Performance Management at Vitality

Health Enterprises, Inc.

Group 5

Case Background:
Vitality enterprise was founded in 1987 in Ames Iowa by Hikaru Fred kikuchi. Initially it
started with importing products and marketing them. In 1989 import tariffs and supply
constraints forced vitality to start their own manufacturing unit. In 1994, vitality partnered with
several leading pharmacy retailers to market their products. In 1995, company went global,
targeting markets around the Pacific Rim including Taiwan, China and Japan. In 1997, Vitality
acquired HerbaPure Nutraceuticals. Vitalitys name was changed as Vitality health Enterprises.
Also in this period company went public. By 2007 company had around 5500 employees in HQ
and nearly 1500 employees in global offices.
In mid 2008 Ms. Beth Williams was made the CEO of Vitality Health Enterprises. In order to
improve the company performance she implemented a new performance management system in
the organization. In 2010, a review of the system gave mixed reviews from the employees with
only 54% of the employees in affirmative.

The Problem:
The Company needs to evaluate whether the new system was actually generating the desired
results in terms of financial benefits and employee motivation.
Performance Management System (before 2009):
Pros:

Low turnover rate due to average compensations being 7- 8% higher than the
competition. The pay policy accounted for comparison ratios which measured the
employee compensation to that of similar people in other organizations and adjusted the
compensation accordingly.

Cons:

The system required the managers to rate the employees from 13 different rating levels.
The rating levels were not clearly defined which resulted in managers giving
homogenous ratings to all the employees. The method de-motivation performers as some
employees coasted while receiving the same benefits.
Though the attrition rate was low, the little attrition that was happening was of the
productive scientists and engineers since they felt unappreciaited for their efforts.
Comparative ratio method resulted in less increments for people who were already
receiving higher salaries giving them less motivation to work .
The system focused on pay stability, the salaries depended on the tenure for which
employees worked regardless of overall performance.

Performance Management System (after 2009):

Pros:

The Company implemented the BARS which gave greater clarity to managers about the
rating system. Also, the rating levels were reduced to 4 from 13.
Managers themselves were rated on their performance on meeting staff needs,
effectiveness in training, development and employee relations, clarity in communication,
implementation of corporate initiatives. Therefore their performance was also under
check.
The system clearly identified poor performers who could be subjected to coaching and
training from their managers.
The system included performance related short term and long term cash and equity
bonuses. ESOPs were offered to upper levels of management to motivate them to actively
implement the new performance evaluation system.

Cons:

The management did not adequately inform the employees about the new system. The
managers were also not given a training regarding the implementation.
Relative ranking would lead to star performers and underperformers in every team, which
would not measure the relative performances amongst teams. Therefore, an employee
who is an underperformer could be performing better than the average performer of
another team. Also, if a team has over-achieved as a whole, the system would force the
manager to distribute their performance to fit the bell curve.
Since the parameters for evaluation were rigidly defined and linked to compensation, the
employees did not have the motivation to perform tasks outside their job descriptions.
Also, managers were not given any extra incentives to perform elaborate evaluation.
Managers still found ways to generalize the rating which forced the HR department to
change the ratings to fit the curve. HR managers were generally not well informed about
the individual employee situations, rendering the entire exercise without any real value.
Since the evaluation had to be done in a specified time period for all employees,
managers did not spend appropriate time on each employee.

Recommendations:
As per our understanding, we recommend the following alterations to be made in the
performance management system:

1. Communication
The senior management should sufficiently inform the employees about the
benefits accruing to the new system and train the managers involved in the
evaluation procedure.
2. Compensation
An employees compensation is dependent on how other members of his team are
performing. He may get a poor rating even if he has performed extraordinarily
compared to his previous performance. Therefore, it is recommended that the
compensation evaluation should also factor in a component of performance
relative to previous years.
Further to motivate employee to act beyond their job description, components
such as overall organizations performance and individual departments
performance should be taken into consideration in their salary calculations.
Parameters for evaluation should be different in different departments. Eg., R&D
scientists should get recognition for their individual contribution while the overall

performance given by the distribution should be given more importance. While

for an executive in the sales department, relative performance should have a
higher weight. Thus the idea is to assign different weights to the relative and
absolute components in different departments.
3. Timing for evaluation:
Since the process is quite elaborate and evaluation should happen throughout the
year as and when the results are generated and goals are met.
The idea is make evaluation a part of the managers regular task list to be
performed rather than a once in a year exercise.
4. Labels:
A lot of emplyees had issues with being tagged as an achiever or low achiever. It
is recommended that these labels are removed and instead a rank order is used.
The idea to increase the point scale from 4 to 6. So that smaller increments could
be given to a larger number of employees.