How would you design a more effective performance appraisal program for OZ Consolidated that can satisfy all stakeholders?

The case study

Its all performance at OZ Consolidated

OZ Consolidated has a five level performance appraisal system using a forced ranking distribution. Superior performers (the top 5 per cent) are rated 1, very good performers (the next 15 per cent) are rated 2, good performers (the next 70 per cent) are rated 3, marginal performers (the next 5 per cent) are rated 4 and unsatisfactory performers (the bottom 5 per cent) are rated 5. Employees rated 5 are given 3-6 months to improve their performance before they are considered for termination. Merit pay increases are awarded only to those rated 1, 2 or 3. Employees rated 4 and 5 are given only legally required pay increases. Promotion, bonus payments and stock options (granted only to those rated 1 or 2) are designed to foster a performance culture.

Problem can arise when a superstar is seen by their colleagues as belonging to another rating group. This causes envy among other workers and reluctance by them to communicate and cooperate with the superstar employee. The typical attitude is that if they are such hotshot, they dont need my help. Likewise, a problem exists with a number of employees rated 3 because they regard their rating as really meaning that they are just average. As a result, they become demotivated, and the better ones (especially the borderline 2s), frequently quit the company. A major source of contention also exists with those rated 5. Some managers argue that a 5 rating resulting in termination is too harsh, implies that the employee cant be saved, and does not sit well with an Australian egalitarian culture. Other managers argue that the system works properly by weeding out the non-performers and that by recognising, rewarding and motivating top performers it has allowed the company to prosper in a very competitive business environment.

The upshot of all of this is that many managers claim that the forced distribution of employees (were managers rank each employee from 1-5) creates to much ill feeling and should be abolished. Some managers (especially the more politically powerful), frequently argue that their subordinates are all superior and therefore, are unfairly disadvantaged if restrictions are imposed on the numbers who can receive a superstar or star rating. Conversely other managers, object to rating employees in their department a 1 or 2 just to satisfy a theoretical distribution when they regard them as undeserving. All of this has created much discussion within the HR department about how to overcome the considerable dissatisfaction with the performance appraisal program present among the companys managers and employees.