4 Risks of Linking 360-Degree Feedback to Performance Appraisal and/or Compensation

“According to the law of nature it is only fair that no one should become richer through damages and injuries suffered by another.” -Marcus Tullius Cicero

The sensitive nature 360-degree feedback programs make them inherently fraught with risk, even when done well. To link the results of the 360 to compensation take these risks to a level that should make you very uncomfortable.

Here are four of the major risks associated with linking 360-degree feedback to compensation.

(1)  It is difficult to know which rater group to use (e.g., manager ratings are significantly higher than direct reports) for feedback. When correlations between rater groups are low, it can be difficult to pick which group’s feedback to pay attention to.

(2)  It is difficult to evaluate within rater agreement. Within a particular rater group, there could be outliers or extreme scores that skew the average for the group. How would you handle outliers?

(3)  360-degree feedback may not measure the right behaviors. The type of rating and response scale for most 360-degree feedback assessments are generally not appropriate for performance appraisal and compensation decisions. (e.g., a “potential” scale should never be used for compensation decisions).

(4)  Raters can manipulate scores to control how a participant gets paid. Raters may evaluate participants with the intention of having a say in future of his or her salary instead of the intention of helping them develop.

Or, conversely, they may attempt to help each other out. Imagine they do a deal with each other, “If you give me high ratings, I’ll give you high ratings too”. This process would diminish the value of objectivity and defeats the purpose of developing personnel.

Unfortunately these risks haven’t stopped many companies from using 360-degree feedback for compensation decisions anyway. In a 2009 survey of over 50 companies by the 3D group, 16% reported that 360-degree feedback was directly linked to pay increases.

While you shouldn’t use 360-degree feedback for compensation decisions, 360-degree feedback can support some aspects of performance appraisal systems. For example, generating an individual performance development plan is typically a strategic part of most performance-appraisal systems and can actually strengthen existing performance management systems. However, it should not be the determinant of performance or replaced with performance appraisal or assessments.

According to UCLA Management Professor, Samuel Culbert, performance reviews “destroy morale, kill teamwork, and hurt the bottom line”. Furthermore, he claims that there is an “absurdity” when bosses, as they often do, base their reviews on anonymous feedback from others. He claims it is synonymous to receiving “hate mail”.

Now…should “hate mail” be what establishes a person’s income? I’d think twice about that!…

Sandra Mashihi

Dr. Sandra Mashihi is a senior consultant with Envisia Learning, Inc. She has extensive experience in sales training, behavioral assessments and executive coaching. Prior to working at Envisia Learning, Inc., She was an internal Organizational Development Consultant at Marcus & Millichap where she was responsible for initiatives within training & development and recruiting.. Sandra received her Bachelor’s of Science in Psychology from University of California, Los Angeles and received her Master of Science and Doctorate in Organizational Psychology from the California School of Professional Psychology.