Read the Shifting the Reward System at Gap, Inc. case study in Part 5 of our textbook Pages 413-415. Answer, discuss, and examine the implications of the following questions:

Why do you think the new reward system implemented at Gap was so successful?

Gap, Inc. is a Fortune 500 global designer and retailer of casual apparel, accessories, and personal care products. Its well-known brands, including Gap, Old Navy, Banana Republic, Athleta, and Intermix, generated revenues of $15.2 billion in 2017. Each brand has its own design, merchandising, inventory management, production, store operations, and store design functions. The organization headquartersthe focus of this applicationincludes centralized logistics, sourcing, information technology, and legal functions as well as the finance and human resources functions that are shared with the brands. The idea of redesigning the performance management system was raised as the organization was coming out of the 2008-2009 Great Recession. The existing system had been introduced to hold on to Gap Inc.s talent during that difficult period. It was more generous than many of its competitors and reflected the companys views on corporate social responsibility. By 2012, the question was being asked, Is it working the way it should? Like other companies, most managers and employees found the performance management process uncomfortable and unclear. Moreover, Gap Inc.s culture was described as very nice, and there were real concerns that being nice had allowed managers to avoid performance problems that, over time, were becoming an organizational problem. The opportunity to shift the performance management process seemed a good idea on two counts: it could improve individual performance and begin to move the culture toward more honest conversations about peoples contributions. The existing process rated and ranked employees once a year. These scores were then plugged into a bonus calculation that gave equal weighting to the financial performance of the employees business unit and the individuals contribution. The bonus pool was established by multiplying the individuals annual salary by the target bonus of 15 percent. Thus, an employee making $60,000/year would have a target bonus of $9,000, which was divided equally between business unit performance and the managers individual contribution. If the business met its expected target level of performance, $4,500 would be allocated to the employees bonus. Higher amounts were available if the business did well, lower amounts if it did not. The individual contribution half of the bonus depended on a rating and ranking outcome. It was not funded by business performance. Each employee was given a calibrated ratingsignificantly above target, above target, on target, or below targetand ranked against other employees. Each rating, in turn, was connected to a percentage of target calculation. For example, significantly above target drove a 200 percent (e.g., 2 x $4,500) bonus while a below target rating meant no bonus. If your manager gave you a significantly above target rating in a year when your business didnt hit its financial objective, you could still receive a decent pay-out. This system put a lot of pressure on man-agers and created a competitive environment at the end of the year. Employees pushed their managers hard to try to get a higher rating. In 2013, Gap Inc.s leadership team asked Rob Ollander-Krane to lead a task force to explore, design, and implement a new performance management process. The objective was to increase the productivity and creativity of the headquarters staff and better align bonuses to the organizations performance. Ollander-Kranes design team explored the research on performance management and concluded that a good system was grounded in a sense of purpose and the ability to feel a level of mastery over ones work, provided more frequent feedback about ones work performance, and supported a growth mindset as described by Carol Dweck in her book, Mindset: The New Psychology of Success. It also needed to be easy to understand and use and empowering to managers. With respect to rewards, Gap Inc.s senior director of global compensation noted, If we truly were to raise the bar on performance, it was also necessary to more closely align the funding of our bonus plan to achievement of financial goals and enterprise objectives. If we changed how we thought about performance management but left the bonus structure the same, we would be sending mixed signals. As design-team ideas emerged that seemed to represent a new way of thinking, it would get feedback from colleagues and senior managers. Eventually, the team created the GPS (Grow, Perform, Succeed) system, an acronym that intentionally reflected Gap, Inc.s ticker symbol to send the message that performance was the key issue. The GPS process eliminated the year-end annual review as well as the rating and ranking process. These were replaced with a company-wide standard of performance communicated clearly throughout the company, We set tough objectives and work hard to exceed our goals. We do what it takes to win in the marketplace with integrity. We live the values of our company. If we fall short of hitting our goals, we quickly learn from our experience and strive to win. Managers inspire and drive performance of their teams through regular coaching and feedback. As part of that standard, the organization encouraged employees to set specific goals linked to clear outcomes, not a list of tasks. For example, increasing revenues through a specific channel, such as online or in-store, by X%. Using outcomes instead of tasks to set goals gave employees the freedom to figure out how to accomplish the goals rather than tying them to a set of tasks that might become irrelevant as the situation changes. As a guide, the organization and the brands provided three broad objectives and encouraged members to align to them whenever possible. In addition to the new goal-setting process, the design team developed the Touch Base process of performance review with simplicity in mind. It asked managers and employees in the organizations headquarters to meet regularly to have brief and informal discussions about the business. The GPS process suggested that one meeting each month be repurposed as a touch base meeting, where everyone was responsible for reviewing the groups progress against goals, sharing ideas for improvement, and updating each other in an informal setting. The GPS program aligned well with a growth mindset. Employees were encouraged to develop clear and challenging goals, were given targeted feedback in regular conversations, and were afforded opportunities to learn from success and failure as they improved their performance. Importantly, by having the performance conversations throughout the year, they were no longer connected to the reward discussion. To emphasize the idea that the clear target was company performance, the weighting of the bonus was changed to 75 percent business-unit financial outcomes and 25 percent individual performance. Managers were given more discretion in how to allocate the bonus, leading to greater potential variability in the bonus depending on the performance of the business. If the business unit did not achieve its objectives, even a high-performing employee might not receive a bonus or it might be considerably smaller. However, employees could make the same or more money than before. If both the business and the individual performed well, the bonus was much larger than before. This change helped to shift employees thinking towards business success because the business had to perform well if they wanted a bigger bonus. Gap, Inc. helped managers implement the new performance management system. The top leadership team defined the business performance levels well before the reward conversation, which addressed the biggest portion of the bonus amount. It defined what amazing performance looked like and told managers the exact amount of money in their individual contribution pool. Managers still had to determine their best performer(s) and allocate higher percentages of the pool to them or decide to give everyone the same percentage. Because some managers had not fully understood the reasons for the change, the human resources department doubled down on efforts to educate everyone on the process. It provided training and support on how to allocate the bonus pools and how to have nice and honest Touch Base conversations with employees. An especially effective program called Feedback People Can Hear was designed to address that need. During the first year of implementation, a pulse survey periodically asked employees four questions: (1) Have you had at least one touch base per month for the last quarter, (2) are these conversations helping to increase your level of performance, and (3) is your manager helping you to learn from your successes and failures and to apply that learning to the future, and (4) does the way in which your manager gives you feedback make you want to get more feedback? The answers were largely positive over time. In addition, there was a significant decline in the number of complaints received by the human resources department from employees who were unhappy with the results of the process, even though some of them received bonus amounts lower than past years. Perhaps the most interesting outcome was the way managers were distributing the bonuses. There was more differentiation between high and low performers, and overall, not including the Gap brand which did not make its performance target, 18 percent of employees received bonus payouts of less than 100 percent of target versus 7 percent for the prior year. Clearly, Gap, Inc.s reward system was becoming better aligned to the firms performance.