Human Resources professionals are tasked with overseeing three important workplace cycles: performance, compensation, and development. But while it can be tempting to combine these three cycles into one, that can undermine the effectiveness of each cycle.
That’s not to say these review cycles can’t work together — they will, in fact, so long as they’re kept separate. Spacing out these three cycles allows them to build off each other while ensuring each gets the attention it deserves. In this article, we’ll take a closer look at what makes performance, compensation, and development reviews distinct, why businesses should keep them separate, and how to schedule these cycles to get the most out of these three types of employee reviews.
How Do the 3 Types of Employee Review Cycles Differ?
Before we dive into how your business can use performance, development, and compensation reviews together, let’s briefly define the key characteristics of these conversations:
Performance
- Looks backward: Performance evaluations are retroactive conversations that assess an employee’s performance throughout the review period in question.
- Evaluates employee performance: Reviews measure the degree to which an employee fell short of, met, or exceeded performance expectations. This allows your business to identify and address subpar performance, while also properly rewarding employees who go above and beyond their job description.
- Shares feedback: Any individual’s manager, peers, and team members share constructive feedback that helps the employee identify their strengths and weaknesses. These conversations can help employees find the motivation to improve their skills and competencies, allowing them to grow professionally in the months ahead.
- Aims to improve performance alignment: Formal performance appraisals help managers and their direct reports come together to discuss what worked well in the review period and what can be improved, allowing both parties to be better aligned on performance expectations moving forward.
Compensation
- Looks backward: Compensation reviews are typically conducted annually as a way to ensure an employee’s compensation matches the value they bring to your organization.
- Rewards employees for their past work: Businesses use compensation as a tangible way to reward employees for their hard work. A raise, bonus, or even new benefit like additional time off is tangible feedback that your business appreciates an individual’s past work and loyalty.
- Determines if employees' salaries fairly and accurately reflect their work performance: Compensation reviews assess a variety of factors including employees’ overall performance, where they fall in their compa-ratio, external factors like inflation, and more to ensure employees are justly compensated in their current roles.
Development
- Looks forward: Development conversations look to the future and the skills and knowledge an employee will need to attain to achieve their career goals.
- Focuses on employee growth: Development conversations discuss an employee’s potential and their professional goals, combining the two into an actionable plan that helps individuals play to their strengths, grow their skills, and work toward the next level of their career.
- Marries employee interests and business needs: Development plans benefit both your employees and your business by helping employees grow and sharpen their skills and allowing your business to fill skill gaps and cultivate future leaders.
- Aims to improve performance through growth: When employees learn new skills and address their weaknesses, they become more well-rounded and successful in their roles.
Benefits of Using Performance, Compensation, and Development in Tandem
These three reviews are the cornerstone of employee engagement. When used effectively together, they can help build the best workplace for your team. Outside of driving engagement, here are a few other benefits of using performance, compensation, and development cycles in sync:
- Boosting employee motivation: Clear performance expectations, strong compensation, and career development opportunities all motivate your employees to do their best. But all of these factors need to be present for your business to benefit. By building performance, compensation, and development cycles that are in sync, your business can create an effective feedback loop that drives higher performance and engagement among your people.
- Giving employees a natural end and start point: Annual performance reviews mark both the end of a review cycle and the beginning of a new one. Self-evaluations act as a natural reflection point that can help employees look toward the future and determine their engagement goals.
- Improving employee and business alignment: Performance and development discussions typically help employees set goals, which allows the outcomes of these conversations to direct the objectives your employees aim to achieve. This can help ensure your employees’ personal and professional goals align with larger business objectives.
- Creating a culture of continuous feedback: Tying these three cycles together lays the groundwork for your company’s managers to meet frequently with their direct reports to share performance updates, discuss roadblocks, or give and receive feedback. This helps your employees benefit from real-time insights, stronger relationships, and accelerated growth.
Common Pitfalls of Combining Performance, Compensation, and Development
While it can be tempting to merge these three reviews into one, they should all remain separate so your employees can get the most out of these conversations. To clarify, these conversations will still happen in close proximity to one another — sometimes even just a few days or weeks apart — but they should not all occur at the same time.
There are a few different reasons you’ll want to separate these three topics that we’ll outline below:
1. Sharing too much at once can overwhelm employees.
While your managers might be tempted to save time by discussing performance, development, and compensation all in one review, combining these three conversations can overwhelm employees. Employee performance reviews are already a stressful time for many individuals. Creating an “all-in-one” annual review that asks employees to listen to feedback, hear about a potential raise, and plan for their future in one 30-minute or hour-long call is a particularly big ask.
Plus, you don’t want employees and their managers to rush through these important topics, as they each deserve significant discussion. Splitting performance, compensation, and development into three distinct review cycles ensures managers and employees can give each topic their full attention.
2. Raises can overshadow performance and development feedback.
Money can be a strong extrinsic motivator for many employees, so much so that it’s what many individuals look forward to most come annual review time. Unfortunately, when businesses combine performance, development, and compensation into one conversation, money often takes the spotlight.
After an employee hears the amount of their raise or the disappointing news that they won’t be receiving a raise this year, they might not be able to focus on much else. This means employees could miss out on the value of constructive feedback and professional development planning. Conducting these conversations separately instead allows employees to listen to and absorb performance feedback or plan their development strategy.
3. Negative feedback can leave employees guarded and closed off.
If an employee receives negative or unexpected feedback or news (like missing out on a promotion or failing to meet performance expectations), they might put up an emotional wall and cut themselves off from the rest of the conversation. Unfortunately, this doesn’t create the best environment to discuss career growth opportunities or compensation changes.
Even if an employee doesn’t receive the news they wanted to hear, they should still be able to envision a future at your company. Separating performance and development conversations can give this individual a few days to process their emotions and return to the topic of growth refreshed and motivated to improve.
4. Performance looks back; development looks forward.
Performance reviews assess employees’ past performance, while development conversations look to the future to promote employee growth. While these two conversations are related, these topics are a lot to discuss in one meeting and require employees to switch gears from focusing on the past to discussing the future.
Since performance reviews lay much of the groundwork for development conversations, it makes sense to conduct these two conversations separately, but in close proximity to one another. This allows employees to use the learnings from their performance review and coworker feedback to determine which development areas they want to improve in the coming months. This way, employees can benefit from the close relationship between performance and development, while ensuring each topic gets the attention it deserves.
The Complete Review Cycle: How to Use Performance, Development, and Compensation
While your managers and employees shouldn’t conduct performance, development, and compensation reviews at the exact same time, these conversations should work in conjunction with one another. This is where timing is everything. You’ll want to find the right balance for your business to ensure employees get the most out of these conversations, without overwhelming them.
While this timeline may look different for every organization based on existing review schedules, company culture, and employee and manager preferences, here’s an example timeline for how your business can plan performance, compensation, and development reviews to cover the past, present, and future.
1. Performance Reviews
To start, try using your business’s existing performance review cadence to direct how you plan the rest of your review cycles. Since performance, compensation, and development are so closely linked, it makes sense for these conversations to happen near one another, but every organization is different. Your Human Resources team knows your business best, so pick the cadence that works for your employees and managers, while ensuring optimal participation.
If you’re looking to improve the effectiveness of your organization’s performance reviews, check out our performance review template library. These templates include helpful processes, questions, and best practices to help your managers make the most of employee performance evaluations.
2. Compensation and Promotion Cycles
Next, you will need to determine how frequently your business will run compensation reviews. This may mirror your performance management cadence, or your business may opt to only run compensation reviews once a year. Whatever you decide, these conversations should occur closely behind your performance reviews. That way, your organization can use performance ratings to determine compensation changes and your employees still have their performance appraisals and feedback fresh in their minds. Of course, you can always run off-cycle compensation adjustments as needed.
Be sure to have managers tell employees how their salary has been impacted as well as why and when these new changes will take effect. This ensures your employees completely understand the factors impacting their compensation, like performance, so they know they’re being paid fairly for their knowledge and expertise.
3. Developmental Reviews and IDPs
A few days, weeks, or months (depending on the cadence you choose) after your performance and compensation reviews, it’s time to kick off development conversations. This is the last of the three cycles to occur as development conversations pull from both performance and compensation reviews. Now, employees can reference the strengths and weaknesses they included in their self-assessment as well as feedback from manager and peer reviews to come up with a shortlist of areas they want to improve moving forward.
Unlike performance and compensation conversations, development conversations should be led by employees. Of course, your managers should listen, ask questions, and coach employees to discover their interests, ambitions, and potential areas of growth. Managers should also find ways to combine those three factors with future business needs to align employee growth with organizational goals. With this support, employees can build individual development plans (IDPs) to outline their goals and create attainable steps to help achieve them.
4. Ongoing One-on-One Meetings
Just because your review period ends and goals are set doesn’t mean your managers’ and employees’ work is done. An integral part of your performance, compensation, and development strategy must be ongoing communication and feedback. These ongoing one-on-one check-ins ensure there are no surprises during annual evaluations. Plus, they allow your employees to address issues and share meaningful feedback in real time.
5. Repeat
Then, continue these performance, compensation, and development cycles on the cadences that are right for your business. You can create a sample People programs calendar like the one outlined above to keep your employees informed and help your HR team stay on track with planning. Together, these different cycles give your employees and business everything they need to grow and thrive within your organization.
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When used together, performance, compensation, and development can make your employees feel motivated, valued, and challenged. Your business should schedule these cycles so they don’t compete, but rather complement one another. This way, your business and employees can reap all the benefits of these workplace conversations. Every organization has unique needs, so experiment to find the cadence and models that work best for your organization.
For example, wondering if a performance-based compensation model is the best fit for your employees and business? Our new ebook, How to Reward Top Talent With Pay-for-Performance, explains how to thoughtfully integrate performance management and compensation at your organization to reward and retain top talent.
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