Case Analysis on:

Performance Management at Vitality Health Enterprises, Inc.

Submitted by:
Noman Siddique Bhuiyan ID-2010521
Nazia Nusrat Antora ID-2231265
Shadman Shafi ID-2231554
Sayeda Wamia Ali ID-2211768

Course Title- Human Resource Management

Course Code- MBA 509
Section- 02
Semester- Autumn 2022

Submitted to:
Dr. Muhammad Shariat Ullah
Adjunct Professor
Master of Business Administration (MBA)
Program at
Independent University, Bangladesh (IUB)
 Introduction

Vitality Health Enterprises, a medium-sized firm that manufactures health and personal care
products, has experienced six straight quarters of strong revenue growth. The company's focus
may be changing away from effective performance management, according to James Hoffman,
the new Senior Vice President of Human Resources. Due to a performance management system
that treats top performers unfairly by using uniform ratings, Vitality has recently experienced an
increase in the departure of the company's skilled research scientists. The business adopts a
forced distribution model of performance rankings, switching from an absolute ranking system to
a relative one, in an effort to keep its best workers. The efficacy of the new system from a
tactical and strategic standpoint must be evaluated by Hoffman and his performance management
evaluation team, who must then report their findings and suggestions to the Board.

The Old Performance Management System

The Rating System:

The rating system had 13 different rating levels from A to E including pluses and minuses. But
the managers were not comfortable with the rating system. They were feeling uncomfortable
about offending their employees and to avoid that gave almost everyone a C or B, few D or A
and infrequently provided E ratings. As a result, the rating system failed to differentiate
performers from nonperformers. Managers were afraid of disappointing a sense of teamwork, so
they rarely gave A within the research and development (R & D) teams, which left best
performing employees feeling ignored and undervalued financially and acknowledging that they
earned similar rewards like their less efficient workers as performance ratings or performance
points were used to determine merit-based wage increases and other rewards.

Job Evaluation Points:

Each position had a base level monthly salary which was altered by upward with a pay policy
line depending on the number of job evaluation points linked with the position. Job evaluation
points were determined in terms of three factors:

Technical Knowledge

Problem-Solving Skills
 Accountability

The formula was;

Pay Policy Line = Base Salary + (Job Evaluation Points*Increase Per Point)

Comparative Ratio:

Salaries of individual were further altered by a comparative ratio based on the performance of
individual. For example, an employee earned 500 job evaluation points would have $7430
monthly target salary and he or she had a compa-ratio of 90%, his or her monthly salary would
be $6687. The ratios actually ranged between 80% and 125% of the target salary and merit rises
to compa-ratio moved to drop on a percentage basis as an employee ascended through the range.
For example, with 85% compa-ratio an employee might reach an increase of 5% to 7%, on the
other hand, an employee with the same performance but a compa-ratio of 110% would reach a
rise of only 2% to 3%. Employees with regular higher performance sometimes earned smaller
raises than their less efficient colleagues.

Benchmarked Compensation:

To retain best employees, Vitality benchmarked compensation to keep the pay policy line at
about the 75th percentile with consider to their compensation peer group. This technique
produced 7% to 8% higher actual compensation than the competition. Low employee turnover
was achieved by applying this method. However, the system only focused on the pay stability of
a flat salary which leaded to no opportunity for bonuses or alternative forms of compensation.
On the other hand, it was difficult to identify top performers to reward and low performers to
terminate, for the system. As a result, the small amount of employee turnover that did happen
tended to occur among more productive scientists and product engineers. Some of these
employees left the company for better opportunity as they were not valued by the employers for
their efforts in the company.

To find a better way to identify and reward top performers, Williams instructed PMET to
evaluate and go over the performance management system. After that rearrange the Vitality’s
compensation practices in order to keep best players in their positions and advance company
growth by attracting new top people. On the other hand, to identify low performers and train
them up for better performance was a related objective.

Revitalizing the Performance Management System

Forced Distribution Model of Performance Rankings:

In June 2009, the performance management system encompassing a comprehensive evaluation and
rewards system, was further enhanced through endorsement of a modified performance
management and incentive system. The main motive behind this revised system was to overcome
the main flaw of the previous system which had failed to effectively recognize the contributions
of high-performing employees.

The new system instituted a forced distribution model of performance rankings. Using this system
employee performance would not be measured individually against pre-set standards, rather it
would be measured in comparison/relative to another employee. In this process, a key problem
would be eliminated which was evident in case of individual performance rankings, many
employees received higher rankings even when their departments failed to meet
performance/organizational goals. The distribution model would ensure differentiation among
employees recognizing those who are actually contributing the most.

To classify the performance of employees, a total of five categories were introduced: Top
Achiever, Achiever, Low Achiever, Unacceptable and Not Rated (applicable for newly joined
employees with no performance records). In order to determine compensation & bonuses,
promotion, training needs, transfers, lay-offs or disciplinary procedures, employees’ performance
are to be assessed based on the ranking category they fall under.

In order to make the ratings process more accurate and less biased, the Performance Management
Evaluation Team (PMET) researched and analyzed the core competencies of the employees and
duties associated with their jobs, hence codifying appropriate metrics like responsibilities and
performance measures for each job class. In conjunction with the metrics, managers were required
to develop specific goals for individual employees, as performance evaluation would also
incorporate how effectively and efficiently employees have met their organizational goals, as a
secondary component in the performance management process. Managers were also rated based
on this system on their performance in meeting staffing needs, training and development of
employees, relations and interpersonal communication with employees and no of corporate
initiatives taken.

Compensation was also adjusted by the new performance management system. Unlike the previous
system which solely relied on annual salary increases based on performance, the new system
incorporated a system of performance related short-term and long-term cash and equity bonuses
which would motivate high performing top talents of the company to stay in the company as they
can receive regular cash payments of their bonus compensation and dividends from stock
ownership opportunities.

Reviewing the new performance management process, PMET2:

Vitality’s new performance management system, while operating in its two-year trial period,
seemed to have proved itself a success in influencing employee productivity as the company
achieved global sales growth in record levels relative to previous years. However, it was time to
review whether the system actually generated meaningful results as intended to, before its launch.
Whether, PMET2 identified top performers of the company effectively and distributed financial
rewards appropriately to retain the best performers.

In addition to data analysis of previous year’s raking data, PMET2 sent out questionnaires, process
surveys and focus groups with employees and mangers to assess the effectiveness and potentiality
of the new system. Responses, to employee surveys indicated that more than half of the employees
preferred the new system, however communication with employees presented some serious
concerns.

Drawbacks of the new system:

1. The new system meant that yearly review process was closely tied with merit increases.
Managers felt employees were more defensive and less open to coaching in order to excel
in performance. They were less likely to perform additional duties outside their job
description because those responsibilities would not fall under review of the new system,
thus less chances of getting rewarded.
2. Managers were unwilling to spend time and effort on implementing the process because
they felt it was less important than other duties considering the reward associated was not
worth their contribution. Some managers felt that the forced distribution system was too
 rigid as regardless of a winning or failing team achieving overall organization goals, the
same individuals would ultimately hold and get reward for Top Achievers rankings, thus
restricting motivational drive to achieve organizational goals.
3. Some degree of biasedness can be witnessed from the side of managers who would
automatically assign a Not Rated ranking to any employee who was new and had been in
the group for less than a year, regardless of considering his performance contributions. In
this way, managers save higher ranking spots for more experienced and senior employees
of the organization.
4. Additionally, managers mostly provided neutral rankings to all employees instead of
strictly differentiating them based on their relative performance against one another. This
made the evaluation less accurate and meaningful. Managers did not want to present
themselves as a bad supervisor or ruin the motivation of the employees and thus would
submit manipulated rankings that would just fit the curve, instead of picking out on
individual employees, they give neutral/average ratings, for example the Achiever category
covers a lot of employees.
5. Some managers simply wanted to avoid the implementation of this new system, because it
was not worth their time and effort or they did not want to anger their teams. Managers
would just rotate highest rankings between employees from one year to the next so that
everyone gets to enjoy a bite of the pie. They maintained balanced ranking whereby no
employee was left behind and every employee was to some extent recognized and rewarded
as a top performer.

For employees, the new system sparked a mixture of both positive and negative judgements;

1. A major issue was adapting to the situation of getting their performance rated against their
colleagues instead of the conventional performance ratings against the job and its
requirements. A reason for this was that the company did not conduct any comprehensive
training to make employees familiar to this new system, causing difficulty to adapt and
accept such changes.
2. Some employees felt the company, using this model is forcing the allocation of employees
at either low or high end of a scale just to meet the targets, even if there isn’t any top
achiever or poor performer in the department and this is not fair for them. They feel the
 whole team should be rewarded if collaborative group efforts meet goals and targets, rather
than individuals only being recognized in highest rankings and the rest of the group
members in lower categories.
3. Some employees feel this system is right for them because it recognizes their hard-earned
contributions and identifies this as an achievement for the employee to hold with pride.
However, some employees feel the previous performance management system was much
more flexible as it had gradations like 13 different rating levels which would open up more
opportunities of rewarding employees despite their performance being strictly
differentiated with others to meet ranking criteria.
4. Managers need to work on all employee’s performance reviews at once alongside fulfilling
other major responsibilities, which can be a burden for them and elicit negative outcomes
due to stress or confusion due to too much work. The timetable for the previous system
was much more relaxed and flexible for managers to handle. This can be a problem for
employees as proper reviews determine their ranking.
5. Some employees feel that the new system which is getting rid of people who are not
performing well may cause a talent shortage in the long run. Employees will always feel
insecure and their work morale will be low, which ultimately may increase turnover and
reduced productivity due to lack of motivation or job satisfaction.
6. Additionally, employees feel the labels used to recognize their performance can be
unsettling as a “Low Achiever”, “Unacceptable” or “Not Rated” ranking may cause
difficulty for the employee to gain social acceptance for their team members or colleague
who might develop an otherwise impression towards the employee.
7. As there is a limitation on the percentage of people that can be classified into a particular
category, it creates a problem between line and staff people. For instance, if a division is
performing well, meeting organizational goals then most of the higher rankings are given
to the line. As a result, there aren’t any higher rankings available to give to staff employees
who are performing just as impressively. Sometimes the best performing groups are
excluded from high rankings as its not possible to accommodate too many best performers
in the distribution. This can be demotivating for many employees who performed
extremely well and deserve to be ranked higher.
 The Future of Performance Management at Vitality Health

The 2-core problem found:

1. The initial thirteen different rating levels had opened the path for managers to abuse the ratings.

2. The PMET 2.0 was introduced to eliminate the key issue, that is the bulk of employees were
receiving high rankings even when their department was failing to meet development and
production goals and time to market schedules. To change the scenario, the PEMT introduced
forced distribution model of performance ranking.

In both the scenarios, Vitality’s approach should have been discouraged, as they never designed
any performance management system that would align the corporate goals with the production of
the company. As the production solely relies on the special doctors and engineers of the company.

Additionally, another crucial issue is that the managers who are evaluating the employees are under
“Rater Errors” as no manager fairly evaluated the employees, as fear had taken over their minds
as, they concluded that rating an individual employee higher than another would de-motivate the
other employees and so on. Rather than identifying top talent, these managers simply tried to
maintain uniform ranking over time, which lead to bulk of employees in the company, however
no employee was identified and rewarded as a top performer.

Analysis of the situation:

Both the Performance Management tools failed the company as the data was misused as well as
manipulated by the evaluators. Thus, a revamp for the company’s evaluation system is desperately
needed so the company can gain back its momentum.

As per the definition of Performance Management, the series of activities designed to ensure that
the organization gets the performance it needs from its employees. If the scenario of Vitality is put
to performance management, then the series of activities is sustaining, however the organization
is not getting the full conversion rate from its employees, as they are not aware how and on what
criteria the employees are being evaluated. Furthermore, the performance of the employees does
not align with the corporate goals of the company, even some employees are reluctant to do jobs
outside their job duties.
To overcome the performance appraisal challenge, first step would be to get rid of the Rater Error
that prevails in the company. For example, abusing of the data provided by the employees, yet
changed by the manager. In this case, the managers at Vitality is having Recency and Primacy
Effects. This occurs when a rater gives greater weight to recent events when appraising an
individual’s performance. For Vitality, the case would be evaluating an employee based on his
performance the week before appraisal, thus such evaluations do not include past performances.
Even one manager stated that, ‘It’s not worthy of my time. It would be great for my team but there
are too many fires to put out. Especially now that I have to do all of them in January. I’ve got more
important, more productive things to do.” Because the time for appraisal and annual goal-setting
process, both the issue is to be completed in January. Thus, the significance of the appraisal is not
prioritized by the managers. As Rater Error prevails in the company, the best option would be if
the HR Department takes over to do the performance appraisal of the employees.

From the case, we learn that a certain group of employees are unaware of the change in
performance appraisal method. Thus, the managers do not communicate with them.

For appraising the performance, the managers can use the Graphic Rating Scale, the scales allow
them to make an employee’s performance on a continuum indicating low to high levels of
particular characteristics. As the tool helps get the rating straight to the point, it is simple and
commonly used by many companies.

There are three aspects off performance can be appraised using graphic rating scale: descriptive
categories (quality of work, attendance, and dependability), job duties (taken from job description),
and behavioral dimensions (decision making, employee development and communication
effectiveness) each of these types can be used for various jobs. However, if two or more people
take part in the rating, they may find it difficult to agree on the exact level of performance achieved
compared to the standard in the evaluating employee performance. Thus, it is better if one party
evaluates the employees, furthermore, to get rid of the rater error it is best if the HR department
evaluate the employees.

There are other tools to measure the performance of employees such as:

1. Behaviorally Rating Scales: the scale describes specific examples of job behavior, which are
then ‘anchored’ or measured against a scale of performance levels. These tools might have been
used however, it is very time consuming and maintaining it takes immense and extensive effort to.
Each different type of job will require different BARS forms needs to be developed for distinct
job descriptions.

2. Comparative Methods: comparing methods requires directly compare the performance levels of
their employees against one another, and these comparisons can supply useful insights. However,
the manager who needs to compare the employees are under rater error, thus the comparisons will
not be fair.

3. Critical Incident: in this case, the manager creates keeps a written record of both favorable and
unfavorable actions performed by an employee during the entire rating period. However, a
manager might note an exceptional performance for scientists and lab engineers. Unfortunately,
the managers are not in the condition significantly note the performance of employees at Vitality.

Conclusion

To conclude, Vitality has the potential to gain back their initial pace. However, they need to take
control of the performance management systems as soon as possible, as the more time they spent
on evaluating the wrong employee, the top talent will not be recognized. It was mentioned in the
case that, Hoffman was concerned as the managers were rating the scientists and lab engineers as
corporate associates and marketers. This clearly shows that the managers are in no position to
evaluate the human capital in such terms. Additionally, the tools and techniques they used, there
significance were not understood by the Raters and the data was misused. Therefore, to get a better
conversion rate of the employees, the best would be to let the HR Department take over the
performance appraisal and use a brand-new tool Graphic Rating Scale. This will not only help
motivate the employees but also aid them understand the evaluation process. Lastly, as a new party
is stepping in to evaluate there is no chance that they will have a Rater Error issue, thus, it will cut
out the Recency and Primacy Effects too.