Organizations have been talking about changing performance management for years. Many in the past ten years abandoned forced performance rankings or have eliminated performance reviews all together. Others like Facebook have reinstated performance ranking. Compelling business challenges — more than Covid-19 — will significantly change performance management for the 2020s.
Let’s explore these challenges and see if they apply to your organization.
The Covid-19 pandemic is now endemic and has forever changed how and where employees and teams work and collaborate. Two years after the beginning of the pandemic and with the Omicron mutation, research by OWL Labs and Global Workforce analytics shows that 90 percent of employees who worked at home during the pandemic were more productive. Most of them still want to work from home at least three days a week, mainly for their own safety. But, of course, they also want to avoid office interruptions, time-consuming commutes, and maintain their improved work-life balance. About 48 percent would rather quit than return to the office full time, and 25 would take a pay cut to work from home.
America’s decade-long labor shortage has caused an increase in employee wages, especially among front-line hourly workers. Wages have increased by 4.8 percent at the end of November 2021, their biggest compensation boosts in at least 20 years, and the increase has been even higher for front-line hourly jobs. Americas’ political stalemate over immigration reform for skilled and unskilled workers (and the country’s low birth rate) will continue to drive up pressure on wages and inflation and hamstring the repatriation of foreign manufacturing back to the US for industries such as semiconductors, automobile parts, and pharmaceuticals. The US Chamber of Commerce asked the Biden Administration to raise the cap on immigrant visas.
CEOs are prioritizing organizational agility, transformation, reskilling and upskilling managers and employees, according to surveys by the Boston Consulting Group and McKinsey. CEOs have these priorities due to competitive pressures, the digitization of work streams, Covid-19, and the pressures to innovate.
Performance management has always been about leadership rather than controlling others — as illustrated by these seven principles.
1 – Managers will need to empower their teams as well as manage performance.
I remember the days when managers in some of our largest and most successful companies set employee goals for the year and told them — in the words of former GE CEO Jack Welsh, “Miss your goals for two quarters, and I will fire you.” Well, Jack Welsh died, and GE after years of missed revenues and downsizing is breaking up. Goals in our most successful and innovative companies such as Google now change quarterly as teams make progress with new technology and innovation or as business conditions change. Google managers use OKRs in their agile environment, not SMART goals. This is the agility of today’s organizations.
In a world of constant change and fierce competition, managers need to continually communicate changing priorities to their teams and be in tune to the team’s progress and how it may accelerate team goals or change priorities. The role of manager goes from tyrant to steward, getting the team what it needs, encouraging them, providing guidance, and empowering them. Research from InnovationOne has found that truley innovative organizations empower their teams to make decision on budgets, redirect investment and even which projects to cut, as long as they are fully aligned with the company’s innovation strategies.
2, Managers need to build resilience and relationships.
The switch to remote work, new safety protocols for those who come into the office or in manufacturing, constant worries about health, losing social interactions at work, guessing if you are next on the layoff list, and learning to use new technologies has caused an increase in stress. What we know from researchers, such as Marcus Buckingham, is that employees can be remarkably resilient when senior leaders stay one step ahead of events. Buckingham means events in the near future, such as around the corner, not next year. Such concerns may include new work priorities, information relating to customers, and details about the small steps they can take to continue the business. Buckingham emphasizes that senior leaders should not sugar coat bad news but should instead speak to reality and what they know. Senior leaders need to follow through on what they say they will do and build trust with employees.
Managers have a role to play as well. Team leaders need to check in frequently with each employee every week to see how they are doing. Buckingham recommends they ask two questions: What are you working on this week? How can I help you? Team leaders also have the ability to tell employees what they need to know for any crisis in the near team. The more they do this, the more resilient their workers will be.
3-Project and team performance needs to be managed in addition to individual performance.
For years companies have understood that the top 20 percent of the workforce drives 80 percent of the performance. Having “top performers” is vital but not enough anymore. It takes an empowering, collaborative, and innovative work culture to be the industry leader. Repeated research shows that the No 1 factor for the success of teams is trust. In these studies, trust was ranked along with having the most intelligent people, most dedicated, best experts, and good operating norms. All of these factors are important. But rrust won out because if they don’t have trust employees can’t take risks and build upon each other’s ideas without worrying someone else will try to steal credit. Trust doesn’t emerge in teams without leaders who build team norms for collaboration, allowing all to be seen and heard, and equally.
4- Building skills, giving feedback, and developing career paths are all essential.
In the future, performance management will be as much about ongoing feedback, skill development, recognition, and career paths as it is about performance. Younger employees today (and frankly of any generation) crave feedback. To retain them, they need to know their contributions are valued and will be promoted and that they will have vital careers if they continue to learn and develop their skills. Managers need to provide feedback continually and discuss their development and career advancement with their employees.
Executives have a role here as well by meeting and encouraging young performers and mentoring them. Research shows that feedback is more effective when it is provided in a positive to negative ratio of five-to-one. What is also essential for agile and growing organizations is having the skills each organization needs for future growth. It is often cheaper to improve employee skills on their current jobs (upskilling) or retraining them for new jobs (reskilling) then hiring someone new. (The exception is highly technical roles, such as data analyst.) Check out my latest blog on reskilling and upskilling and how it drives business outcomes.
5- An increasingly diverse workforce must be led with transparency and connectivity.
Several surveys by Gartner, Mercer, and McKinsey show that diversity, equity, and inclusion (DEI) are all critical priorites in enabling company growth. While DEI has been given lip service for years by companies, it is now finally becoming a business imperative in an era of labor shortages. In the October 2020 Mercer Global Survey, DEI was top-of-mind for organizations across the globe, with 74% of companies reporting an increased focus on DEI near the end of 2020. Of these companies, the majority (64 percent) were reviewing talent management processes, such as hiring, performance management, and succession planning, to identify and mitigate potential biases. McKinsey’s long-standing research shows that more diverse and inclusive companies have higher financial success. McKinsey’s research is not alone. In the 1950s, economist Gary Becker’s groundbreaking research found it is costly for firms to discriminate against productive workers. The advice provided in Nos. 1-3 above when applied equitably and recruiting and promoting employees equitably will greatly improve diversity and inclusion – and help relieve staffing shortages.
6-Companies must pay to market rates.
According to the US Labor Department, compensation is increasing at its highest rate in at least 20 years. (Unfortunately for workers, consumer prices rose faster.) Government data also shows that 6.9 million Americans are unemployed (down from more than 10 million in July), with an unemployment rate of 4.2 percent. Roughly 4.4 million US workers quit their jobs in September and the “quits rate” rose by 3 percent, according to the latest edition of the Job Openings and Labor Turnover (JOLTS) survey, each a new record. However, front-line hourly workers, people of color, and workers in health care, hospitality, and retail are much more likely to leave their jobs, according to Mercer’s 2021 Inside Employee’s Mind Research. Nonetheless, turnover rates for IT workers and professional workers remains high.
I am asked frequently what will be the average pay increase for 2022. My answer is that the two-to-three percent annual pay will not be adequate for most industries. Depending on the industry and region of the country, it is more likely be four to eleven percent, or even higher. I advise employers to manage to their most current salary market data and get feedback from their recruiters (who will use data on the number of rejected offers), and turnover data by department. The Great Resignation has become the Great Reckoning as employees who have felt underappreciated and under paid will leave for greener pastures. However, meeting market pay rates is only a minimum for attracting and retaining employees. As said earlier, employers need to provide the flexibility, safety, benefits, and career advancement employees are demanding.
7-Companies should drop forced ranking and consider changes to performance ratings.
Research shows that the forced ranking of every employee into a top to bottom ranking by manager hurts collaboration and innovation over the long-term. Even stalwarts of forced ranking such as GE and Ford gave up on it years ago, often because of the lawsuit costs. Companies that abandoned performane ratings found that dialogue between managers and employees increased during their performance and development meetings.Companies that conduct annual performance ratings (but without forced rankings), will need to include the context of each employee’s performance. For example, has the performance of a top performing employee stumbled this year because the employee has taken on a new role for career development and is becoming proficient with new skills? Has another employee’s performance slipped because of a personal tragedy? Is a team’s progress stumbling because of unexpected issues with new product technology, which are no fault of the team? Developing new performance ratings such as “learning new skills” or “developmental” or “facing issues outside of work” will infuse empathy in the process and will help retain good and excellent performers.
InnovationOne’s research also shows that many organizations must change their performance management systems to reward questioning, risk-taking and collaboration and not just goal achievement.
Covid-19, remote work, and expectations of young workers, are changing performance management. The forces driving these changes will continue for the decade. What does your organization need to do to adapt?
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting, managing partner of InnovationOne, and Sales Advisor to MeBeBot. He works with companies to transform HR and recruiting, implement remote work, and develop extraordinary leaders, teams, and innovation cultures. He is the author of the highly acclaimed book, Hack Recruiting: the Best of Empirical Research, Method and Process, and Digitization. Subscribe to his weekly blogs at www.VictorHRConsultant.com.