Case 1:

Compensation and Performance Evaluation at Arrow Electronics

Steve Kaufman, the CEO of Arrow Electronics, was agitated and pacing around his
office, discussing with Arrow’s VP of Human Resources whether they should abandon the
Employee Performance Review (EPR) system that had been installed three years ago. The
process was not providing what Kaufman had been hoping for, in terms of identifying
outstanding individuals whose careers could be accelerated – as well as those whose careers
might be better pursued elsewhere – and it was creating a great deal of turmoil within the
organization. He thought that perhaps he should just give up trying to get managers to rate
their employees honestly and candidly. No one seemed happy with the system, not the
employees getting the reviews, and not the managers who were filling them out and
communicating them.

He could still recall the meeting they had held, to review the summary statistics after
using the new process for the first time in 1995. “Send them all back and have them redone,”
he had said in great frustration. “These can't be right.” The President of North American
Component Operations had been incredulous. “What do you mean they can’t be right? They’re
subjective evaluations! Besides, we can’t send them back – we can’t ask the branch managers
to do these all over again; they’ve already spent days on the damn things and they have real
work to do.”

At this, the VP of Human Resources retorted, “What do you mean – ‘real work’? You
don’t think that reviewing the performance of our employees and giving them feedback and
counseling is part of the real work that our branch managers do?”

“How can it be possible that on a scale of 1-5” Kaufman observed, “that we consistently
come out with an average of 4.5? How is it that no one in our entire organization received a 1
or 2 on any of their seven performance areas? Everyone must be below par on something.
The board of directors gave me a 2 on two of my seven rankings, and if I get two 2s, sure as
hell someone, somewhere in the company should get at least one. How can we use these
ratings to guide our salary administration process? This would imply that virtually everyone in
the company should get the maximum salary increase. That can’t be right, and it’s not
financially feasible.”
Case 2:

Gap Inc.: Refashioning Performance Management

Gap Inc. used to have what Rob Ollander-Krane, Senior Director, Organization
Performance Effectiveness, refers to as a “traditional” performance management process –
with goals setting at the beginning of the year, a single end-of-year review meeting and
performance ratings.

“It was an annual process,” he says.“At the start of the year goals were set at the
business level and then loosely cascaded down to business units, teams and individuals. Most
people documented their personal goals somewhere, but many didn’t. And most of those who
did just put them in a drawer and didn’t look at them again for 12 months, when they would
write a 14-page tome to try and justify a better rating at their end-of-year review.”

The ratings process was directly linked to the Gap Inc. bonus scheme, with higher
grades leading to bigger payouts.“The way the process was set up, I think most employees
saw the end-of-year performance discussion – which sometimes captured information that was
15 months old – as something they had to suffer through in order to get to their rating and find
out how much money they were going to get,” says Ollander-Krane.

“All they really wanted to know was ‘Did I get the A or the B grade and therefore I felt
good, or did I get the C and it was just another lousy year?’ Although the manager and
employee discussed the content of the review, they weren’t really having a conversation that
drove performance – it was just what they had to do to get to the conversation about the
money.”

And not only did the process’s structure distract from actually discussing performance, it
sometimes led to further difficult conversations when managers’ ratings were changed to fit the
company’s forced distribution curve.

“We used a curve to ensure our total bonus payments stayed within the overall budget,
so we would sometimes have to revise our managers’ ratings down,” says Ollander-Krane.

“So leaders or HR would end up having contentious conversations with managers about
changing their grades, and then the managers would have contentious conversations with their
employees when they had to go back and say ‘I know I said you were an A, but you’re really a
B’.”

Above all else, the process was simply not delivering results in terms of improved
business performance for Gap Inc. It was complex, time-consuming and expensive. At the
company’s headquarters alone, it was estimated that people were spending 130,000 hours a
year and significant payroll on the process. And to top it all, managers and employees disliked
the process – as one employee complained in an opinion survey:“I think the annual review and
rating is a waste of an employee’s time . . . causes unnecessary stress . . . and is really an old
way of thinking in this modern day and age.”

All of this, combined with a growing consensus among thought leaders in the HR and
performance field that “traditional” performance management had had its day, led Gap Inc. to
decide the time had come to radically overhaul its approach.
Case 3:

Wells Fargo

Wells Fargo for a long time was looked upon as one of the most trustworthy and ethical
banks in the nation. The company’s vision is to “satisfy our customers’ financial needs and
help them succeed financially.” And the company’s published values are, “What’s right for
customers; people as a competitive advantage; ethics; diversity and inclusion; and leadership.
https://stories.wf.com/ceo-tim-sloan-introduces-vision-values-goals-wells-fargo/

However, in 2013, rumors circulated that Wells Fargo employees in Southern California
were engaging in aggressive tactics to meet their daily cross-selling targets. According to the
Los Angeles Times, approximately 30 employees were fired for opening new accounts and
issuing debit or credit cards without customer knowledge, in some cases by forging signatures.
“We found a breakdown in a small number of our team members,” a Wells Fargo spokesman
stated. “Our team members do have goals. And sometimes they can be blinded by a goal.”

The Wells Fargo compensation system emphasized cross-selling as a performance

metric for awarding incentive pay to employees. The company also published scorecards that
ranked individual branches on sales metrics, including cross-selling. Branch managers were
assigned quotas for the number and types of products sold. If the branch did not hit its targets,
the shortfall was added to the next day’s goals. Branch employees were provided financial
incentive to meet cross-sell and customer-service targets, with personal bankers receiving
bonuses up to 15 to 20 percent of their salary and tellers receiving up to 3 percent.

Wells Fargo had multiple controls in place to prevent abuse. Employee handbooks
explicitly stated that “splitting a customer deposit and opening multiple accounts for the
purpose of increasing potential incentive compensation is considered a sales integrity
violation.” The company maintained an ethics program to instruct bank employees on spotting
and addressing conflicts of interest. It also maintained a whistleblower hotline to notify senior
management of violations. Furthermore, the senior management incentive system had
protections consistent with best practices for minimizing risk, including bonuses tied to instilling
the company’s vision and values in its culture, bonuses tied to risk management, prohibitions
against hedging or pledging equity awards, hold-past retirement provisions for equity awards,
and numerous triggers for clawbacks and recoupment of bonuses in the cases where they
were inappropriately earned.

According to DOJ officials, Wells Fargo management finally admitted that the
company’s performance measures pressured employees to meet "unrealistic sales goals that
led to thousands of employees opening millions of accounts for customers under false
pretenses or without customer consent often by misusing customers' identities."

In September 2016, Wells Fargo announced that it would pay $185 million to settle a
lawsuit filed by regulators and the city and county of Los Angeles, admitting that employees
had opened as many as 2 million accounts without customer authorization over a five-year
period.
Case 4:

Moonlight Automobiles Ltd. Primary

Moonlight Automobiles Ltd. Primary is the field of manufacturing of two wheelers. They
manufacture and market mopeds. These are available in the brand names ‘Arrow’ and ‘Double
Arrow’ where ‘Arrow’ is their traditional product and ‘Double Arrow’ is the improved version.

The company started about 20 years ago. Their product ‘Arrow’ enjoys a reasonably
good reputation and they were comfortable in the market. However, with the entry of the new
generation of fuel-efficient mopeds the company started losing its market.

They immediately started developing the improved ‘Double Arrow’ but by the time they
came out with this new model, the competitors had already strengthened their position in the
market.

The ‘Arrow’ model was still acceptable by a segment of the market as it was the
cheapest vehicle. ‘Double Arrow’ is a new generation vehicle. It was costlier but its
performance was much superior. It is compared favorably with the competitors’ products;
however, it was yet to gain a foothold in the market.

The company had to refurbish the marketing activities in order to get back their market
share. They employed young sales engineers to launch a strong sales drive. Mr. Ramesh
Tiwari, Btech and a diploma holder in marketing got selected and was put on the job.

Mr. Ramesh Tiwari started well in his new job. He was given a territory to contact the
prospective customers and to book the orders. The company has introduced a new financial
assistance scheme. Under this scheme, buyers were given easy loans. It was particularly
advantageous for group booking by employees working in an organization.

Mr. Ramesh Tiwari was able to contact people in different organizations, arrange for
group bookings and facilitate the loans. His performance was good in the first year and in the
second year of his service.

The company had its own system of rewarding those whose performance happened to
be good. They usually arranged a paid holiday trip for the good performer along with his wife.
Mr. Ramesh Tiwari was accordingly informed by the marketing manager to go to Chennai with
his wife on company expenses. Mr. Ramesh Tiwaru asked him as to how much it would cost to
the company. The marketing manager calculated and told him that it would cost about $8,000.
He quickly asked him whether he could get that $8,000 in cash instead of the trip as he had
better plans. The marketing manager countered this saying that it might not be possible to do
so. It was not the trading of the company, however, he would check with the personnel
manager.

After a couple of days, Mr. Tiwari was informed that it would not be possible to give him
a cash reward. Mr. Tiwari grudgingly went for the trip and returned. On his return, he was
heard complaining to one of his colleagues that his little daughter was also along with him.

The marketing manager and the personnel manager thought he was a bit too fussy
about the money and some of his colleagues also thought so. During the subsequent days, Mr.
Ramesh Tiwari’s performance was not all that satisfactory which showed his lukewarm attitude
towards his job and the subordinates.