12.3 Performance appraisal and performance-related pay

12.3 Performance appraisal and performance- related pay

The base salary, as determined in the process of job evaluation, does not account for all of Polish employees remuneration and performance-related or variable pay accounts for a growing percentage. Performance-related pay refers to that part of the salary which is not paid automatically for carrying out the regular tasks linked to a job but for the individual performance of the employee holding that position.

When the Polish economy was centrally planned there were already a few elements of performance-related pay, but in the mid-1980s government restrictions on the extent of this were abolished and firms were free to develop their own systems. However few made use of this freedom and either abandoned performance-related pay altogether or retained their existing system. The old method essentially consisted in paying a fixed amount on top of the base salary at the end of a certain period, and non-payment reflected a negative assessment of the work of the employee concerned (Jacukowicz, 1997, p. 97).

According to Jacukowicz (1996, p. 30), three different versions of performance-related pay are currently used by Polish corporations:

• Model A: an allowance is paid for above-average performance. Expected average performance is reflected in the base salary arrived at as the result of job evaluation (this version is typically used by companies with an analytical system of job evaluation).

• Model B: a performance-related bonus is paid for work results that are of crucial importance to the overall success of the corporation, for example high product quality or the optimum use of raw materials.

• Model C: a performance-related allowance is a regular part of the salary and can only be withdrawn under certain conditions. In the event of extraordinary performance it may be increased. In one Polish bank this allowance is withdrawn under three conditions: distrain of the employee s salary, intentionally damaging behaviour towards the company and formal admonition of the employee by the management.

Until the early 1990s few companies regarded performance-related pay as an incentive for their employees to do a better job, but in recent years there has been increasing awareness of and readiness to use the instrument and to introduce state-of-the-art systems of employee and performance appraisal. More than a quarter of the companies examined by Rostkowski had adopted this practice between 1998 and 2000, and a further 8 per cent had introduced their system between 1995 and 1997. Prior to that time only 3 per cent had introduced such a system (Rostkowski, 2001, p. 15). Of the 61 per cent of companies that still lacked a systematic performance appraisal system, 36 per cent planned to introduce one in the near future.

According to the data collected by Rostkowski, performance appraisal is dominated by two methods : rating scales (81 per cent of companies with performance appraisal) and the essay method (35 per cent). Methods such as ranking and 360-degree feedback do not yet play an important role (3 per cent each), but they are becoming better known and there seems to be a degree of willingness among the companies planning to introduce performance appraisal in the near future to use these instruments (11 per cent for ranking and 7 per cent for 360-degree feedback “ see ibid., p. 18).

With rating scales the relevant criteria and their relative weight have to be chosen . Also required are specific scales with different levels, such as ˜poor , ˜average and ˜ excellent . The criteria often include traits such as cooperation, communication ability, initiative, punctuality and technical or work skills. The appraiser rates the employee s performance on each scale and, taking consideration of the relative weights, a total performance value is obtained (Ridder, 1999, p. 391). Most companies use between five and 20 criteria and four to seven performance levels (Rostkowski, 2001, p. 22). Smaller corporations only consider four or five traits (such as product quality, material consumption and cleanliness of the workplace) (Czajka and Krawczynski, 1992, p. 55).

With the essay method the appraiser prepares a written statement about the employee being appraised, usually concentrating on specific strengths and weaknesses in respect of job performance. The statement may be written and edited by the appraiser alone or composed in collaboration with the appraisee (Ridder, 1999, p. 388). More structured versions of the method include questions such as ˜Describe in your own words the progress made with regard to work quantity, work quality, work-related knowledge and skills, development opportunities, own strengths and weaknesses (Rostkowski, 2001, p. 21).

A unique feature of 360-degree feedback is the number and diversity of appraisers, including internal and external customers, superiors, colleagues and subordinates “ that is, everybody who is in regular contact with the appraisee and is able to give an appraisal of his or her performance (Ridder, 1999, p. 390; Rostkowski, 2001, p. 21f).

There is relatively little information on the proportion of employees in Poland whose pay is significantly performance-related, but according to an estimate by Watson Wyatt (1999, p. 2), about 80 per cent of general managers, 70 per cent of middle managers and 50 per cent of professional staff in CEE countries are currently eligible for annual bonuses. Both short-term and long- term incentives are increasingly being used and the bonuses that are paid out (as a percentage of annual base salary) are similar to those in Western Europe (Table 12.5). In fact for some Western companies the proportion of bonus pay is higher in their Polish subsidiaries than in their home country. The bonus paid to an employee for a given period generally depends on two factors: individual performance and the performance of the company. In the case of companies situated in Poland, it is estimated that bonuses account for about 15 per cent of total remuneration for upper management levels and 10 per cent for lower management levels (FAZ-Institut, 1997, p. 25).

Table 12.5: Proportion of bonus pay in the salaries of general managers in selected European countries (per cent)

	Hungary	Czech Republic	Portugal	Poland	United Kingdom	Austria	Germany
Bonus pay/base salary	29.0	16.3	21.3	37	23.3	30.4	22.3
Bonus pay/total salary	22.5	14.0	17.6	27.0	18.9	23.3	18.3

Source : Adapted from Watson Wyatt (1999), p. 1.

Long-term incentives such as stock options are also being offered by a growing number of companies in the CEE region, especially in the rapidly growing high-tech and telecommunications sectors (Watson Wyatt, 1999, p. 3). Lying behind this is the competition for experienced and talented executives and the fact that stock options can help to create an ˜ownership mentality . This latter point is particularly important for companies in emerging markets where until the 1990s employees worked for state-run enterprises . Furthermore stock options are a good way of building leverage into the pay package. A Watson Wyatt study carried out among 25 high-tech and telecommunications multinationals operating in CEE found that these companies were fairly democratic in their provision of long-term incentives: of the companies surveyed, 63 per cent offered stock options to all employees, and the restriction of stock and other long-term incentives to executives at higher levels of the organization rarely occurred in this region. The minimum period in which employees can exercise their stock options is critical in terms of tying their interests to the success of the company.