Traditional Performance Management Doesn’t Work Any More. Try this…

GE, Ford, Microsoft, Hewlett Packard and other well-known companies put “up or out” performance management systems in place in the 1980s. These systems rated employees on results and behaviors, and the ratings were used to make decisions about employee potential.  While some companies used calibration meetings to get more consistent ratings, most relied heavily on the direct supervisor’s judgment, unfortunately, with unreliable results.  Based on these ratings, many companies took out the bottom 10% of employees every year, believing it was the fastest way to generate change and drive profitable growth.

The research they touted was conducted by Professor Steven E. Scullen and his colleagues. Scullen created a mathematical simulation from a sample base of employees in multiple companies, controlling for the impact of voluntary turnover, the quality of the applicant pool, and the validity and reliability of the ranking assessments. Each of these companies identified up to the bottom 10% of their workforce every year, fired them, and then replaced them with the best available candidates from the applicant pool. The results suggested that:

A forced ranking system could lead to noticeable improvement in workforce potential. Most of the improvement should be expected to occur over the first several years, and the improvement is largely a function of the percentage of workers to be fired and the level of voluntary turnover.[i]

The higher the percentage of poor performers fired, the higher the jump in company performance, if you replaced them with better workers and didn’t lose your best employees due to voluntary turnover.

The research had one catch: “Up and out” has a diminishing return. 

If the bottom 10% of employees are fired every year, a company creates a very competitive environment. That kills collaboration, employee engagement and trust in management—the key ingredients for discretionary effort, productivity, and innovation. Companies using “up and out” in the 1980s missed this point.

Many companies have since abandoned the practice of taking out the bottom 10% of poor performers each year due to lawsuits, including GE, where CEO Jack Welch once championed it.

Ford, Goodyear and Capital One stopped their forced ranking systems after age-discrimination cases.[ii]  In 2012, Expedia got rid of forced ranking, which was described as an effort to “rehumanize” the relationship between employees and their bosses.  Bloomberg Businessweek quoted Connie Symes, Expedia’s executive vice president for human relations as saying, “We wanted performance management to be less ‘event-orientated’ and to be something that managers and employees engage in as a regular part of how they do business together—not a look back at last year and assigning a grade to it.”

In November of 2013, Microsoft Inc. announced that it was ending its Stack Ranking System. David Auerbach, a former Microsoft employee, told Bloomberg Businessweek that the practice had employees feeling helpless and, “Encouraged people to backstab co-workers.”[iii]

So, what does work for performance management?

Following are some best practices:

Provide continuous feedback, coaching and development—not an end of the year data dump. Managers should hold regularly scheduled one-on-one meetings with every employee on their team (at least weekly or biweekly). These meetings are an opportunity for employees to give managers updates on their work, discuss obstacles and indicate what assistance they may need.  Managers need to vary their coaching and development advice based on the skills and experience of each employee so that it is relevant and helpful.

Don’t depend on a manager’s feedback alone to make judgements about who is or isn’t high potential. Initiate at least semi-annual performance meetings among managers to share reviews on employee accomplishments, how they achieve results, and development progress. These meetings are twice as effective when there is a well vetted and understood set of work-based competencies in place—not just intuition. The competencies should be derived from an analysis that identifies the knowledge, skills and attributes that make your best employees THE BEST. This analysis can be done quickly and without a lot of effort.

Train your managers to be “builders” and to use what I call the “ACE” methodology:

1. A-Alignment Business is fast paced. Goals are no longer for the year. Managers need to continually align employees to changing market conditions, customer preferences, and the company’s strategies and goals.
2. C-Constant Communications and Clarity. Change is a constant, and it requires constant communication and clarity on issues such as roles, information sharing, timing, operating norms, decision rights, and progress.
3. E-Empathy and Empowerment. Mangers who show empathy, provide recognition, and let employees have a say in how they achieve their goals engender more engagement and achieve better results. We know this from numerous studies on emotional intelligence.[iv] The same goes for successful teams. (See my blog “What makes a Team Smart,” http://wp.me/p5FLSC-7.)

Finally, select managers who have the interest and skills to be builders. Builders align their teams with the organization’s purpose and strategies and constantly provide clarity on goals, roles, responsibilities and operating norms. They empower their teams and take an active interest in employee development. Hold managers accountable for being builders, as well as for their employees’ performance and results! Don’t use management roles as a plum reward for the technical expert who does not have these skills.

Have you recently updated your performance management system? What has worked for you?

Victor Assad is a strategic human resources consultant and coach who works with key decision makers and human resources leaders on talent management, accelerating change, leadership development, and other strategic initiatives. Please e-mail Victor at victorassad6@gmail.com or visit Victor’s website at http://www.victorhrconsultant.com for free articles and white papers—including his white paper on Performance Management.

[i] Steven E. Scullen et al., “Forced Distribution Rating Systems and the Improvement of Workforce Potential: A Baseline Simulation,” Personal Psychology 58 (2005):3.

[ii] Tom Osborne and Laurie A McCann.  (2004) “Forced Ranking and Age-Related Employment Discrimination”, American Bar Association, Human Rights Magazine, Vol. 31. No. 2, http://www.americanbar.org/publications/human_rights_magazine_home/human_rights_vol31_2004/spring2004/hr_spring04_forced.html

[iii] “Microsoft Kills Its Hated Stack Rankings. Does Anyone Do Employee Reviews Right? by Joshua Brustein, Bloomberg Businessweek, Companies and Industries, November 13, 2013.

[iv] Daniel Goleman (2006) Working with Emotional Intelligence, Bantam Dell, Division of Random House, Inc., New York.