It is thought that in the war for talent, having a system that rewards performance, a meritocracy, is one that highly talented individuals would gravitate to.  In other words, employees would want to work in an environment where rewarding and promoting employees is based on their merit.  However, implementing meritocracy is not that simple.  One of the major issues many organizations deal with today is how to develop and implement an appropriate performance management system.  If the performance management system is out of whack, how does that impact meritocracy?

A study by Emilio J. Castilla, Professor of Management at the Massachusetts Institute of Technology Sloan School of Management, examined the gender and race implications of seemingly impartial, merit-based employer bonus systems.  He focused on whether unconscious bias was held in check or still played a role despite a system that was allegedly designed to minimize or eliminate its impact. 

According to Dr. Castilla, “[w]hen managers believe their company is a meritocracy because formal evaluative and distributive mechanisms are in place, they are in fact more likely to exhibit the very biases that those systems seek to prevent. . . . According to my findings, the very belief that an organization is meritocratic may open the door to biased, nonmerit-based behavior when managers make key individual-level career decisions.”

What does this mean?  According to study, women and minority men in the same organization, in the same job, and with the same supervisor, receive lower salary increases than white men—even with the same performance evaluation scores when it is presumed to be a meritocracy.  In particular, in his longitudinal study of a large service organization, he found that the annual salary growth for women was 0.4% lower than for men, and African Americans and Hispanic Americans received salary increases that were 0.5% lower than equally performing white employees. Dr. Castilla also found that workers born outside the United States had annual salary increases that were 0.6% lower than U.S.-born employees.

Over time, these differences add up to greater disparities.

Dr. Castilla also notes that many companies “decouple” merit to performance in an attempt to be fairer to employees.  What he found is that higher level managers made merit decisions and the biases were still in play.  In other words, performance and merit discussions usually involved a great deal of subjectivity and “the typical performance evaluation process is vulnerable to biases with respect to gender, race, nationality, and other personal factors not related to performance.”

However, Dr. Castilla also found that in an environment that is not considered a meritocracy, the opposite may be true.  Managers may try to compensate for the “apparent” unfairness in the environment and give women and minorities higher increases, trying to overcome their inherent biases.

So how does and organization increase fairness to a meritocracy?  First, Dr. Castilla recommends more transparency in the merit increase process.  He compares the processes in terminations and promotions and finds that less measurable bias is found when decision-making is increasingly transparent.  Salary raise decisions generally are opaque and need the pressure that transparency provides.

Second, he recommends a three prong approach to ensuring fairness in merit increases. To begin with, Dr. Castilla recommends having a performance reward committee monitor reward decisions.  Next, he recommends that all senior managers have to follow a formalized process for assigning rewards based on employee evaluations and to briefly justify the merit increase.  Finally, the performance award committee would have the right to change any merit recommendations when the need arises.

Third, Dr. Castilla recommends that organizations focus on more accountability and transparency in the merit processes.  Organizations will need processes and procedures that managers are required to follow and managers who deviate must be held accountable.  Next, he recommends both process and outcome transparency be implemented.  Not everyone needs to see the process, but it is important that the organization identify those who should, and again hold them accountable for any issues that may found or arise from the process.

HR can ensure that unconscious bias is reduced throughout the process by implementing some of the following according to Michael D. Thomas of Ogletree Deakins:

·       Ensure that pay and bonus policies are legitimately related to performance and are nondiscriminatory in their application.

·       Train all supervisors and managers to avoid wage discrimination and to identify unconscious bias.

·       To the extent possible, increase transparency in salary guidelines and requirements for bonuses. Employers may want to clearly convey these guidelines and requirements to employees so that they understand the employer’s expectations, which must be met to obtain a raise or bonus.

·       Use a diverse team of reviewers to determine bonuses.  The more diversity there is in the decision-making process, the more likely HR can identify and correct bias before it becomes a discriminatory practice.

Probably the best practice is to award merit increases uniformly and keep it unrelated to the performance review.  By doing so, the performance review can focus on employee improvement and development.  Transparency will be important in this process as well as manager calibration, what one manager says is high performing may not be high performing compared to other employees.  And for those high performers, reward them through incentives or bonuses.

Sources:  Achieving Meritocracy in the Workplace, Dr. Emilio J. Castilla, MIT Sloan Management Review, June 13, 2016; Ogletree Deakins 12/28/16

ASE is offering a webinar on January 25th to learn how our performance management tool, Constellation HR, allows managers to have a more objective, ongoing conversation with employees about performance.  To register or learn more, click here.

In addition, join us February 2nd in Livonia for the Performance Appraisals: Performing and Conducting class.  Click here to register or learn more.