The Impact of People and Performance Management: Managing the Shift to Pay for Performance at UC Dwaine B. Duckett Vice President, Systemwide Human Resources EPIC Webinar April 12, 2016

What is driving the shift to pay for performance at UC Performance management at UC – why is it important What is successful performance management Differentiating pay to relative performance Q & A Today’s Key Topics 2

What is driving the shift at UC? Engagement survey results show employees want performance to be recognized and differentiated – superior performance is to be rewarded Limited resources – time, people, finances Over $14B spent on people, systemwide – payroll, benefits, pension and other compensation Not handling Performance Management correctly is a risk to the University in terms of turnover and employment claims Using good people and performance management practices ensures that we treat people in an equitable way and reduces the risk of increased claims. 3

“Everyone can’t be above average compared to each other” 4

What is driving the shift at UC? It is the right thing to do It is part of good people management It creates a culture of engagement “Ultimately, predictable pay increases that are based on performance engage employees, maintain the University’s competitive position for talent and help build an even higher performing organization where staff feel they can excel.” Janet Napolitano 5

7 out of 10 employees are not actively engaged when managers don’t hold them accountable for performance Gallop.com 3x increase in engagement when managers regularly meet with employees about performance Gallop.com What is driving the shift at UC? Industry Research 6

What is driving the shift at UC? 2015 Employee Engagement Survey Key Drivers most to likely improve overall levels of engagement with little or some attention 69% Sustainable Engagement Career Development* Career Development* Supervision Performance Management* Performance Management* 7

> DEVELOPER NOTES 2015 UC Staff Engagement Survey Results

> DEVELOPER NOTES 2015 UC Staff Engagement Survey Results

> DEVELOPER NOTES 2015 UC Staff Engagement Survey Results

Systemwide Performance Review completion rates are declining In the performance year, only 77% of performance reviews were completed Employees are not receiving regular feedback on their performance Receiving performance feedback once a year is not enough to be meaningful, inspiring or engaging. This increases risk of lower engagement and turn-over What is driving the shift at UC? Current UC Trends & Relative Performance 11

Sampling of systemwide completed reviews indicates that ratings are skewed towards higher ratings overall Employees are receiving over- stated performance reviews Employees who are truly “exceeding expectations” are not being rewarded differently from lower performers Year Exceeds Expectations Meets Expectations Improvement Needed/ No Rating %20.2%3.2% %11.7%2.4% %34.2%1.3% What is driving the shift at UC? Current UC Trends & Relative Performance Transitioning to a performance management process that is ongoing and differentiates pay based on relative performance addresses these trends 12

Performance Management at UC Why is it important People management is a critical skill and is increasingly important Pace of change rapidly increasing and won’t slow down Performance management is a key piece of people management Giving feedback and holding people accountable are the foundations of performance management Once is not enough – feedback needs to be ongoing throughout the year Managers need to learn how to set realistic goals that are adjusted as priorities shift Goals should provide motivation and focus Streamlining the performance review processes makes the process manageable Complex processes frustrate all parties Goal setting should focus on key items Reviews should focus on key accomplishments Differentiating pay for relative performance reinforces good performance management practices and ensure that contributions are recognized 13

An ongoing, collaborative process between managers and employees to: Build the relationship – predictability & trust Set expectations and goals to drive performance Revisit expectations and goals throughout the year – adjust as needed Discuss performance and accomplishments Give and receive feedback to Come to agreement or common understanding Gain ownership/buy-in Learn what you need to do as a manager to better support your team Provide a basis for differentiated pay based on relative performance and contribution Identify professional development needs and career aspirations Performance Management is a key accountability for managers There should be no surprises – employees should know how they are doing every day Employees who have regular and meaningful performance management discussions with their managers are more productive and have more opportunities to do challenging work and learn new skills What is Successful Performance Management 14

What is Successful Performance Management Performance Management Model This process takes place regularly throughout the year as business needs change, goals are updated and achievements are made. 15

Manager’s Role Set expectations Give employees the insight needed to achieve key outcomes Hold employees accountable Enable meaningful performance conversations Support employees’ development plans Connect performance management with pay for performance and talent management Employee’s Role Understand what performance management and pay for performance means Participate actively in the ongoing process Discuss performance expectations Own their performance Ask for performance feedback What is Successful Performance Management 16

Manager’s Role Set expectations Give employees the insight needed to achieve key outcomes Hold employees accountable Enable meaningful performance conversations Support employees’ development plans Connect performance management with pay for performance and talent management Employee’s Role Understand what performance management and pay for performance means Participate actively in the ongoing process Discuss performance expectations Own their performance Ask for performance feedback The Emerging Role of Human Resources and Employee Relations Act as an objective 3 rd party Support managers and employees in understanding performance management and differentiated pay for relative performance Coach managers on how to have meaningful performance conversations Assist managers in making pay for relative performance decisions What is Successful Performance Management 17

Pay for performance is: Based on relative performance - not an across the board amount – a guideline Allows flexibility to reward top performers Provides clarity in compensation discussions Establishes “Good/Fully Meets Expectations” as the benchmark Not preset or force ranked Differentiating Pay for Relative Performance Recommended Model PoorGoodGreat Performance Rating Does Not Meet Partially Meets Fully Meets Consistently Exceeds Out- standing Increase %0% % 2.0 – 3.0% % 4.5 – 6.0% Population5% 75%10%5% 10%75%15% 18

All people managers, and aspiring managers, now have access to the UC Performance Management Series eCourses This set of 8 online e-courses cover the fundamentals of performance management at the University of California Check your local UC Learning Center for courses Performance Management at UC Performance Management eCourses Performance Management Series eCourses Performance Management Overview Setting Expectations Giving & Receiving Feedback Engaging & Developing Employees Conducting Performance Appraisals Motivating, Recognizing & Rewarding Employees Coaching for Performance Managing Corrective Action 19

Q & A Your Questions Answered

In performance reviews, my director has often said that no one exceeds expectations; an employee can only meet expectations. This is a disincentive for employees to work at their best. How do you address this issue? First of all, you are correct; if there is no chance to achieve the highest rating why have it listed as a possible rating? We want people to strive for the highest level possible. Hopefully your manager will change their view. There are many people across the system (albeit a small percentage) who receive the highest ratings. Managers consistently say that 3% is not enough to differentiate performance. They don't see it as enough to not make people upset. It is important to make distinctions where differing levels of performance during the period actually exist. It is more costly and problematic to upset the high performers by giving them the same amount as lower performing individuals. How do we address campus calibration? Some managers may be overly generous and believe they have all top performers, while another supervisor might be overly critical of his employees performance. As a best practice, the purpose of calibration is to help alleviate the disparity of ratings from manager to manager. As the managers in a specific function, school or division discuss their teams and the ratings, they also discuss what the rating criteria are. Often, ratings move up or down depending on that discussion. Ultimately department or division heads along with Chancellors can address the phenomena of high and low raters with the help of HR. Systemwide HR is also willing to give calibration advice. Performance Management at UC: Q & A 22

What is the driver for changing to P4P (pay for performance) in the middle of a performance review cycle? Staff was not notified that this would be the standard before the evaluation period started. Last year’s letter from the President to campuses gave the option of doing ATBs (Across the Board) for FY It also said that pay for performance would be the mode of pay delivery staring this year. Please let us know where you are at and we can figure out why the message may not have travelled through your organization. Again, Systwemwide HR would be happy to help in conjunction with local leaders and HR departments. Does a multi-year trend of exceeding expectations suggest a need to assign additional responsibilities and reclassify? We are moving away from reclassifications as a compensation delivery method with the implementation of Career Tracks. People will now be promoted when they have a multi-year trend of exceeding expectations and are ready to take on additional responsibility. If we truly pay for performance, won't turnover increase - managing out the poor performers? Yes, it is possible that turn-over rates could go up, but turnover among poor performers who may actually be costing UC more due to lack of productivity is a good thing. It may also motivate higher performing individuals to push to achieve more in pursuit of distinction for their own performance. In the systemwide engagement survey, Question #16 "I feel my campus does a good job matching pay to performance" how is that influenced by union covered staff who receive union negotiated increases vs non-represented? It is not influenced by unions, only non-union staff participated in the survey. Performance Management at UC: Q & A 23

Won't pay for performance potentially exacerbate our employment claims as lesser performers allege they're paid less due to discrimination? Seems to me pay for performance is more about retention than loss prevention. No, if done properly it should be clear that lower performers have not performed as well as high performers based on objective criteria. Anyone who needs help laying out a case for objective differences in performance should consult with their local HR professionals. Wouldn't implementing pay for performance be more successful if there was also a COLA (Cost of Living Adjustments) program for non-represented staff? Not necessarily. At some level we assume that most of our population is performing well and should get an increase. Designating COLA raises for low performers as opposed to having true pay for performance could have a dampening effect on productivity. How do I explain that a previous rating was higher than this year's rating for same performance levels? Performance reviews cover the current year and performance ratings are not labels to be carried forward year after year. Situations, projects and goals change each year meaning someone who was above expectations one year, may not get the same rating the next. Some UC Organizations that have committed to moving to the new merit based approach per the President’s note are inserting the following phrase into performance reviews, in situations where last year’s high or exceptional rating translates to be this year’s meets expectations rating due the shift. In order to take advantage of this phrase organizational calibration at a departmental/campus/location level must take place: “Although there has been a rating change due to calibration and the new merit pay construct, this individual’s performance is generally equivalent to last year’s based on the old performance scale and/or rating construct.” Performance Management at UC: Q & A 24

3% merit pool generates more dollars from top earners than lower earners, but % merit COSTS the pool much less at the low end than the high end. There needs to be some fairness/consideration about the dollar impact: high earners at 4% "take away" more money from others than low earners who earn 4% -- how is this accounted for in the top-down approach to approving the merit increases? Balanced out and calibrated across a large number of people (say a campus) this should not be an issue. High level individuals should have their performance rated compared to other high level, high paid individuals. There should be very few circumstances where the calibrated ratings “take money away” from the large number of lower level employees in the organization. What controls are in place to "catch" managers and control points that support "across the board percentage" raises? Your local HR professional is hopefully being consulted by higher level administrators all the way to the Chancellors. I am sure they are committed to following the President’s instructions not to do ATB ratings. If it so happens that a large number of employees get similar increase amounts, that is not a problem in and of itself. When an ATB is announced that means everybody gets the same increase regardless of performance or performance rating – which is de-motivational. Will these merit based increases apply to union employees? No. Policy and bargaining agreements specify wage increases for represented staff. Performance Management at UC: Q & A 25

The performance evaluation tool used is not in line with this type of program. What type of revised performance evaluation tool will we receive in order to implement this new program? Locations have maintained latitude to implement performance evaluation tools to fit their operations. Per the President, you should give your feedback to the head of your location's operating unit or HR and make suggestions on a tool that may work better. They may make a change you see as an improvement. I have previously used pay for performance only to see those distinctions removed with equity reviews. How do we balance P4P with equity? Equity is a misunderstood concept within the University. The word equity is often used to refer to alignment with the external market or when retention increases are given. There are also mechanisms that look at equity based on various EEO classifications that take into account responsibility, time in position and performance over time to ensure people are being treated fairly and equitably with regard to pay. This does not mean they are not all making the exact same amount of money. Performance Management at UC: Q & A 26

"Some organizations use a technique that integrates performance appraisals and pay adjustments. If a person’s pay is below the midpoint, they would receive 1-2% more compared to a person who is paid above the midpoint for the same rating. Would UC ever consider this? Example: Someone who receives an Outstanding rating but is paid below the midpoint would receive 6% increase as compared to another employee receiving Outstanding rating who is paid ABOVE the midpoint and would only receive 4%. What you are referring to is the use of a technical term call “compa ratio” which says that the more a fully functioning and qualified individual penetrates upward into a range the more difficult it is to achieve the highest increase amounts/percentages. This is done to prevent overpaying and accelerating individuals out of a grade range or highest value for a particular j ob. We hope to incorporate compa ratio into our compensation programs in the future as most large organizations use this as a best practice. What are your thoughts on the recently-popular move to do away with structured rating scores and towards frequent meaningful discussions, and it's viability as an approach for UC? Many companies are moving to a non-rating approach for performance reviews. The success of that type of program relies on having an established history and practice of regular performance conversations. It would be phenomenal for us to get really good at giving feedback and distributing rewards to a point that we could do away with a lot of the structures that cause anxiety and consternation around reviews. An organization that is accomplished at giving excellent feedback makes a lot of the hair splitting structure and labels you see in many performance management systems obsolete. Performance Management at UC: Q & A 27