Discussing rewards for people

Ten years ago, in Out of calibration, I described how and why Microsoft calibrated employees in the same discipline, career stage, and division to determine consistent rewards for performance. Calibration meetings are now called people discussions, and Microsoft no longer specifies the percentage of employees that must fall in each reward range—the “curve” is gone. Instead, managers use a slider in the rewards tool to indicate each employee’s impact, and then those sliders are adjusted through people discussions to align expectations across the division.

Although some mechanics have changed over the past decade, the general approach and reasoning are the same as when I became a Microsoft manager in 1996. Looking back, what’s remarkable to me is that all 14 of my managers in those 25 years ran their people discussions differently. I also sat in on people discussions for other groups, and each of those was unique. There were small differences, such as what information was placed on index cards or the order in which people were discussed, and there were large differences, such as the content covered, the time spent, and the choice of which people to discuss in greater depth.

Different managers have different styles and preferences. To minimize the impact of those differences on these crucial conversations, Microsoft should use a consistent approach, as it has in hiring. If it’s important to calibrate employee expectations, it’s important to calibrate the calibration meetings. Doing so would make rewards more consistent and help the managers running the people discussions, as well as those attending them. But given the wide range of approaches used currently, what’s the best way to run a people discussion? Glad you asked.

The goal

The goal of people discussions is to align performance expectations for employees across a division within each career stage and discipline, rewarding comparable impact with comparable pay. (Career stages are also called level bands, such as Senior, Principal, and Partner.) Impact includes individual accomplishments, contributions to others, and building upon others’ work. Impact can be celebrated or muted by the way it’s achieved: lifting coworkers and partners versus shoving them down and aside.

To reward comparable impact with comparable pay, you need to consider groups of employees that make a similar overall impact—what I like to call equivalence classes. Once those equivalence classes are established, you can apply the available compensation budget to each equivalence class according to impact (setting the rewards tool sliders). Managers place their employees into equivalence classes, then org managers break up, combine, and reorganize their managers’ equivalence classes into joint equivalence classes for the organization.

People discussions are also used to determine promotions and uncover performance issues. If an employee is in the midrange (or higher) equivalence class for the next level, a promotion may be in order. Similarly, if an employee is in a low equivalence class or might even better fit in the midrange equivalence class for the career stage below, it may be time to discuss performance issues.

Non-goals of people discussions include:

• Ranking employees within an equivalence class. There’s no need since everyone in the equivalence class receives the same rewards.
• Balancing compensation budgets. There’s no need since after the people discussion, you can adjust rewards for each equivalence class to best allocate that year’s budget.
• Specifying size limits of equivalence classes. There’s no need since budget isn’t an issue (previous point), and Microsoft no longer defines the distribution of rewards. Some divisions may set expectations around differentiation of rewards, but those can often be met after people discussions by adjusting rewards for each equivalence class.

The preparation

Managers should come to people discussions with seven information items for each employee.

Name	Promote now (Y/N)?
Level/Budget	Length in level

The first four items go on a sticky note or index card like the one above that can be moved around a board (real or virtual) to designate equivalence classes. Higher level and budget values denote higher expected impact. (Budget is typically only included for managers and is often only team compensation budget.) The length in level is measured in months as of the next reward distribution (typically mid-March or mid-August).

The next three items should be recorded in notes by the employee’s manager, along with additional employee feedback brought up during the people discussion. These notes can be passed along to the manager’s manager for aggregate org-wide people discussions.

• A list of no more than five major impacts the employee had during the review period (include any associated peer feedback). Not activity—impact. Not six or seven—five or fewer. Everyone did lots of work—what really stood out?
• A single sentence describing what makes the employee unique and remarkable. Some folks lightheartedly call this a person’s superpower. Why should we value and retain the employee?
• One improvement that would best unblock the employee’s continued growth. If the employee is perfect, they have no future growth potential. What’s the employee’s biggest hurdle?

Notice how these three items concisely capture the variety of impact and the way it was achieved. I’ve seen more detailed lists, but they add time without adding insight (reducing the signal-to-noise ratio).

Some org managers like their staff to fill out templates with the information above. Choose whatever method makes it easiest to have a productive people discussion.

Some org managers ask managers to “come in balanced”—that is, with a balanced compensation budget. To do so, put your employees in equivalence classes yourself or with your own people discussion, and then adjust rewards for each equivalence class so that the budget is balanced. These are initial values that will get adjusted again through your manager’s people discussion.

The procedure

The people discussion meeting takes about five minutes per employee plus ten minutes for each career stage discussed. If you’ve got a 20-person group with four career stages (ex: SWE I, SWE II, Senior, Principal), that’s 20*5 + 10*4 = 140 minutes (roughly two and a half hours). For orgs with 100 employees, expect the discussion to take roughly nine hours. In large groups, there’s typically a large equivalence class in the middle, so those people are often skipped to focus time on low- and high-impact people. Personally, I prefer to discuss every employee, since great and problematic folks can sometimes get lost in the middle. Schedule meeting time accordingly.

Invite the org manager, the org manager’s manager (optionally as a courtesy), the org HR representative, the managers, and other significant stakeholders at the discretion of the org manager. I usually invite PM managers and sometimes key customers and partners. (They often don’t attend—it’s a long meeting.)

The following steps should be taken for each career stage, starting with highest (ex: Principal). Start with the highest career stage to establish its midrange equivalence class, which will be used later to evaluate promotions into that higher stage.

1. Each manager gets a row on the real or virtual board where they place the index cards for employees in the career stage being discussed, grouping them into that manager’s equivalence classes, with the lowest class on the left and highest on the right.
2. Starting with one employee from their highest equivalence class, each manager enumerates the name, promote now status, level/budget, length in level, one to five impacts, the superpower, and one improvement for their employee. Other attendees can, if they choose, briefly add feedback on each employee they know. The org manager should hold the time for each employee to five minutes.
3. The org manager then moves the set of employee index cards just discussed into one or more joint equivalence classes. The org manager needs to establish the first cut at equivalence, setting clear expectations.
4. Everyone then discusses the joint classes—breaking up, combining, or moving around cards as needed and agreed to by the org manager.
5. The procedure returns to step 2 with each manager’s next employee in their highest equivalence class. Managers with smaller teams than their peers may choose to skip their turn if their next employee is clearly in a lower equivalence class than the others. Joint equivalence classes are reused and reconfigured as needed.

When every employee in the career stage has been discussed and placed in a joint equivalence class, the org manager then discusses promotions and performance issues.

• Employees considered for promotion should have landed in a high equivalence class and fit in the midrange (or higher) equivalence class for the next level. Other employees in high equivalence classes with more than 12 months in-level should also be considered for promotion.
• Employees in low equivalence classes should have performance discussions with their managers. For lower career stages (ex: SWE I, SWE II), employees in midrange equivalence classes who’ve been in-level years longer than their peers should also have performance discussions, since they should be ready for promotion but aren’t.

At the end of each career stage, the org manager may have some summary thoughts on the results and quality of the discussion. The attendees may also agree to take a short break. You typically work through lunch.

This procedure was refined over decades using elements from people discussions run by many different organizations and leaders. The method focuses on consistency, fairness, diversity, impact, differentiation, and running an efficient and effective meeting.

The exceptions

Our lives are complex involving a variety of circumstances. For people discussions, there are three special cases to mention when discussing an employee.

• Part time/On leave If an employee works part time or takes a leave, they won’t have as many chances as their peers to make substantial impact. Their prorated compensation already accounts for this. Mention that the employee works part time or took a leave before enumerating their one to five impacts so that volume of opportunity won’t count against them twice.
• Job fit Sometimes employees are in roles that don’t align with their strengths and/or accentuate their weaknesses. This may place the employees in low equivalence classes. The performance discussions for these employees should focus on reassigning them to roles that better fit their skill sets. While those roles may be outside the company, often they can be within the same org.
• Randomization Sometimes employees are switched frequently between projects, teams, and managers through no fault of their own. These switches inevitably reduce employee impact. Experienced employees should take steps to avoid such randomization, but for inexperienced employees, randomization can be accounted for by placing them in midrange equivalence classes.

The mistakes

Managers often make mistakes in people discussions. Here are some common ones.

Some org managers discuss each employee but don’t create equivalence classes. Instead, each employee is rewarded independently of others (grouped indirectly by rewards but not directly by peers). That’s a problem because without the context of peers it’s hard to be consistent, it’s hard to compare impact fairly, and it’s hard to provide the employee with feedback and examples from peers in nearby equivalence classes.

Some managers take more than five minutes per employee. That’s a big mistake. You annoy your peers and org manager, leave no time for clarifications and feedback, and could cause a poor assessment because folks can’t remember what you said. It should take no more than three minutes to enumerate the one to five impacts, superpower, and improvement for each employee. Avoid describing mind-numbing detailed activity. Focus on differentiation and top impact. Practice until you can describe your employees nicely in less than three minutes. Org managers should hold you to that limit.

Some managers argue about ordering within an equivalence class. Since everyone in the equivalence class gets the same rewards, these arguments are superfluous at best and antagonistic at worst. If you feel your employee is sufficiently differentiated from the others within an equivalence class, argue for the class to be split or for your employee to be in a different class. If your org manager and peers disagree, move on.

Some managers agree with an equivalence class for an employee but want the employee moved to a higher class anyway in order to retain them. Not only does this unfairly harm peers, but it also may not retain the employee. While retention can be related to compensation, retention is a separate matter. There’s a special budget available for retention if money is the issue. There are new assignments, new roles and responsibilities, and additional visibility and ownership opportunities if those are an issue. Use the right tool to solve the problem.

Some managers can find no fault, weakness, or growth area for an employee. That’s tragic. No growth area means no growth. The employee is done. Even if an employee is up for promotion, consider what’s keeping them from the level beyond that. Everyone deserves a balanced view of themselves and an opportunity to improve.

Some managers refuse to give anyone less than full rewards—another big mistake. The compensation budget is typically around 110% of full rewards for everyone. Employees who had outstanding years may receive 140%, 160%, or occasionally 180% of full rewards, depending on their equivalence class. However, if no one receives less than full rewards, then only one in four employees can receive 140%, and no one can get more. Some years it might make sense to have just two equivalence classes, but most years there’s greater differentiation. The solution is to accept that each year a few people do struggle for a variety of reasons. An employee’s challenges may be temporary or a trend, but either way, it’s better to be honest with the employee about their situation. Doing so sends the employee a clear message. It also frees up funds to recognize a special year for a few of their peers.

The result

Using a common approach to people discussions produces fair, consistent, differentiated rewards based on impact for a diverse collection of employees. It also simplifies running and attending people discussions, since there are clear and familiar expectations across groups and years.

Have each manager come prepared with simple index cards (real or virtual), a list of one to five major impacts the employee had during the review period, a single sentence describing what makes the employee unique and remarkable, and one improvement that would best unblock the employee’s continued growth. Schedule a meeting with enough time to discuss each employee (five minutes per employee plus 10 minutes for each career stage) and invite all key stakeholders. Starting with the highest career stage, discuss each employee for five minutes, and then have the org manager place them in a joint equivalence class with attendees reviewing. Verify that employees up for promotion are from high equivalence classes and fit into at least a midrange class at the next level. Follow up with employees in low equivalence classes to ensure their performance improves. Account for part-time employees, employees on leave, employees in roles that don’t fit their skill set, and employees that were switched frequently between projects, teams, and managers.

The result is an efficient and effective people discussion that lacks the confusion and disparity that inconsistent approaches can bring. Determining people’s rewards is stressful enough. These meetings are long and difficult. Setting them up to be constructive, personal, fair, and clear can make a hard day feel quite rewarding.