[This article first appeared in _Small_Business_Report_.] JUDGE AND BE JUDGED Hampton Pension Services has an antidote for the dreaded performance appraisal. by Theodore B. Kinni NO ONE ENJOYS PERformance appraisals. Even stellar employees feel vulnerable as their day of judgment approaches. Salary increases and promotions hang in the balance, and no one is ever quite sure which way the scales will tip. "I was petrified by my first traditional appraisal," remembers Maria Schneider, a senior plan administrator at Hampton Pension Services Inc., Akron, Ohio. "I had no idea what to expect from this manager whom I didn't even work that closely with." Managers aren't any more comfortable giving performance appraisals. After all their efforts at team-building and morale-raising, they are forced to rank their subordinates both individually and critically, often using a standardized system that does not accurately reflect the realities of the workplace. Usually, the resulting fear, anger, and bewilderment easily drown out the occasional appraisal high points. Quality guru W. Edwards Deming recognized this problem when he identified traditional performance appraisals as one of his seven "deadly diseases." In Out of the Crisis, Dr. Deming concluded that appraisals cause organizational disruption and human damage. He urges management to eliminate them immediately and completely. While a simple executive decree could easily obliterate performance appraisals, it does not answer the question of what will replace them. On what basis will employee performance be managed, evaluated, and rewarded? Hampton Pension Services, one of the largest pension-administration and consulting companies in the Midwest, has come up with an innovative solution. There, all employees rank each other in an unusual combination of self, peer, subordinate, and managerial evaluations sometimes called a 360-degree appraisal. The company's 40-odd employees rate every employee in the firm, including themselves, on how well each satisfies 10 performance statements. Their answers are quantified and averaged to provide a numerical total determining the percentage of the annual raise and bonus pool received by each employee, including company founder and president Walter Bettinger II. The evaluation criteria--deceptively simple statements that comprise the evaluation form--are the heart of Hampton's performance appraisal process. (Do you 1 strongly disagree or 10 very strongly agree that "if I was starting a business, I would want this person to work for my company" is one example.) And the questions provide more than desirable performance criteria; they also define and promote an internal code of behavior for the company's employees. ("Treats co-workers in a friendly, respectful, considerate, and professional manner.") "The questions reflect what the firm as a whole wants the company culture to be," says Mr. Bettinger. "A team of employees from all levels developed them in 1989. The team is staffed on a rotating basis, and it meets after each evaluation period to continually refine the program." The peer-evaluation system has been carefully crafted to yield untainted results. Because confidentiality is critical to frank appraisal, the evaluations are prepared on computers using a standard format. Employees copy their evaluations to disks which are then anonymously returned for compilation. During the compilation process, an evaluation statement is prepared for each employee. The statement includes the numerical rankings for the employee as judged by the company as a whole. It also includes breakdowns of the evaluations based on the rater's job level. Thus, an employee can see how he or she is viewed by management separately from how he or she is seen by peers. These statements are distributed to each employee with an explanatory memo. "I try to communicate trends in the memo," says Mr. Bettinger. "I try to identify areas of improvement and trouble spots. Since new employees generally rank lower than their peers, I try to reassure them that it's a natural result that will soon correct itself." Managers also schedule individual meetings as needed. Overall employee rankings also remain confidential and are used only by senior management. Honesty is a critical issue. "We discard the lowest and highest score in each evaluation," says Senior Vice President John Harabedian, Hampton's administrative head. "We also look carefully for unusual results. There aren't a whole lot of surprises. We talk to the employees and their supervisors if we get one." When the company found that the evaluations almost always result in hierarchical findings (the higher the position, the higher the score), the company split the workforce into three tiers: management, nonmanagerial professionals, and administrative assistants. An employee's final ranking is made among his or her peers only, and each receives the same percentage raise as those who rank comparably in the other two tiers. What do the employees at Hampton expect of each other? Traits such as teamwork, responsibility, honesty, diligence, and respect for others jump off the evaluation form. These are "soft" qualities that managers using traditional appraisal techniques often have a difficult time objectively quantifying. Numerous academic studies have shown that peers are predisposed to attach more importance to interpersonal skills than are supervisors, who usually emphasize technical skills. Not surprisingly, employees also tend to be more frank and forthright with their peers than with their supervisors, thus lending increased validity to their rankings. "If your supervisor says you're not a team player, it's easy to make excuses. After all, what does this guy know?" Mr. Harabedian says. "But, when all your co-workers tell you the same thing, it makes you look at yourself in a different way. Quality people take it upon themselves to improve.. Interestingly, new employees at Hampton usually rate their own performance higher than their peers do. With time, the situation reverses--veterans tend to rate their own performance lower than their peers do. Maria Schneider, a senior plan administrator who has been evaluated under the program since its inception, thinks that "as time goes by, you become more realistic about your own performance." Overall employee scores are rising year to year and typically the more responsible the positions employees hold, the higher their scores. "That means the program is working," believes Walter Bettinger. "Managers should score higher than administrative assistants. That's why they have their jobs. Overall scores should also rise as the entire group gets better." To Mr. Betringer, the peer-evaluation program is more than a democratic means of distributing financial largess. He uses the evaluations to guide the construction of the firm's management team and to track its performance. "Honest, unbiased information is hard to find when you run a company," he says. "If my score drops on Q4 treats co-workers well, I realize I need to be more aware of how I'm dealing with people. They also tell me who I should be watching for promotion or who needs help." For the firm's managers, the system produces ongoing subordinate (or upward) appraisals, a technique adopted by IBM in the 1950s. Dr. Lou Forbringer, vice president of human-resources planning and development at Mercantile Bank of St. Louis, characterizes subordinate appraisals as a "missing link" in developing managerial effectiveness. "There are three compelling reasons to use upward appraisal," says Dr. Forbringer. "Subordinates can better observe and evaluate certain managerial practices. Multiple assessments can yield better results than single appraisals. And the technique supports employee-involvement programs." At Hampton, John Harabedian says, "When 40 people are telling you something, it has a real impact. For example, I've always thought I was very good at handing out kudos. But, if that score comes down, it reminds me to credit people for good work. It makes me a better manager." For all the benefits of the peer-evaluation program, there is still a complication or two. For example, the program does not adequately appraise technical skills and job knowledge. At Hampton, these areas are still best covered by supervisors on a one-to-one basis in a traditional interview. Financial reinforcement for these appraisals is provided in the form of merit salary increases and bonuses that are distributed for outstanding job performance or increased responsibilities. The company also offers generous awards for successfully completed professional certifications by which an employee could increase his or her base pay by up to $20,000 over a three-year period. A complication stems from corporate growth. As the size of the workforce increases, employees are unable to realistically evaluate the performances of co-workers they barely know. Currently, Hampton asks employees to give colleagues with whom they are unfamiliar an "average" grade. "As we get larger, we will simply break the system up," says Mr. Harabedian. "However, it is important to continue to include as large a knowledgeable evaluater group as possible." Logistics aside, the Hampton peer-evaluation system seems a rousing success. awe have gone from scratch to over 800 clients in 10 years with the help of this program," declares Walter Bettinger. "Our employee retention rate is excellent and so is our client retention rate." Only one professional employee has voluntarily left the firm for a competitor in 10 years. There have been no voluntary terminations among administrative assistants in almost five years. Contrast that to an average annual employee turnover rate of 20% for the entire pension-administration industry. Further, Hampton's client retention rate is remarkable 99% per year. Industry averages range from 80% to 90% per year. Perhaps most impressive, however, are the common values and strong culture the program perpetuates. "I've been with the company for five and a half years and we have grown from six employees to nearly 50. We occupy four different floors instead of a few offices. Yet, we are mere of a team and a family now," says Ms. Schneider. "The peer review solicits everyone's input and keeps us open to others. It keeps us all on the same wavelength. Here, everyone is on an equal footing. No one looks down on anyone else." Theodore B. Kinni is the founder of The Business Reader, a Brecksville, Ohio-based book source serving corporations internationally. HAMPTON PENSION SERVICES INC. PEER EVALUATION FORM* Q 1: Places organization above self (is a true team player). Q 2: Works additional hours beyond the minimum required for his/her job level or works more diligently than the typical employee. Q 3: If I was starting a business, I would want this person to work for my company. Q 4: Treats new co-workers and existing co-workers in a friendly, respectful, considerate, and professional manner. Q 5: Accepts responsibility for errors without making excuses or becoming defensive, while striving to minimize the likelihood of repeating them. Q 6: Is very careful to review any work he/she has done before passing it on to another person. Q 7: Is a positive influence in the firm by only criticizing the firm or co-workers when he/she has a well-thought-out suggestion for improvement. Q 8: Is always understanding when I make a mistake that requires him/her to do extra work. Q 9: Avoids bringing personal matters into the office that could have a disruptive impact on his/her co-workers. Q 10: Is always respectful to his/her supervisors and maintains the same working diligence whether his/her supervisor is present or not. KEY: 1: Strongly Disagree 3: Disagree 5: Sometimes Agree and Sometimes Disagree 7: Agree 10: Very Strongly Agree As our company expands, there may be co-workers with whom you have little or no contact on a day-to-day basis. For these individuals, there may be a question or two that you are not sure how to answer; therefore, please complete those questions using what you consider to be an "average" choice. * January 1, 1993-June 30, 1993.