By Michelle Conlin

During the boom, workers often shrugged off annual reviews as exercises in utter meaninglessness. Companies were so desperate to keep people that grade and bonus inflation ran rampant, creating a kind of corporate Lake Wobegon, in which all performances were strong and all cube dwellers above average.

Now, in the New Economy’s first recession, the glow is gone as harsh reviews pummel grades, batter bonuses, and often turn the closed-door sessions into tense, stony-faced affairs. True, economists note lots of encouraging data supporting an upturn. But by then, many reviews will likely be altered for good.

That’s because what was once a smushy, subjective effort by finger-in-the-wind managers is hitting new levels of scientific precision–with the help of the latest technology. More and more, companies are turning to Web-enabled employee performance software that allows them to analyze with cold, hard data just how effective their ranks are. Back in the 1980s and ’90s, the focus was on business units, with compensation tied to the group’s overall performance. Today, tracking software can zoom in on the finest-grained measure of an individual’s output, so that everyone from customer service reps to marketing execs can be paid in the modern equivalent of a piece-rate system.

Think of it as a kind of Six Sigma program for human capital. By identifying which workers are best at which skills, companies can quickly assemble the most stellar teams. The technology’s performance data help managers identify whom to lay off, thus helping to cut costs and lift productivity–even in the midst of a downturn. Moreover, it’s another tool in the emerging corporate star system, in which top players are lavished with rewards, while the middling make do with less. It was all part of the larger development in Corporate America of transforming labor from a fixed to a more flexible cost.

The methods are attracting a growing group of adherents, including Hewlett-Packard (HWP ), General Electric (GE ), DuPont (DD ), and Sun Microsystems (SUNW ). British Airways PLC (BAB ) uses the new software to ensure that customer service reps’ time in the break room or on personal calls doesn’t count on the clock. Customer-complaint resolutions and ticket sales also are calculated. The technology can keep track so that extra incentive dollars are eventually kicked directly into the paychecks of those whose digital records merit the boost. “We knew how many hours our planes were on the ground or in the air–the productivity of our capital,” says Steven Pruneau, British Airways’ manager in charge of the project. “But we didn’t have a fraction of that kind of information about the productivity of our other assets–our human capital.”

While the technology–which is made by companies such as Synygy, Incentive Systems, Workbrain, Replicon, and Performaworks–is most commonly deployed in customer service departments, it is reaching into other layers of companies, too. At Hewlett-Packard, a new incentive calculator allows sales and marketing executives to see just how much they’ll earn if they double their goals. At Bayer, executives were able to instantly rejigger incentive metrics after the September 11-related run on Cipro. Bayer wanted sales staffers to reap windfalls only if they were putting in extra physician and hospital calls, not just riding on the unprecedented demand.

Critics say these developments can take on an Orwellian cast. Some software experts predict companies will soon be able to blend in the monitoring information they already have–how much time their employees spend pleasure-surfing the Net, what time they arrive at work via their key cards, and what they do when they get there through concealed security cameras–with the new goal data. If that happens, there will likely be a huge dustup over employee privacy. But in the near term, the new technology is bound to make it easier for companies to single out the coasters–as well as identify who the above average really are.

SOURCE: BusinessWeek.com

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