Performance Management at Vitality Health Enterprises, Inc - Case Study Example

? Performance Management at Vitality Health Enterprises, Inc Performance Management at Vitality Health Enterprises, Inc Introduction Vitality Health Enterprises has successfully overcome the recessionary pressures and experienced six consecutive quarters of strong revenue growth. The company has been struggling to maintain its industry position for the past few years as a result of growing rate of staff turnover and lack of innovations. Undoubtedly, the Vitality cannot survive stiff market competition without the expertise of their top performers. Hoffman identified that pitfalls in the current performance management system had discouraged the firm’s top performers and negatively influenced innovations. This paper will critically analyze the Vitality’s performance management system, and will provide potential recommendations to make this system effective for the firm’s business growth. Section 1 1. Case Summary & the Problem Vitality Health Enterprises, Inc was founded by Hikaru Fred Kikuchi in Ames, Iowa in 1987. Within the first three months, Kikuchi’s achieved sales revenue of more than $15,000 from the business. In late 1989, the firm established its own manufacturing facility in order to minimize the firm’s dependency on Japanese products. By 1991, Vitality’s revenues grew to $3 million per year and the company stopped depending upon Japanese finished-goods suppliers. Over the next few years, Vitality strived to spread its business across United States and Canada and moved its head quarters to Des Moines with intent to take advantages of better expansion opportunities. By 1995, the company gained a strong global presence by launching its products in countries like China, Japan, and Taiwan. In 1997, Vitality increased the size of its business notably with the acquisition of HerbaPure Nutraceuticals, and a decade later the company grew to nearly 7,000 employees. In order to address the stagnation caused by the 2008 global financial crisis and to deal with rising material costs, the Vitality recruited a new CEO, Beth Williams. As part of implementing the new business strategy developed, Williams organized the Performance Management Evaluation Team (PMET) to evaluate whether performance management goals were met. The PMET discovered that the many of the employees had not been satisfied with the current performance management system because it often failed to appreciate top performers adequately. Williams identified that rewarding top performers adequately and retaining them with the company for a long time were essential to accelerate the company growth. She also observed that a well planned restructuring of Vitality’s compensation practices would be inevitable to bring the change identified and to attract new top talent. As a result, Williams implemented the new performance management system in June 2009. To be specific, the problem with the firm was that the new performance management system characterized with a forced distribution model of performance rankings, ‘moving from an absolute ranking system to a relative one’ (Bingham & Beer, 2012). The company continued this system for the next two years. James Hoffman, the newly appointed vice president of human resources at Vitality, found that the new performance management system was not really helpful to motivate top performers despite six straight quarters of strong revenue growth. Evidently, the new system also underappreciated the efficiency of top performers and assisted poor performers to survive, because many of the managers had not been effectively abiding by this system. Some shortcomings of the new system also contributed to this problem. Section 2 2. Effectiveness of Vitality’s Performance Management System While analyzing the corporate history of Vitality Health Enterprises, it seems that the firm’s performance management system has not been effective. The firm’s previous performance management system posed numerous problems to its professional staff including scientists, engineers, and product managers. This performance rating system had 13 different levels ranging from A to E including pluses and minuses. However, managers were not keen to rate employees properly as they claimed that such a practice would offend employees. In order to promote their personal interests, managers gave almost every employee C or B ratings whereas they used A, D, or E ratings very rarely. Managers thought that providing A rating would adversely affect the sense of teamwork and egalitarianism within the R&D department. This practice led to homogenous ratings and therefore the top management failed to distinguish performers from nonperformers. As a result, the firm’s top performers were undervalued and hence they received similar wage increases as their less-productive coworkers. As per the case study, “this frustration was compounded by the point system Vitality used for salary calculations and performance-based raises” (Bingham & Beer). The job evaluation points and the comparative ratio used for pay policy line really worsened the situation. The authors add that employees with equal performance and different comparative ratio might receive varied increases in salaries. As a result of the shortcomings of this performance rating system, even consistent top performers often received smaller increases in salaries than their less-productive colleagues. In an attempt to address this issue and to retain the top performers, the organization benchmarked its compensation. However, the Vitality gave little attention to bonuses or other forms of compensation. This situation resulted in a high average salary regardless of the firm’s actual overall performance. This system also made it difficult to reward top performers and to terminate low performers and the net result was that many productive employees tended to leave the organization. Although the company implemented a new performance management system to resolve the drawbacks of the previous system, it also produced many unintended outcomes. To illustrate, the management defined core competencies and key duties of different jobs as part of executing the new performance rating system. As a result, employees became reluctant to perform duties outside their job because those efforts would not be reviewed or rated under the new system. One of the major weaknesses of the new system is that even an underperforming department can still have a number of top achievers. In short, the Vitality’s newly implemented performance management system is also ineffective. 3. The Normal Grading Distribution While closely evaluating the case study, it seems that discontinuation of the normal/bell-shaped grading distribution system would impose additional financial burden on the organization. In addition, it is clear that this system can benefit Vitality significantly if it is monitored properly. Therefore, it is recommendable for the Vitality management to continue to use bell-curved grading distribution. Stewart, Gruys, and Storm (2010) indicate that bell-curved system in performance appraisal can be very effective for the overall performance of the organization as it has the potential to measure employee performance properly and thereby to reward or penalize employees accordingly. If this system is implemented properly, it is the best option to motivate consistent high performers and to retain them with the firm through stock options or increases in pay. It is obvious that majority of the employees in an organization would be categorized as average performers. The normal grading distribution system provides employees with training and other opportunities to improve their performance and hence to become top performers. Evidently, this situation would enhance the firm’s overall level of competency. In the words of Chattopadhayay and Ghosh (2012), the bell-shaped system is extremely helpful to identify and warn/terminate poor performers, and this in turn can improve the productivity of the firm noticeably. Undoubtedly, this forced distribution system would help the employees to aim higher and such a change in attitude may promote innovations within the organizational environment. From the case scenario, it is clear that this forced distribution system rated employee performance with respect to one another instead of measuring their performances against predetermined standards. If managers adhere to this policy with greater transparency, it would help avoid numerous employees receiving high rankings even when their department fails to meet the operational goals. Referring to Bingham and Beer, another potential feature of this system is that managers were also rated under bell-curved distribution “on their performance in meeting staffing needs; their effectiveness in training, development and employee relations; their clarity in communication; and their implementation of corporate initiatives”. Hence, it is a comprehensive policy to measure the performance of the overall organization. Hence, the Vitality management should continue to use the bell-curved grading distribution system after making proper changes such as effective monitoring. 4. Performance Management If I were in charge of improving the Performance Management System at Vitality, I would take a favorable approach toward those who ranked consistently at the bottom of the distribution. It is clear that those who consistently ranked at the bottom are very unproductive and hence they can contribute nothing to the wellbeing of the organization. I would never allow those employees to continue in the organization without improving their efficiency, because such a practice would negatively affect the overall productivity of the organization. Dealing with an unproductive employee is a very challenging task for even a most experienced manager because it can have considerable influence on employee morale. In order to manage consistently underperforming employees, the manager must try to discover the root cause of their poor job performance. The causes of staff un-productivity may include family problem or worksite conflicts. In the opinion of Cappelli (2008, p. 184), the manager must maintain better personal relationship with his subordinates and talk to them personally to recognize their actual problems. If poor performance is a problem persisting with more employees, there can be an underlying organizational issue for the manager to deal with. Once the manager gets to the root of the problem, he can obtain an idea about how to handle the issue. Often a manager can obtain potential solutions to employee problems through a personal talk because it is the effective way to get a clear picture of the problem. If the employee has personal/family problems, it is advisable to give him strong moral support. And, if the problem is something related to the workplace, manager has to support the employee through an employee assistance program (EAP). If motivational factors such as salary or recognition constitute the cause of poor employee performance, the manager can tackle the issue by effectively distributing job responsibilities or increasing incentives. If these resolution approaches fail to improve those employees’ performance, the manager can use other approaches such as salary cuts, demotion, and finally termination. Before terminating an unproductive employee, I would ensure that I have done everything possible to retain him; otherwise this action can have a negative impact on the employee morale. Furthermore, I would improve Vitality’s performance management system by making some changes to the current forced distribution system. First, it is necessary to modify the Not Rated category introduced under the bell-curved grading distribution system. PMET2 discovered that the managers automatically assign a Not Rated ranking to any worker who had been working in the firm for less than a year, regardless of their actual performance, with intent to reserve higher rankings for senior employees. I would therefore clearly define the criteria for giving a Not Rated ranking to an employee. I would set up a committee like PMET to monitor the performance rating practices of managers. It was uncovered that many managers do not really comply with the forced distribution system so as to safeguard their personal interests. To illustrate, managers try to abstain from differentiating between employees as they fear that this practice would adversely affect the spirit of teamwork. Hence they left this process up to people who are unable to make comments on the individual performance of employees. Finally, managers tend to rotate top rankings between their teammates from one year to next with intent to eliminate unrewarded time and to simply avoid ego-clashes among team members. Hence, in order to improve the current normal distribution system, I would design new strategies to review managerial activities like employee rating. Conclusion In total, the management performance system has not been effective in the Vitality Health Enterprises due to unfair execution. This situation led to increased staff turnover and lack of innovations. Although the company has recently introduced the forced distribution system to eliminate the shortcomings of the previous system, it also failed to meet the stated goals as a result of improper managerial reviews. In order to better reward the top performers and to penalize low achievers, the company has to continue to use the current bell-curved system with necessary modifications. References Bingham, J & Beer, M. (2012). Performance Management at Vitality Health Enterprises, Inc. Harvard Business School. Cappelli, P. (2008). Talent on demand: managing talent in an age of uncertainty. Harvard Business Press. Chattopadhayay, R & Ghosh, A. K. (2012). Performance appraisal based on a forced distribution system: its drawbacks and remedies. International Journal of Productivity and Performance Management. 61 (8): 881-896. Stewart, S. M., Gruys, M. L & Storm, M. (2010). Forced distribution performance evaluation systems: Advantages, disadvantages and keys to implementation. Journal of Management & Organization. 16: 168–179. Read More