“performance Management at Vitality Health Enterprises, Inc.” Case Study

...

Human capital emergence

The employees in Vitality are the most valuable human capital, which could create value for the company. The company could not effectively identify top performers and lower performers. The compensation system cannot motivate the employees. When the employees feel unfair of the compensation system, it could generate conflicts among the employees, managers, and HR department. The interaction between human capital, social context, and organizational work environment was inefficient. It made a negative environment for human capital emergence.

Root causes

The root cause of all the problems above was that the compensation system did not motivate employees. The system made the boundary between top performer and lower performer too vague. It didn’t effectively reward higher performance employees and coach the low performance. It also gave employees opportunities to be free riders. The compensation system needs to be modified to motivate the employees.

3. Would an employee with superior performance year after year (under the old performance management system) keep receiving higher and higher pay increases? Explain why or why not – and discuss potential problems related to this issue.

No, the employee couldn’t keep receiving higher and higher pay increases. According to the compensation system of Vitality, the individual salaries were not only based on the pay policy line formula. It was further modified by the comparative ratio. When the comparative ratio was higher, the merit increases would decrease. Therefore, if an employee continuously has high performance, his/her salary would increase year by year. The comparative ratio of him/her would increase with the increasing salary, which would decrease merit increase.

Potential problems:

Lower and lower pay increase rate for top performer

Employee dissatisfaction

Low morale

Low employee engagement and loyalty

Free riders

Turnover

4. What are the key features of the new (revised) performance management system?

- The new system uses a fixed distribution model of performance ranking. The ratings of the employees become relative. Also, the number of categories falls to five.

- The employees who are too new to the company or the job would not be rated.

- The manager and employees settle specific goals as a part of the performance evaluation. Also, the managers themselves will be rated on some performance of employee relations.

- The performance reviews of the whole company need to be conducted in January.

- The compensation does not limit to salary increases, it has added ‘a system of performance-related short- and long-term cash and equity bonuses’.

- The company offers ‘limited stock options to upper levels of management and directors’.

5. What problems under the old system are solved or mitigated by the new system? Explain

- The new system forces managers to rank with differentiation. It won’t be homogenous ratings. Due to the fixed distribution model of rankings, everyone has to be settled in the five categories with proportion requirements.

- The top performer and lower performer could be identified. With the fixed distribution model, the ratings tend to be relative to employees. There has to be comparison between different employee performances.

- The employees’ needs and feedback become more important. The managers will be rated about the performance in meeting employees’ needs, the effectiveness in the relationship and communication with employees etc. They have to listen to the employees.

- The pay does not only depend on salary increasing any more. The new system has included performance-related cash and equity bonuses to employees, and limited stock options to upper managers.

- Partiality of the managers and the effect of external factors could be reduced. All the performance reviews are conducted by January. The managers could evaluate all the employees at the same time. The timetable made them to consider more comprehensively, compare the performances and the collaborations, and restrain the effect of external rankings.

6. What problems arise under the new system (Again, be sure to discuss specific implications for value creation/value capture and human capital emergence)? Consider both the short and long term.

Shot term

It is more difficult to discuss the performance with the employees with the new system, since it ties with merit increases more tightly. It is harder to create value and emergence human capital, because employees become more offensive and less willing to accept coaching. Human capital emergence needs social context to work efficiently. The uncooperative spirits are barriers for human capital emergence.

Fewer employees perform the duties out of their job descriptions. Meanwhile, managers do not spend enough effort working on the new performance management process. The new system rewards depending on the performance of the job responsibilities. The employees and managers would feel that the extra effort would not get rewarded, so they are not willing to work on it. They do not have motivation to create more value if they could not capture more value from the extra work.

Some managers consider the fixed distribution model too strict. If everyone in a team works great together, there still has to be some employees falling into the low achiever category, and vice versa. The managers would have difficulties to allot same performance employees into different categories of ranking. Moreover, the employees with same performance would feel unfair if they were assigned to low achiever lever. When employees create value for the organization, they have the right to capture relative values, or dissatisfaction would arise.

Some managers do not comply with the new system in some ways. Some tend to allot some new employees to Not Rated ranking irrespective their real performance in order to assign old employees to the higher rankings. Some continued to use the old way of performance rankings. Some managers even lie to the employees about their ratings, or rotate the high rankings between employees from different years. The human