If you’re an HR executive or a forward-thinking manager who is up on your HR trends, you’ll already have heard the news: the annual appraisal is quickly on its way out. Article by Stuart Hearn, CEO – Clear Review.

This isn’t a surprising statement anymore, with dozens of articles proclaiming the demise of the annual performance review and discussing its replacement: continuous performance management. This is a new way of monitoring and encouraging performance and necessitates regular, meaningful performance discussions year-round. It’s being accepted and adopted by organisations across all business sectors and it is centred around three core principles: Employees should constantly be working towards achieving short-term SMART objectives; Employees should be receiving frequent, real-time feedback; Employees should be having regular, future-focused performance conversations with their managers.

As you can see, the premise of continuous performance management — known to some as agile performance management – is incredibly simple. What isn’t so simple is the question of how to handle pay and bonuses following a shift towards this new style of performance management. In fact, this is a question that often gets asked, but is rarely covered in articles online. It’s important to discuss this concern, as a solid and well-thought-out system needs to be in place before HR eliminates performance management tools such as employee ratings and annual appraisals.

Below, you’ll find information on how to handle the issue of performance-related pay and bonuses when you do away with quantitative annual appraisals and move towards a more constructive, qualitative approach.

Why is this a question we should be asking?
The issue of how we can address performance-related pay is something that needs to be covered, because traditionally, companies have based these decisions on ratings taken from annual appraisals.

As continuous performance management involves the removal of annual appraisals, experienced managers are left with a void and lots of questions. They want to be fair and duly reward employees, but with a lack of information and no answers to perfectly reasonable questions, they might end up getting frustrated with the new system. They might even assume continuous performance management doesn’t work. This isn’t the case, but the transition from one system to another might take time.

Switch your focus from quantitative data to qualitative feedback
Generally, HR and managers love data. It provides them with the information they need to make informed decisions. However, even if you accumulate a lot of in-depth data, it might not be entirely reflective or helpful. For example, you might have employee ratings for every single employee on file, but you won’t know how much effort the employee is making to improve. You might know how many sick days an employee has taken off in the past year, but you likely won’t know much about their struggles with workplace stress. You also won’t know much about how often managers and employees are talking and exchanging feedback.

Regular performance check-ins allow employee and manager to develop a relationship. This improved communication will give managers more of an understanding of how an employee is performing, meaning they will be in a better position to advise on pay and bonuses. This is fairer to the employee and more effective overall. It’s an approach that requires a shift to more qualitative data, which can be quite an adjustment. Ultimately, though, employees will receive fairer compensation. De-couple your performance measurement from your regular performance conversations

There are a number of approaches you can take to measuring performance, but regardless of which option you take, you should adhere to one simple rule: divorce performance measurement from regular performance conversations. The whole point of regular performance discussions is that employees are given the freedom to openly discuss performance issues and concerns without judgement. When this is established, managers can help employees overcome these issues, provide training and ultimately improve performance.

However, if you add any form of performance measurement or assessment into these conversations, you can expect transparency to instantly drop. An employee isn’t going to be completely honest regarding their weaknesses or struggles if they know that this honesty will result in lower pay. The answer to this (and a solution supported by the Chartered Institute of Personnel and Development (CIPD)) is to have a separate process, outside of your regular check-ins, that operates periodically, with the sole purpose of assessing performance and potential.

Qualitative questions to ask when making performance-related pay decisions
Now that you’re living without numerical ratings, you might be wondering what questions to ask when it comes to evaluating performance-related pay decisions. Remember: there will always be an element of subjectivity involved when measuring performance, but this is also the case for employee ratings. It has been shown that employee ratings are still subject to bias, including recency bias and the ‘halo and horns’ effect.

With this in mind, here are five questions managers should ask themselves when assessing employee performance and their eligibility for raises and bonuses: Has this person made an exceptional impact above and beyond their job description and agreed objectives throughout the year? Has this person consistently demonstrated our organisation’s values and behaviours throughout the year? If you have answered ‘yes’ to both of the above two questions, are you nominating this person to receive an additional discretionary bonus? Do you have concerns about this person’s performance over the last 6-12 months? Is this person ready to be promoted today?

Managers must be completely honest about their answers to the questions above, but on top of this, they need to question what they themselves can do to help improve employee performance. Are there any training programmes available, or steps that could be put in place to help the employee? Asking questions such as these means assessing performance isn’t solely about the employee; it’s about the organisation in general, and how it can improve to encourage greater levels of engagement and productivity. Done right, this new process can help everyone in the organisation grow and thrive.