When we removed performance rankings from our performance review process at Medtronic Coronary and Peripheral in 2012, some executive leaders and managers warned that employees would lose the competitive edge to perform. They didn’t.
Our changes included holding weekly or biweekly meetings between managers and employees as well as formal quarterly updates to goals and a year-end performance review. We also implemented an online performance management system that enabled goal setting, feedback, note taking, the employee review and 360-degree feedback.
In our experience, employees were more open to feedback when we removed performance rankings, and we eliminated arguments over the ratings. We differentiated between our best, worse, and steady performers and the best performers received much higher pay increases and stock options. But the compensation decisions and discussions occurred later in a separate meeting.
Research at the time backed up our changes. According to Deloitte, 39% of the companies they surveyed changed their performance management systems to place more emphasis on continuous feedback, coaching, and separating feedback from pay discussions. Companies that have made such changes include: Adobe, New York Life, Motorola Solutions, Kelly Services, Dell, Juniper, IBM and even GE. These changes included eliminating forced ranking, laying off the bottom 10%, and the performance rating. Also, these companies emphasized more ongoing feedback between employees and managers.
These were good changes to make. New understanding of organizational psychology revealed that when the bottom five or 10% was removed two or more years in a row, it unleashed too much competition between employees that hurt the cornerstones of innovation: collaboration, risk-taking, and trust. These rating and forced ranking systems also took a lot of management time. Deloitte said employees and managers spent 2 million hours a year on performance reviews. Gap said the process cost $3 million a year.
Some companies, however, have reviewed their performance management practices and decided to keep them, including performance ratings, after making some tweaks. Facebook is one of those companies. After analyzing their performance management system a few years ago, they conducted focus groups and a follow-up survey with 300 employees. An overwhelming 87% of employees wanted to keep performance ratings. Facebook kept their performance evaluations for three reasons: fairness, transparency, and development.[i] Facebook ties their ratings directly to compensation. Facebook management concluded that ratings help employees understand how their total contributions are seen by the organization.
A survey by research company CEB of 30 organizations and just under 10,000 workers found a 10% drop in employee performance and a 6% drop in employee engagement by companies that abandoned performance ratings and made the process less formal. CEB concludes that when managers didn’t provide ongoing feedback and employees did not receive performance rankings workers become confused about where they stand. Some workers even become less satisfied with their pay since their bosses don’t explain salary decisions anymore.[ii]
Whether your company uses or does not use performance ratings, it is critical that managers provide ongoing feedback, both positive and negative, so employees know what goals and milestones to focus on, and what they need to do differently to improve their performance. Managers who cannot provide this ongoing feedback should not be in management. To be sure, the documentation of performance is essential, especially for difficult performance discussions, for discharges and reductions in force.
Furthermore, when the compensation discussion occurs, it will be a yardstick that employees will use to measure the perception of their performance and how it stacks up against other employees and where they stand in the company. The bigger the pay raise, the higher your value to the company. When this conversation occurs, it is critical that managers have laid the groundwork for their ongoing feedback and with the performance review regarding the employee’s performance and what they need to do to improve.
The CEB report doesn’t mean that companies should go back to conducting ratings. For most companies, I don’t recommend them. What the report does reinforce is the importance of ongoing performance and developmental feedback and the value of having managers in place who are capable of and have the courage to provide this feedback.
If you are going to eliminate performance ratings be sure to follow these four steps:
- Train your managers on giving frequent performance and developmental feedback.
- Get feedback from employees on how well managers do with providing feedback, motivating, coaching and empowering. It is not necessary to do this weekly as some pundits or software platforms encourage. This is counterproductive and gets old fast. But it is essential to seek anonymous employee feedback and provide it to managers.
- Use on-line performance management software technology that allows managers and employees to set goals, provide ongoing feedback, take and document notes on weekly meetings, update goals quarterly, and provide annual reviews. If your payroll/HRIS system does not enable this, there are many other software platforms that do.
- Calibrate the performance and potential of employees by using job-specific competencies and group calibration meetings. Allowing individual managers alone to provide the sole feedback is risky. Your organization needs to have objective standards and more than one manager’s input on an employee’s performance to counter unconscious bias and organizational politics. As Artificial Intelligence evolves and is used more by human resources organizations, it will improve an organization’s ability to identify the competencies of its best performers and help reduce unconscious bias.
Remember, your performance management system provides analytics to inform your learning system goals and your succession planning. Business moves fast, and high performing organizations need to be continually assessing workforce skills and motivation to judge what future learning or new skill sets are required to compete against new competition, technology, and business models.
It is essential to truly understand the performance, innovation, and engagement of your workforce for your company’s overall financial performance.
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting and is a Managing Partner of InnovationOne. He consults and provides “hands-on” support for innovation, global talent strategies, developing agile leaders and teams, and other strategic initiatives.
Do you want a more in-depth review of performance management? Download for free “The Good, The Bad, and The Ugly of Performance Management–And What to Do About It!”. Interested in training your managers on performance management, check out my Manager Training to Develop ACE Leaders. Visit https://victorhrconsultant.com/ to learn more.
[i] Lori Goler, Janelle Gale, and Adam Grant, (November 2016) “Let’s Not Kill Performance Evaluations Yet: Facebook’s experience shows why they can still be valuable,” Harvard Business Review.
[ii] Emily Peck (June 29, 2016, 7:45 AM ET), “companies That Got Rid of Performance Ratings Aren’t Doing So Well, Sadly. Ratings are a necessary evil and companies may go back to using them.” The Huffington Post. Found at https://www.huffingtonpost.com/entry/long-live-the-performance-review_us_5772ca2ce4b0eb90355c8b05.