HBS Case Study: Arrow Performance Reviews

Using performance reviews to determine employee rankings and pay raises produces many undesirable effects and Arrow Electronics observed most of those effects during the first few years of using performance reviews.  This case highlights the difficulty in mapping some measure of performance to financial reward.

The biggest problem with a performance reviews is that it is not an objective or absolute measure of performance.  It is not an absolute measure because it is used to rank employees who are competing against a fixed raise pool.  With a fixed raise pool, employees already know that their compensation will not adjust significantly if they increase performance quickly.  A performance review is not objective because it relies on the judgement and biases of the manager.  Very often, subsequent managers over a group will rate individuals in very different ways.  As with any measure, the performance review can be manipulated to achieve dubious goals.

It would be better to pay employees market rate for their skills (assuming they apply the skills adequately in their jobs) and pay bonuses based on the financial success of the company.  Managers could then mentor the employees to help them improve their skills and have a higher market value.  This type of performance management will encourage more desirable behavior.

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Explore posts in the same categories: BADM 720 - Organizational Behavior

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