves than any manager could reasonably ever be.

Here is how it worked:

At the beginning of each year the employee was asked to list the five most important goals and objectives they had for their job in the upcoming year. Then they were asked to enumerate the specific actions they would take to achieve these objectives. Next, the employee was asked to list his or her three greatest strengths and weaknesses. Once these strengths and weaknesses were cataloged, the employee was asked to identify three specific efforts they would make to leverage their strengths and an equal number to correct any weakness. For the final step the employee was asked to write two or three paragraphs summarizing what they would be able to report as their performance at the end of the year.

This entire process was in collaboration with and support of the manager. This put an onus on the employee to be the ones setting the standard of performance and accountability. Once all was agreed to, both the employee and the manager signed the “plan of performance.” Then each quarter the manager and the employee would have a brief meeting to discuss the activity and progress the employee had established and committed to achieve. If adjustments were needed, they could be made at that time. At the end of the year there would be an “annual review.” in which the employee – not the manager – would take the lead. In effect, employees would “grade” their own performance based on the goals and objectives they had set for themselves.

The reality is that we know better than anyone if we are performing well. What the company discovered was that by using this approach to “self-directed performance reviews,” the employee set higher standards, had more of a sense of personal accountability and made a greater effort to meet established goals. Allowing the employee to set their own goals and performance standards within the job was a great lesson in empowerment and personal responsibility. It also fostered a feeling of trust and respect between the employee and the manager. This in turn promoted collaboration between the manager and the employee, with the manager in a support, rather than demand role.

This “open book” approach to performance review may seem like Pollyanna to those locked into the constraints of the traditional graded performance review system, but there are two things in its favor – it works and the old system has failed. Not only is this new approach simpler, it eliminates conflict and uncertainty while involving the employee in a way that makes them part of the process, not its victim. In short, it gets a passing grade.




Is the Power in You to Empower Others?

The promise of most business leaders to empower employees has about as much credibility as a politician’s promise to bring about change

No management technique is more talked about, praised and promised than the concept of employee empowerment. The idea of empowering employees is held up by business gurus as some form of management nirvana. Rare is the business executive who does not avow devotion to empowering employees and the benefits derived from employing it. And yet, for something so universally touted as an invaluable management tool, it’s amazing how rarely it is taken out of the toolbox. The truth is, if there is a popular management concept more honeycombed with hypocrisy, myth and duplicity than the idea of “empowering employees,” one would be hard pressed to find it.

There is a simple reason for this disconnect between the lip-service praise for employee empowerment and the strong reluctance on the part of many managers to implement the concept. Most corporate managers simply do not understand what it means to empower employees. Too often, they mistakenly equate giving power to employees with a reduction in their own power. The reality is that empowering others actually enhances the power of the leader. But for those managers who have invested their whole career in an effort to achieve a position of power and are married to this misconception that empowering employees is losing power, it’s understandable why the idea of giving away any of their hard-earned power would be an anathema to them.

These leaders fail to understand the unique – seemingly conflicting – characteristics of corporate power and that is that power hoarded ultimately weakens and is lost, while power that is willingly apportioned will, in the long run, magnify the power of the one who shares power.

The real meaning of empowering employees – something rarely mentioned or understood – is not the actual transfer of power – with all its rights and responsibilities – from the manager to the employee; the manager retains all the functional power of their position. Rather, it is the sharing of the essence of power that empowers employees.

Ask yourself: What is the real value of power? Isn’t the essence of power having the ability to have some influence and control over events that will impact you and your future? Do you feel better about yourself and more involved when you believe that you have a say in what happens in your life? Do you feel a sense of appreciation and loyalty toward those who put you in a position of power?

How you answered these questions can help you understand the real reason why empowering employees is such a potentially powerful management tool. You see, the empowering of employees does not mean giving your power away; it means retaining your power, but sharing it. The manager retains all the functional power of their position, but they share the value of having power with employees, so that they can, in fact, influence the actions of the organization and feel they can make a difference. It does not mean the leader has abdicated the power to make the decision, but it does mean that others feel empowered in the process of making the decision.

Enjoying the Fruits of Your Labors

If you worked hard to attain your power and enjoy the feeling of having it, don’t you think those who work for you would enjoy the same feeling? If you are the one who makes others feel empowered, isn’t it natural for them to feel beholden to you for the power they are allowed to share?

The truth is that most employees really don’t want the risk and responsibility that comes with actual power, but they do want the feeling that they can make a difference in the organization and that their talents and experience are valued in a way that can influence decisions that are made by those in power. The power of the leaders who follow this philosophy is boosted because the employees so empowered – with the ability to influence and make a difference – have a strong incentive to follow and support the leader who is the source of their empowerment.

Using Your Power to Empower Others

Once you truly understand the concept of empowering employees, you can then take the steps to make it happen: building trust, showing respect and offering consistent, open communication.

A leader empowers others by trusting others. Trust is built when an employee is assigned a task and then given the support, tools and authority engaging-and-empowering-184x184to complete it. If a leader exhibits trust in the employees to do their job – by avoiding hovering over them and micromanaging – then the employee feels empowered to make a difference and has incentive to do the best job possible.

A leader empowers others by inviting input. When a leader discusses issues with employees, asks questions, seeks input and asks for recommended solutions, it is a clear sign that the leader respects the knowledge and experience of the employee. Such action empowers the employee to participate and be involved. This approach does not transfer the power to make the final decision to the employee, but it does empower them to influence the final decision.

A leader empowers others by sharing Information. Information is power, and being “in the know” is always equated with power. So much so that many leaders seek to hoard and hide information lest its dissemination dilutes their power. When information regarding vision, plans and results of an organization are consistently, openly and honestly shared with employees this “being in the know” gives them the feeling of importance and empowerment that encourages participation and ownership.

A leader empowers others by recognizing and rewarding the accomplishments of employees, being accessible and building open relationships with employees, showing concern for the future of the employee by investing in the development of their knowledge and skills and by creating a transparent culture that liberates the potential of the employee in a way that allows them to feel that they do have the power to make a difference.

Any one of these actions regarding, trust, respect, communication and the other elements of empowering employees can be used by a leader without giving up one iota of real power; and yet by sharing the benefits of having power the leader empowers others.

And the Moral of the Story …

If a leader is going to seek to empower employees it is first important to understand exactly what that means. Many leaders are under the misconception that empowering others equates to a loss of their own power. Just the opposite is the reality. The more a leader empowers others, the more power they will acquire. The true essence of empowering employees is not abdicating power, but in sharing the benefits of power which boil down to having influence within the organization and being in a position to make a difference. And, that’s the difference between talking about empowering employees and actually benefiting from the effort to do so.


ESOP – The Fable and the Fraud

ESOP is a fanciful fairytale of sharing spun amidst the props of smoke and mirrors.

I have always been a believer in the motivational power of parallel interests that are created when employees share an ownership interest in the company they work for. It puts everyone on the same page and allows those who create value to share in the reward of success. And I know it really works.

After all, I helped create a very successful company – LifeUSA – that was founded on the premise that success is more likely to be achieved using a business model of direct employee ownership. But at the same time, I have also harbored the opinion that the employee stock ownership plan known as ESOP is not the best way to achieve that objective; it may, in fact, do more harm than good. The truth is that in many cases ESOP is an acronym for Employees See Only Promises.

My concerns about ESOPs emanate from the fact that they are a very complicated way to create parallel interests: they promise employee ESOPownership but fail to include rights of ownership. Plus, there is the potential for conflict of interest, which run counter to true parallel interests.

What ESOPs do is create a synthetic form of “group ownership” for employees as opposed to true, individual ownership that is enjoyed by company founders and management. Sure, using  ESOP “ownership” as a way to motivate employees  is better than no plan at all. But these plans are often more effective at demonstrating management’s desire to have their cake and eat it too, since they engender a feeling of false promises among the rank and file.

A Growing Concern

As ESOPs have grown to include almost 12,000 companies, the federal government has become concerned with the potential for abuse – if not fraud – that can occur in the structure and management of these plans. The Wall Street Journal recently reported that the federal government is currently the plaintiff in 15 lawsuits related to ESOPs. Virtually all of this litigation revolves around the potential abuse in the valuation of company shares (often sold by company founders or senior management) purchased by the ESOP “for the benefit of employees.” The Journal reported that since 2010 the Labor Department has recovered over $240 million from companies that had abused ESOP plans, all of which involved stock valuation.

The Nuts and Bolts of ESOPs

Technically, ESOPs are defined-contribution pension plans, regulated under the 1974 Employment Retirement Security Act (ERISA). As a qualified retirement plan, ESOPs offer favorable tax benefits for the company and employees. For example, contributions made by the company into the ESOP to purchase shares of the company are deductible and these contributions are not taxable income to the employee until they actually receive the benefits, usually at retirement.

Even though ESOPs are considered a retirement plan for the benefit of employees, the assets of these plans can be – and often are – used to enrich the management of the company, create liquidity for existing shareholders and serve as a lucrative “exit strategy” for company founders. This can result in a significant potential conflict of interest between existing shareholders and the employees who are “buying” the shares via an ESOP.

The vast majority of companies that have adopted ESOP plans are private; meaning there is no existing “market” for its stock. The result? Not only is there is no sure-fire way to determine the value of the stock, existing shareholders have little or no liquidity, that is, a ready-made market to sell shares. An ESOP remedies these problems for existing shareholders by creating a “captive” market for their shares and the liquidity they desire.

But, you ask, if there is no real “market” for shares, how can fair value for shares be determined? Simple. Outside consultants are be brought in (paid for by the company) to place a valuation on the stock, the price at which the employees (the ESOP trust) will purchase the stock from selling shareholders.

Now comes the tug-of-war. Existing shareholders seek the highest value possible, while employees seek share price as low as possible. This creates the potential for conflict of interest that ultimately has triggered the government lawsuits over valuation. And it raises an even more important question: If the stated idea of the ESOP is to motivate the employees with a feeling of ownership, just how much motivation and incentive will be engendered in employees who feel they are being forced to buy the stock at inflated prices?

The next important question is: Regardless of the price that is determined, where is the money going to come from for the ESOP trust to buy the stock from current owners? The company is obligated to make annual contributions to the ESOP and these funds are used to purchase the stock, but from the viewpoint of existing owners it could take years for them to receive the value for selling their shares. Not something they are likely to want to do.

To solve this problem (it is really only a problem for existing shareholders) about 70 percent of all established ESOPs “leverage” the purchase of the stock by taking a loan against the stock. This works well for existing shareholders because they can put cash in their pocket now, while the ESOP must use future contributions to re-pay the loan. There is nothing inherently wrong or immoral with this approach, but it does Pay-Daycreate a potential conflict of interest and the actual interests of the selling shareholders and employees participating in the ESOP are not truly in parallel going forward. One side has received their reward, while the other side has the promise of reward in the future.

Another potential conflict of interest arises when it comes to voting the shares of stock. Even though current shareholders have been paid for their stock, management of the company often controls the voting power of shares held by the ESOP but not yet allocated to participants, and that action that could take years. Again, there is nothing illegal in this type of structure, but when thinking of parallel interests and the motivation that real ownership provides, it leaves a lot to be desired.

If the existing owners of a company are seeking a way to cash out or create liquidity in the most tax-advantaged way, then an ESOP is the answer. But if management really believes that the way to enhance the total value of the company is by putting the interests of the employees in parallel with the interests of the company, then there are simpler, easier and more effective ways to accomplish that objective than using an ESOP.

So what are some of the ways to build real parallel interests between company founders, the company and employees?

First off, at LifeUSA, all employees and sales representatives as a condition of employment were required to use 10 percent of their gross pay to purchase new stock issued by the company. If someone was making $25,000 they were required to buy $2,500 of LifeUSA stock. Since the stock of LifeUSA was not publicly traded, the cost of this new stock was pegged at the same price the founders of the company paid for their stock.

Second, there was only one class of stock – common voting stock – for all shareholders. This meant the CEO of the company and the newest employee both owned the same class of voting stock, purchased at the same price. The CEO could not benefit from his stock unless everyone in the company could also benefit from owning their stock.

Thirdly, the happy outcome was that everyone working at LifeUSA was a real, direct, individual owner of the company. This may not have been the most tax-efficient way to spread ownership in the company, but it was simple, easy to understand and in pure parallel.

Just in case you might wonder, LifeUSA moved from being a start-up company in the life insurance industry to one of the fastest growing and most successful companies of the 1990s—a vivid testament that true employee ownership does, in fact, motivate employees to work harder and produce stunning results. In 1999 — 12 years after its founding — Allianz SE purchased LifeUSA for a value of $540 million and every single one of the 800 employees working at LifeUSA received a share of that purchase price. l

More times than I would like to count, I have been told that the LifeUSA model would not work for other companies. I agree that it would not work if you did not really believe in the concept of true shared parallel interests and didn’t want to work at it. But for the most part those comments come from the non-believers, the greedy and the lazy.

There are other ways a company can gain the benefits of parallel interests created by employee ownership without taking on the complexities, complications and potential problems of an ESOP. From my perspective and experience, the best way to motivate employees to work hard for the success of the company is to develop a plan that gives the employee both the feeling and the benefits of being an owner. And the best way to do that is make them real owners.

And the Moral of the Story …

I recognize that reading the ins-an-outs of an ESOP plan can be tedious and boring, but that’s the point. If you are an owner of a company and, deep in your heart, you really want to find a way to create liquidity for yourself and even create an exit strategy, then the path for you is to pretend that your motive is altruistic and that you want every employee to enjoy the benefits of ownership. And the best way to do that is to create an ESOP.

On the other hand, if you really believe that you will gain more value by sharing value; if you believe that building true parallel interests means creating a plan under which no one benefits unless all benefit, then you will eschew any thoughts of the fable called ESOP.