Since its inception in 1935, Arrow Electronics has been able to grow its business by adapting to the ever-changing technology industry; so much so that by 1995 it was known as the world’s largest distributor of electronic components and computer parts.
Along with its success, Arrow faced problems with retaining employees in an industry known for high turnover and the dilemma of an ineffective perfomance appraisal system. Many employers within the distribution industry faced turnover rates as high as 20-25% a year to poaching by other distributors through guaranteed incentives. In an industry notorious for incentiving employees, it is no wonder that it is never enough and employees learn to be loyal to the highest bidder rather than a partciular company. What this clearly illustrates that money is only good for so long until it’s time to move on to the next job and get paid more until that the excitment of that increase wears off too and becomes just another paycheck.
Arrow’s response to the issue of lack of loyalty was to get students right as they graduate from college. Their thought that was by starting them off with a good salary and promoting Arrow’s status within the industry, the loyalty would be higher. After the two year introductory period, what Arrow actually found was that instead of comparing their salary to their fellow graduating class, the employees were comparing themselves to others within the industry. In addition, the higher starting salary Arrow offered to these new graduates caused contention within the employees who had been with Arrow for several years. Thus, this approach not only failed to keep the new employees, but it caused resentment from those who had been there and felt that they had earned their place. A better approach might have involved finding out what the long time employees valued about Arrow and what the company can do to continue to keep them happy rather than making them feel inferior to these new, fast tracked graduates. I strongly believe that if people are satisfied in their job and with the company, money will take a backburner (to a certain extent because we all have bills to pay) and the employees will be loyal.
In addition to the issue of turnover, the CEO, Stephen Kaufman, was adamant about using performance appraisals as a way to weed out employees as well as tying it to salary increases. The PA system rated employees on an implied scale of 1 to 5 (the actual categories used verbiage comparing the employee being evaluated to other employees) and was extremely subjective. In the beginning, managers would simply give everyone high ratings, but Kaufman was unsatisfied with these resultings saying that employees can’t be good at everything and basically that even if this were true, Arrow’s budget could not support all of the performance raises. Furthermore, when managers fired employees for performance related reasons, HR could find no documentation of poor performance when all of the prior evaluations had high ratings. Kaufman blamed the managers for the problems with the PA system, thus he decided to implement more training for the managers to familiarize them with what he was looking for in the results. Kaufman made it clear that he was looking for a particular distribution of the ratings and even went as far as mandating that every employee receive at least one 2 in the areas of evaluation. While Kaufman was trying to get his employees to understand that low scores were not a form of punishment, the fact that the ratings were tied to compensation contradicted this assertion. Thus, managers would give higher ratings to people who were about to leave in order to try to bump their salary to convince them to stay. Also, managers would give higher ratings to people they worked with more closely to avoid the awkwardness of having to deal with unhappy employees who did not receive a raise due to poor ratings.
Kaufman fails to realize that his PA system is the real problem, not the management’s inability to evaluate employee performance. The system is extremely subjective, comparing employees to one another rather than basing it on their actual ability to do their specific job, which doesn’t provide valuable feedback to employees. A better approach is to get rid of the PA system and allow the managers to provide continuous feedback to their employees throughout the year. PA systems do not provide an accurate way to weed out employees. If employees are underperforming, they should know about it when it happens and the manager should work with the employee to understand why (lack of training, etc.). In addition, PAs should never be the driving factor for salary increases because it promotes management to rate people according to whether they should receive a raise or not regardless of their actual performance.
My advice to Arrow is to throw out the PA system and work on keeping the employees you have by improving your system to increase employee satisfaction through methods other than monetary incentivization.