FISCAL NOTE STATE HUMAN RESOURCES COMMISSION PERFORMANCE MANAGEMENT RULE CONTACT PERSON: Jennifer McGinnis, [email protected]919-733-8340 RULES: 25 NCAC 01O.0101 POLICY – Repeal 25 NCAC 01O.0102 PURPOSE – Repeal 25 NCAC 01O.0103 COMPONENTS OF A PERFORMANCE MANAGEMENT SYSTEM – Repeal 25 NCAC 01O.0104 RATING SCALE – Repeal 25 NCAC 01O.0105 DISPUTE RESOLUTION – Repeal 25 NCAC 01O.0106 MONITORING, EVALUATION, REPORTING – Repeal 25 NCAC 01O.0107 PERFORMANCE MANAGEMENT POLICY - Adopt 25 NCAC 01O.0108 PERFORMANCE MANAGEMENT COVERED EMPLOYEES – Adopt 25 NCAC 01O.0109 PERFORMANCE MANAGEMENT DEFINITIONS – Adopt 25 NCAC 01O.0110 PERFORMANCE CYCLE – Adopt 25 NCAC 01O.0111 DOCUMENTATION OF PERFORMANCE – Adopt 25 NCAC 01O.0112 PERFORMANCE MANAGEMENT RESOURCES AND TRAINING – Adopt 25 NCAC 01O.0113 CONFIDENTIALITY AND RECORDS RETENTION – Adopt 25 NCAC 01O.0114 PERFORMANCE MANAGEMENT COMPLIANCE – Adopt 25 NCAC 01O.0115 PERFORMANCE RATING DISPUTE – Adopt 25 NCAC 01O.0207 FREQUENCY OF PERFORMANCE REVIEWS – Adopt 25 NCAC 01O.0208 PERFORMANCE PLANNING – Adopt 25 NCAC 01O.0209 PERFORMANCE FEEDBACK – Adopt 25 NCAC 01O.0210 ADDRESSING POOR PERFORMANCE – Adopt 25 NCAC 01O.0211 ANNUAL PERFORMANCE EVALUATION - Adopt (See proposed rule text in Appendix.) STATUTORY AUTHORITY: G.S. 126-4; G.S. 126-3(b)(8) IMPACT SUMMARY: State Government Impact: Yes Local Government Impact: No Substantial Economic Impact: Yes Federal Government: No EFFECTIVE DATE: July 1, 2015
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FISCAL NOTE STATE HUMAN RESOURCES COMMISSION
PERFORMANCE MANAGEMENT
RULE CONTACT PERSON: Jennifer McGinnis, [email protected] 919-733-8340
142, Section 25.2C.(b)) and ordered a comprehensive review of the public employee compensation plans
to include review of the performance management program (S.L. 2012-142 and Session Law 2011-145,
Section 29.20). The legislation required recommendations for the design of an effective employee
performance evaluation system, including the identification of effective employee performance measures
and information systems to track and monitor employee performance. The Legislative Services
Commission never awarded a contract for this comprehensive review. In the meantime, the Office of
State Human Resources (OSHR) led the effort to comply with the State Auditor’s recommendations and
received authority through passage of H.B. 834 (Session Law 2013-382) to develop criteria and standards
for performance management and employee evaluations. It was determined that the OSHR would lead the
efforts to overhaul three primary areas related to performance management:
1. Policy/Rules,
2. Process, and
3. Technology.
In early 2012, the OSHR Talent Management team conducted thorough needs assessments with the
Cabinet, Council of State, Judicial and others agencies to establish requirements for both learning and
performance technology systems. OSHR drafted the request for proposals that included the requirements
for a performance management system, and in October 2012, OSHR selected Cornerstone on Demand
from the bidding vendors. Cornerstone is Software as a Service. OSHR received the funding for
implementation and for the subscription services for both learning and performance management. OSHR
successfully implemented the Learning Management System between June 2013 and December 2013 and
to date, has had over 1,000,000 learning object completions. The Performance Management (PM)
automation is an additional functionality in the system, so OSHR placed the implementation on hold until
H.B. 834 was signed into law, then OSHR signed an agreement with the vendor to provide the
implementation of the PM component.
The technology is configured to meet the policy/rules and process needs of the State and allow both
OSHR and State agencies to monitor and report on the process and policy/rules compliance. The state-
wide PM administrator will work with the agency PM administrators to determine the agency
configurations, if appropriate. In addition, the tool can be utilized by individuals who do not have access
to computers on a daily basis.
The establishment of the Statewide Performance Management rules would provide standardization of
both rules and process, as well as pave the way for the implementation of a technology-based tool to aide
both managers and employees in the performance management process. The policy/rules would define the
performance management philosophy and provide consistent application of the process with technological
monitoring. These rules would establish standard rating scales and interface with the Employee Relations
and probationary employee rules.
To address the issues identified in the State Auditor’s report, OSHR is proposing a series of changes to
the current performance management program, as outlined in Table 1 below.
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Table 1. Proposed Performance Management Program Changes
Current Performance Management
Program
New Performance Management Program
Each agency has a unique PM process,
form, and policy. • Standardized and automated form and rating scale
• Standardized policy and process
Each agency has a unique PM philosophy
and PM training approach.
• Standardized philosophy
• Training would be 80% standardized, with 20% agency specific
PM Training is conducted on an “as
needed” basis.
• Imbedded in manager/supervisor and individual contributor
curriculum
• Utilize varied delivery methods
• Training would be consistent and continuous
Many PM plans duplicate the job
description and do not include strategic
goals.
• Strategic goals cascaded from top of organization
• Collaboration during goal setting process
• SMART goals which move organization forward
Managers provide a rating to employees
with little or no employee input. • Continuous dialogue throughout the year
• Formal and informal coaching
• Ability for employee to provide feedback on progress
• Manager is held accountable for ensuring each employee has a
performance plan in place
Managers alone determine final
performance ratings. • Calibration sessions conducted at beginning and end of cycle
Includes only employees who are subject
to the State Human Resources Act • Includes employees at all levels of the organization, including
employees exempt from the State Human Resources Act
Summary and Impact of Proposed Rule Changes:
Benefits of Performance Management Policy, Process, and Technology Standardization
There are many benefits of a standardized performance management system. The State of North
Carolina’s performance management system was built from a combination of performance management
best practices, agency best practices (including the NC Department of Transportation, DOT, which
implemented a very similar performance management system in and around 2010), input from a
collaborative working team consisting of representatives from all Cabinet, Council of State and Judicial
areas, as well as feedback from pilot implementations within the Department of Environment and Natural
Resources (DENR), Office of Information Technology Services (ITS), and OSHR. After the pilot
implementations, a “lessons learned” exercise was conducted, which included receiving feedback from
end users at both the individual contributor and manager/supervisory level. These lessons have been
incorporated into the strategy for an enterprise rollout.
The benefits expected from this new system are presented below by affected party.
5
State Government:
1) Staff time and cost savings from:
a) Eliminating agencies’ “shadow” PM processes
Under the previous policy, each agency developed its own PM process, forms, and systems,
evaluated the system every 3 years, and developed PM training, as well as defined values at the
different levels of the rating scale and converted agency-specific rating scales to the state-specific
rating scale. Based on the State Auditor’s report and needs assessment meetings with agencies,
OSHR estimates that 100 FTE working within Cabinet and Council of State Agencies as well as
the Judicial branch were providing at least 500 working hours each per year to design the
individual agency processes and then to monitor compliance with those. At an average hourly
compensation (salary plus benefits) of $38.04, the cost of the previous policy is estimated at $1.9
million. When the new PM system is implemented, PM policy, forms, and process would be
standardized and would gradually decrease the amount of time agency PM coordinators spend on
these tasks. Additionally, utilizing standardized classroom and e-learning delivery methodologies
for PM training would reduce the need for agencies to develop and revise unique training
programs related to performance management. Based on DOT’s experience with the PM system,
as well as that of agencies implementing the pilot, this analysis assumes the proposed change
would lead to an initial reduction in hours to 250 hours per employee (who are dedicated to
internal PM process/policy), and then to 100 hours, resulting in time savings of about $1.5
million per year.
b) Eliminating need for HR review of agency processes
By eliminating the agencies’ “shadow” PM processes, the change would also save State Human
Resources Commission and OSHR staff time on reviewing agency PM processes and approving
agency policies and procedures. OSHR plans to reallocate whatever time is saved on agency
reviews towards consulting with agencies’ performance management personnel and focusing on
PM strategy, calibration of goals and performance plans, and employee engagement, discipline,
and retention using the new PM system. Therefore, this analysis does not estimate either the value
of the time saved from eliminating the need for OSHR review of agencies’ performance
management processes, or the cost of staff time to establish and implement the new PM system,
since they would cancel each other out.
c) Decreasing agency administrative reporting times
The reporting time would decrease as a result of having one singular database to report on the PM
process, ratings, and system. OSHR estimates that under the prior policy, agencies needed a total
of 100 employees with the average hourly compensation (salary plus benefits) of $38 providing at
least 100 working hours each to meet the reporting requirement, for a total cost in the first year of
$380,400. When the new PM system is implemented, PM reporting would be in one central area
and would increase the reporting ability and decrease the amount of time required to collect and
report on PM data. Also, the performance ratings would be automatically sent from the PM
technology tool directly to BEACON, so the HR staff would not have to run any final reports or
manually enter the overall performance ratings into BEACON. All this would decrease by half
the reporting hours to 50 per year per those 100 employees, based on the experience of PM
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implementation in DOT and other pilot agencies. Assuming a 1% annual wage growth (based on
recent state employee salary increases approved by the NC General Assembly), the time saving
would be close to $190,000 in the following years.
d) Automating the PM process
The change would result in a move from a manual, paper-intensive process to an electronic,
automated process that also provides electronic storage. OSHR estimates that each of the
currently 8,000 state managers spend 11 hours per employee annually on Performance
Management (1 hour on performance planning, another hour on interim reviews, about 7 hours on
related employee issues, and 2 hours for annual performance evaluations – see column 1 in Table
2). At an average manager compensation of $38/hour (salary plus benefits), the value of that time
is currently estimated at $19.5 million. With the automation of the system, it is estimated that
managers would be able to gradually decrease the amount of time spent on the process and
employee relations issues and increase the time spent on proactive coaching and development.
This analysis assumes that from FY 2016-17 and beyond, manager time spent on PM would be
reduced to 7 hours per employee annually (1 hour on performance planning, and 1 hour for the
interim review, 2 hours for coaching, close to 2 hours for related employee issues, and 1 hour for
annual performance evaluation – see column 3 in Table 2). This decrease would result in annual
savings of about $11.7 million starting in FY 2016-17, assuming a constant state employee
number of 75,000 and an annual increase in state manager salaries of 1%.
Table 2. Estimated Time Supervisors Spend Annually on PM related work, per Employee
Type of Task Current PM
System
New PM System
in FY 15-16
New PM System
after FY 15-16
Performance planning 1 3 1
Interim review 1 2 1
Employee issues/guidance 7 7 4
Performance evaluation 2 4 1
Total 11 16 7
e) Improving retention
The agency expects that hiring and training costs would decrease from potentially improved
retention of top talent as the rules lay a foundation for performance to be utilized as a component
of compensation decisions. As a result of a more transparent PM system, there is also a possibility
that the proposed change would lead to better retention of talented employees; however, there is
little information related to this causality and estimating the benefit of this transparency may be
difficult.
f) Spending less time on grievance process
The agency expects this would result from applying similar performance expectations for
employees across state government and addressing all performance that “does not meet
expectations” prior to it becoming an employee relations issue. OSHR does not track the number
of grievances that specifically originate due to performance issues, making this benefit difficult to
7
quantify. Additionally, quantification would be complicated by the fact that OSHR has anecdotal
evidence of managers inflating performance ratings to avoid the previously lengthy and time
consuming grievance process.
g) Addressing poor performance in the probationary period
This would lead to identifying the need for termination sooner, and possibly leading to cost
savings. OSHR does not have the necessary data and information to estimate this savings.
2) Increase efficiency/efficacy from:
a) Improving job and agency performance as a result of increased accountability
The authors of a 2011 study suggest that performance management can be used to drive employee
engagement.2 They believe that performance management activities, such as collaborative setting
of performance goals, providing ongoing feedback, and effective annual and interim evaluations,
can serve as a useful framework for managers to translate strategic goals into actions that increase
engagement. Other researchers have built on these results, showing that feedback has a positive
impact on employee job satisfaction and found that the implementation of a performance
management process, which facilitates communication of organizational goals to employees,
promotes motivation and dedication.3 Another survey conducted by Deloitte revealed that 56% of
responders believed that a performance management process, which relies more on goal setting,
feedback, and coaching and less on numeric ratings, positively affects employee engagement and
performance.4
The Gallup 2014 report “State of the American Workforce” estimates that close to 70% of the
workforce in North Carolina is currently disengaged.5 At a cost of about $2,400 per employee
who is disengaged (based on a $2,246 estimate from 2011 and NC inflation data),6,7 and assuming
that 70% of the state’s 75,000 employees are disengaged, the cost of disengagement to the state is
currently close to $126 million annually. OSHR believes that under the proposed changes,
engagement would be driven by the new process of collaboration and continual dialogue between
managers/supervisors and employees throughout the year; the interaction between
2 Mone, Edward et. al. “Performance Management at the Wheel: Driving Employee Engagement in Organizations.”
Journal of Business and Psychology. June 2011, Volume 26, Issue 2.
http://link.springer.com/article/10.1007/s10869-011-9222-9#page-1 3 Ángel Calderón Molina, M., Manuel, H. G., Palacios Florencio, B., & Luis Galán González, J. 2014. “Does the
balanced scorecard adoption enhance the levels of organizational climate, employees' commitment, job satisfaction
and job dedication?” Management Decision, 52(5).
http://search.proquest.com/docview/1633967226?accountid=14078 4 Parent, David, Nathan Sloan, and Akio Tsuchida. “Performance Management: The Secret Ingredient.” Global
Human Capital Trends 2015: Leading in the New World of Work, Deloitte University Press. February 2015.
http://d2mtr37y39tpbu.cloudfront.net/wp-content/uploads/2015/02/DUP_GlobalHumanCapitalTrends2015.pdf 5 Gallup. “State of the American Workplace: Employee Engagement Insights for US Business Leaders.” 2013.
http://www.gallup.com/services/178514/state-american-workplace.aspx 6 People Metrics. “Calculating the Cost of Employee Disengagement.” June 13, 2011
http://www.peoplemetrics.com/blog/calculating-the-cost-of-employee-disengagement 7 IHS Connect Regional Database. North Carolina Consumer Price Index (CPI) (1982-84=100) Forecast.
Total Benefits $1,141,200 $7,728,916 $25,375,324 $31,509,137
NPV of Benefits (mil.)* $56.2
Net Impact $130,700 ($32,132,925) $19,035,259 $25,108,638
NPV of Net Impact (mil.)* $7.2
* NPV stands for Net Present Value and is computed as of FY 2014-15 using a 7% discount rate, as required by
statute (G.S. 150B-21.4 (b1)).
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Risk Analysis
There are uncertain future events, that should they occur, would impact or jeopardize established
assumptions. These include:
1. The lack of continued funding for the performance management technology
If this were to occur, state agencies may not be able to continue implementing the PM system,
and therefore the costs and benefits estimated might not be incurred.
2. Different impact on employee engagement than assumed
The analysis assumed that the new level of transparency and increase in employee accountability
would lead to about a 3% point annual decrease in the employee disengagement rate, which
would translate into a savings of $2,400 per employee. While the survey literature on this topic
suggests a positive relationship between well-designed PM systems and employee engagement
and subsequently, between employee engagement and performance, there is little direct empirical
evidence on the extent to which a well-designed PM system actually increases engagement and
therefore, results in higher performance. . 8,9 Additionally, $2,400 is only one estimate of what the
value of disengagement per employee may be. Research from Gallup suggests it could be
between $3,400 and $10,000. Table 5 presents the two-way sensitivity analysis for the $7.2
million in net benefits ($56.2 million NPV of benefits less $49 million NPV of costs) to the
assumptions used to compute the savings from lower disengagement.
Table 5. Sensitivity Analysis for Disengagement Cost Saving Estimate
Sensitivity Analysis on 4-
Year NPV of Impact
Savings per Employee from Increased Engagement
$1,000 $2,400 $3,500 $5,000 $10,000
Annual
Decrease in
Percent of
Disengaged
Employees
0.0% ($23.6) ($23.6) ($23.6) ($23.6) ($23.6)
1.0% ($19.7) ($14.3) ($10.1) ($4.3) $14.9
2.0% ($15.9) ($5.1) $3.4 $14.9 $53.4
3.3% ($10.7) $7.2 $21.3 $40.6 $104.7
4.0% ($8.2) $13.4 $30.3 $53.4 $130.4
5.0% ($4.3) $22.6 $43.8 $72.6 $168.8
3. Different impact on time savings than assumed
The benefits section made several assumptions about the decrease in staff time spent on
performance management as a result of the new system. The analysis assumed that the
implementation of the new system would require managers and employees to spend 5 additional
8 Mone, Edward et. al. “Performance Management at the Wheel: Driving Employee Engagement in Organizations.”
Journal of Business and Psychology. June 2011, Volume 26, Issue 2.
http://link.springer.com/article/10.1007/s10869-011-9222-9#page-1 9 Koufteros, Xenophon, Anto (John) Verghese, and Lorenzo Lucianetti. “The effect of performance measurement
systems on firm performance: A cross-sectional and a longitudinal study.” Journal of Operations Management,
Volume 32, Issue 6, September 2014. http://www.sciencedirect.com/science/article/pii/S0272696314000473
hours on performance management in FY 2015-16. Due to the new level of transparency and
increased employee accountability, the new system would lead to a 4-hour decrease in the time
supervisors/managers spend per employee after the year of implementation and to an increase in 2
hours spent by each employee. Tables 6 and 7 present the sensitivity of the cost and benefit
estimates (the 4-year NPV) to these assumptions.
Table 6. Sensitivity Analysis for Time Saving Estimates during Implementation
Additional Time Spent on PM by
Managers and Employees, per Employee 4-Year NPV of Net Impact (mil.)
0 $31.6
2 $21.9
5 $7.2
7 ($2.5)
10 ($17.2)
Table 7. Sensitivity Analysis for Time Saving Estimates after Implementation
Sensitivity Analysis on 4-Year
NPV of Net Impact
Additional Time Spent by Managers after Implementation
-8 -4 -2 0 2 5
Additional Time Spent
by Employees after
Implementation
0 $35.0 $15.3 $5.4 ($4.5) ($14.3) ($29.2)
1 $31.0 $11.2 $1.4 ($8.5) ($18.4) ($33.2)
2 $27.0 $7.2 ($2.7) ($12.5) ($22.4) ($37.2)
4 $18.9 ($0.8) ($10.7) ($20.6) ($30.4) ($45.3)
5 $14.9 ($4.9) ($14.7) ($24.6) ($34.5) ($49.3)
4. The impact of the new compensation structure
OSHR is planning to roll out a new compensation structure in 2016 that could have components
of pay for performance associated with compensation. Such a component is very likely to
improve retention, especially of top employees, and thus reduce replacement costs. Gallup
estimates that a conservative replacement cost is, on average, about 50% of an employee’s annual
salary.10 Annually, cabinet and council of state agencies replace, on average, approximately 7,000
FTEs, translating into a replacement rate of about 9%. Assuming that the proposed changes
would lead to a 10% decrease in the replacement rate, and given the average state employee
salary of about $41,600, the proposal could save about $14.6 million in replacement costs
annually. Table 8 below shows how this saving is affected by the 10% decrease in the
replacement rate. Note, the federal government, which has a similar performance management
system in place as the one proposed in NC as well as pay-for-performance, has a replacement rate
of 4% in 2012 (based on a retention rate excluding retirees of 96%).11
10 Robison, Jennifer. “Turning Around Employee Turnover.” Gallup. May 8, 2008.
http://www.gallup.com/businessjournal/106912/turning-around-your-turnover-problem.aspx 11 US Government Accountability Office. “Performance and Accountability Report Fiscal Year 2012.” Table 1.
http://www.mercer.com/content/dam/mercer/attachments/global/Talent/Assess-BrochurePerfMgmt.pdf 14 Vorhauser-Smith, Sylvia. “Three Reasons Performance Management will Change in 2013.” Forbes. December