Best Practices in HR
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  March 15, 2022

3 reasons to avoid 360º reviews in the compensation process

No manager or HR professional would consciously seek an ineffective process. However, many HR processes and leading practices are perceived by employees as unfair. Whenever measured, the efficacy of such practices is low.

The compensation process is the most criticized by employees, leading to loss of confidence in the company. As a means of making fair and substantiated decisions, leaders and HR managers look for ways to appraise employees and measure their development, results and behavior. That way, pay raises and promotions can be more objectively justified. One of the means employed is the 360º review. Even though intentions are good, the results will not always meet the expectations. There are at least three reasons to avoid 360º reviews:

1- Inflated results

The first reason is inflated results: people tend to appraise others better, be it to avoid conflict or due to the fact that they’re appraising friends. It’s a political matter above all else, an “I’ll scratch your back and you’ll scratch mine” situation. No one wants to be the one to appraise others badly, regardless of what the real scenario is. That’ll lead to higher appraisals than what is warranted in reality. By using that result to come up with a pay raise, the conclusion will be that many people deserve it. The financial reality, however, is that the necessary money amount will be way higher than the available budget.

2- Team demotivation

Another downside to 360º reviews is that, since there are many appraisals involved, the manager needs to moderate them and make a decision. That’ll cause the team to feel like they performed the reviews for nothing. They’ll often question the need for the appraisals to be done at all, since it’s the manager who ultimately calls the shots. As a consequence, there’s a negative impact on the team’s motivation and sense of belonging.

3-Wasting time with result calibration

As if the previous reasons were not enough to drop 360º appraisals entirely, here’s another one: wasting time with result calibration.

A first calibration step has already been performed when the manager moderates the team appraisals. Regardless of the time it takes to do that, many companies will still perform a calibration step among managers. That’s a way of avoiding unbalanced appraisals. The time invested in such practice, however, is often surreal. Managers often report in excess of 20 hours working only on appraisal calibration every performance cycle. That’s right, over twenty hours… And if you happen to be a team manager, you know that time is scarce and every minute is precious.

Should we “throw out the baby with the bath water”?

We’ve mentioned three disadvantages to using 360º reviews for compensation processes. But if regarded in a different context, 360º reviews can be a great tool for feedback and a great resource for coming up with development plans.

In an environment where there’s psychological security, peer appraisals are usually very realistic and will most always be a good resource for professional development. Besides, it’ll favor relationships, collaboration and communication.

Trying to use 360º reviews for compensation purposes takes away its best qualities. Every experienced manager or HR professional knows that. How can we disconnect the feedback created with 360º reviews from the compensation process, while providing agile, fair compensation?

When it comes to compensation, the Team-Set Salaries process, developed by the agile pioneer Klaus Wuestefeld, makes that possible. As to feedback, it’s always best to promote a feedback culture in the company. The combination of both will give employees a resource for development and a perception of fairness in the compensation process. That’ll impact employees’ sense of belonging and motivation, as well as reducing employee turnover throughout the company.