Compensation
As we have seen, moving from using 360-degree feedback for development only to using it to set goals during the performance appraisal process requires work, but can be fairly straightforward. The next logical use for 360-degree feedback in the performance appraisal process is in the area of compensation. This particular transition, however, presents some distinct problems.
It has always been difficult to translate a numerical rating of performance into what is perceived as a fair pay increase. Adding multi-source ratings does not necessarily address this issue. To make an accurate assessment of performance that will be useful for decisions about pay, it is essential to evaluate not only what a manager does but also how the work is done. Although 360-degree feedback works well for assessing management behavior and leadership competencies, it is not well suited to measuring work unit results. Raters may not have an opportunity to observe work unit outcomes or have access to the information necessary to determine whether business performance targets have been achieved. Generally, it is the boss who is in the best position to make this type of assessment. So a combination of 360-degree feedback and the boss’s evaluation is required to obtain the complete picture necessary to make a decision about compensation.
The question then arises about how much weight should be given to the boss’s evaluation and how much to the multi-source feedback. When most organizations first use 360-degree ratings in compensation decisions, they give them a moderate or no weighting and gradually evolve to 50 percent or higher. There are several factors, based on nineteen years of research, that an organization should consider to determine when and if it is feasible to use 360-degree feedback for other purposes besides development. These factors include:13
1. User satisfaction: 75 percent of affected employees should strongly support the use of multi-source feedback in general.
2. Spread of scores across performance measurements: The range of scores should clearly differentiate high, medium, and low performance. If everyone appears to be a high performer, the system fails to provide enough information for pay and promotion decisions, because everyone looks alike.
3. Valid and fair feedback: Distinctions among people should represent truly high, medium, and low performance. Ratings must be based on actual performance and not on friendship, collusion, or competition, nor on gender, age, or ethnic background.
4. Accountability for ratings: Raters must be accountable for honest ratings. The percentage of invalid responses should be below 5 percent, and people who consistently provide invalid responses should be held accountable.
5. Safeguards to ensure fairness: People should understand and support safeguards that minimize scoring biases. Such safeguards include valid performance criteria, procedures for selecting competent and trustworthy raters, and a scoring method that eliminates clearly invalid responses.
Tips for Making 360-Degree Feedback Work in Pay Decisions
In general, we believe that 360-degree feedback has a clear role to play in all aspects of the performance management system. There is little downside to its use for development or as part of goal setting and measuring progress toward achieving those goals. However, if an organization wants to incorporate 360-degree feedback into its compensation and promotion systems, it should consider the following caveats:14
• Use 360-degree feedback in combination with boss’s evaluations of how well work unit performance targets were achieved.
• Multi-source feedback should initially be given low weight in the compensation decision until user confidence and support are established. Gradual increases in weight should parallel increases in user acceptance.
• Respondent anonymity must be assured, or scores will be inflated and generally useless.
• Time requirements should be kept to a minimum. If the data collection methodology is too time-consuming or cumbersome, raters may not be as thoughtful or complete when responding. Administration should be quick, convenient, and efficient.
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