Inc. query

Q: "I'm president of a small company with 14 employees. We have five board members, including me, and we each own 19% of the business. (A sixth partner, not on the board, owns the remaining 5%.) I'm looking for a way to generate constructive feedback among the board members, all of whom are also senior managers. The problem is asserting the authority to do that. How can I, as president, critique the performances of board members to whom I must also report?" --Mark Troutman, president of Summit Reinsurance Services, a $4-million, year-and-a-half-old reinsurance underwriter and broker based in Fort Wayne, Ind.

A: You might want to call your lawyer on this one.

See, the question you pose -- How can equal, high-level partners appraise one another's performance? -- often arises at law firms. Like your business, law firms are owned and operated by a set of partners. Those partners evaluate one another through a peer-review process, which works well "in settings where you have owners who are also involved in management," says Peter Sherer, an associate professor at the University of Oregon's business school.

When you're establishing a peer-review process from scratch, the key is to secure the buy-in of the principals. "The entire group has to agree upon the standards by which feedback will be developed," says Sheila Regan Coin, a human-resources consultant in Washington, D.C. The logic is simple: if group members sign off on certain evaluation criteria, then they'll have an easier time abiding by the feedback they receive.

At law firms, peer-review methods vary. But one universal ingredient is the managing partner, who is dedicated to the entire process. Say the firm gathers feedback through written forms. The managing partner not only collects and reads all the forms but also summarizes the comments and delivers the news -- both good and bad -- to the individual partners. According to Irwin Heller, managing partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Boston, managing partners also have the authority to alter compensation based on the feedback.

Should peer evaluations influence the partners' compensation at your business? The answer depends on whether you think changes in compensation will motivate your colleagues' performance. Law partners tend to take their peer reviews seriously -- perhaps because review-based compensation can form a large percentage of their annual income (10% to 25% at Mintz, Levin). It's possible, of course, that if the compensation at stake were small beer, tying it to feedback might not have much effect. But "it's not just money that generates worker motivation," Coin points out. She adds that review-based compensation can also hinder quality feedback: reviewers might curtail their criticisms, knowing their comments will affect a peer's paycheck.

For small-business partnerships, Coin suggests separating the review process from remuneration. If partners agree that the company's performance will improve in concert with a fruitful review process, then they shouldn't need money to motivate their individual efforts. After all, their incomes are tied to the company's performance anyway.

And if partners like the idea of review-based compensation? Well, they must then also embrace a system for compensation decisions. The key to initiating a review process linked to compensation is persuading your partners to place their confidence in two things: the evaluative criteria, and the arbiter of the evaluations.

The criteria should, as a rule, include objective, measurable goals. Subjective evaluations of job performance can be troublesome. One solution is Heller's method at Mintz, Levin. "We ask each partner to submit their own memorandum, to describe their year's highlights, and to specifically cite things we wouldn't know by looking at the records," he says. Mintz, Levin also asks some of its associates to submit written reviews of each partner's performance. That gives Heller a perspective on another intangible: management style.

You and your business partners need to decide whether you want such bottom-up feedback. Experts agree that gathering it would be in the partners' -- and the company's -- best interest. Naturally, your best bet for getting honest feedback from the rank and file would be to assure staffers that their criticisms will remain anonymous.

Though law firms offer a working model for the "how" of a peer-review process, it's arguable that law firms -- which generally conduct annual reviews -- don't offer the best model for "how often." Barbara Kate Repa, vice-president of content for HR One Inc., which runs a Web site for human-resources professionals, encourages quarterly subject-specific feedback, as opposed to an anxiety-laden all-inclusive review at year's end. "A year's a long time in the workplace these days," she notes. In Repa's view, partners don't need to evaluate topics like compensation and promotion more than annually; but perhaps compensation should be discussed in April, promotion in July, a third topic in October, and so on.

The partners also need to reach consensus on how to obtain feedback and deliver it to one another. At Mintz, Levin, Heller has partners respond in writing to a mix of open-ended and specific questions. He uses open-ended prompts like "Talk about your partners" to learn who (if anyone) comes to mind as a standout for any reason at all. Specific questions cover items such as how partners have performed as mentors, and what bar activities and speaking engagements they've participated in.

After gathering the written reviews, Heller meets individually with each partner to "get a human feel for what's on the paper," he says. That helps him determine how much fervor or personal bias informs a partner's complaints. Next, Heller boils down the feedback and makes decisions about compensation. Then he or other supervisors deliver the praise, criticism, and paycheck information to each partner.

Having a managing partner administer the entire evaluation process is a big advantage of the law-firm model. Should small businesses try to cultivate their own managing partners? They can certainly try. But Joseph Straub, for one, author of several books in The Agile Manager series, thinks that designating a managing partner out of thin air can cause chemistry problems and that small businesses are better off looking outside their ranks for objectivity. "Any criticisms that are aired might cause ongoing friction and resentment," he observes. "Also, the tendency to not be too honest with each other would be there."

But giving outsiders a role in performance reviews raises other issues. Besides finding -- and paying -- a consultant, there is the question of whether a consultant can digest your business thoroughly enough to devise an adequate feedback system. Still, Straub suggests that affordable outsiders -- such as local professors and SCORE volunteers -- can help, even if only as moderators for group meetings.

If you do choose to initiate a peer-evaluation system, you and your partners should keep two things in mind. First, finding a good system might mean many rounds of feedback on the feedback system itself. Second, regardless of the ground rules that you, as a partner, establish for communicating criticism, you must always make an effort to keep your remarks professional rather than personal. Otherwise, you might really need to call your lawyer.

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