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THE DIMINISHING VALUE OF TRADITIONAL PERFORMANCE REVIEWS

By June 10, 2019 Posted in Talent Management

The difficulty lies not so much in developing new ideas as in escaping from old ones” – John Maynard Keynes

Most companies recognize that human capital is an inestimably valuable asset and their most consequential source of cost, risk, innovation, productivity, knowledge, reputation and competitive advantage. It stands to reason, therefore, that the relentless pursuit of time-relevant, quality-driven, and engagement-improving performance management systems ought to be a critical component of a sound business strategy.

Sadly though, notwithstanding the headline-grabbing stories of organizations revamping their performance management structures – or stating in industry surveys that the redesign of performance management is a high priority – the reality is that outdated and inefficient models, long past their erstwhile utility, remain stubbornly entrenched in the day-to-day practices of the vast majority of companies. It’s what Washington Post’s Jena McGregor calls “the annual rite of corporate kabuki.”

Research clearly attests to the difficult challenges faced by companies struggling to break the code of effective performance management. In a study by Deloitte, 58 percent of executives said their performance reviews failed to improve performance or drive employee engagement and amounted to an unproductive use of their time . Gallup asserts that only 14 percent of employees strongly agree that their performance reviews motivate them to improve. 

The Society for Human Resource Management refers to research conducted by the Corporate Executive Board covering 13,000 employees worldwide, in which 66 percent said it “interferes with their productivity,” 65 percent stated “ it isn’t even relevant to their jobs,” and 90 percent noted they “don’t believe their companies’ performance reviews provide accurate information.”

The problematic areas of traditional performance management have been well documented, some of which merit further exploration in this article. 

UNCLEAR PURPOSE

What is the purpose of performance management? The conceptual notion that it’s designed to “drive higher levels of performance” is quickly diluted among the conflicting answers given by managers – many in the same company – when asked the same question. 

Is the purpose to improve performance? To provide legal protection against potential lawsuits? To improve behavior? To identify high potentials? To identify low performers? To determine compensation actions? To define promotions, demotions, lateral moves, terminations? To create individual development plans, or performance improvement plans, or training plans? To reinforce company values? All of the above?

The lack of a clear and focused purpose or, worse yet, the tendency to assign a multitude of purposes – which leads managers to emphasize (or deemphasize) whichever “purpose” is most (or least) relevant to them – renders it into a stress-inducing exercise leading employees to question its credibility, mistrust their managers, and avoid or reject the process altogether.  

Not surprisingly, according to Gallup, “only 2 in 10 employees strongly agree that their performance is managed in a way that motivates them to do outstanding work”. Even more astonishing, in a Harvard Business Review survey, 58 percent of respondents said they would trust a stranger more than their own managers.   

UNSKILLED MANAGERS

Effective performance management requires a set of well-honed people management skills. Research, however, reveals significant gaps in this area.  In a survey conducted by CareerBuilder involving nearly 2,500 employers, 26 percent of managers indicated they were not ready to lead when they moved into people management roles and 58 percent said they received no management training.

A study conducted by Korn/Ferry – in which over 7,500 managers worldwide were ranked on 67 leadership competencies – revealed numerous people management competencies ranked among the bottom 10, including Developing Direct Reports and Others, Understanding Others, and Motivating Others. 

Compounding the problem, the employee-manager ratio has steadily increased over the years, with the effect of reducing the time spent between managers and employees and thus magnifying the need for each interaction to be more effective and meaningful.

BURDENSOME BUREAUCRACY

 It is estimated that managers spend on average 210 hours per year on performance management tasks with annual costs up to $35 million for a company with 10,000 employees. Following an analysis of their respective performance review programs, Deloitte and Accenture discovered they were consuming 2 million hours a year on traditional reviews, most of it spent on process administration. 

Equally alarming is the extent to which companies waste time measuring non value-added indicators, placing more emphasis on process rather than outcomes.  In one study, 41 percent of respondents measured the percentage of managers – and 35 percent measured the percentage of employees – who completed the performance management cycle on a timely basis. Less than 20 percent measured the quality of goal-setting or the frequency of feedback during the year. 

OUT OF TOUCH 

For many decades since its formal inception in business settings, people management followed a predictable rhythm characterized by bureaucratic processes, narrowly defined roles, rigid divisions of labor, highly centralized hierarchical structures, and monolithic career progression. 

The traditional performance review – generally predicated on goal-setting, end-of-year review, and standardized ratings and rankings – thrived in this environment with its emphasis on measurement over development, processes over people, standardization over individualization, and inflexibility over adaptability.  

The business landscape has undergone a profound transformation since then, where the emphasis on agility, innovation, change, and flexibility are now strategic imperatives for profitable and sustainable growth. We have moved from individual reporting to matrixed management configurations, from hierarchical/top-down to team-based/bottom-up models, and from siloed organizations to globally connected ecosystems.

These new realities expose the inadequacies of the traditional annual review. Its static structure is incongruent with the rapid and multiple course-shifting events that occur throughout the annual business cycle. A goal established in January may be rendered utterly irrelevant in December.  

Moreover, according to the Pew Research Center, millennials constitute today the largest generation of the U.S. labor force (35 percent).  They expect far more frequent and meaningful dialogues with their managers so they can understand how they are doing, how to improve, and how to get to the next level. According to Gallup’s report How Millennials Want to Work and Live, when asked the question “does your manager hold regular meetings with you?”, 44 percent of those answering “yes” were engaged at work. The study also revealed that only 21 percent meet with their manager on a weekly basis. 

BUILT-IN BIASES

Advancements in neuroscience research reveal that the perceptions we form and judgments we make about other people are inescapably influenced by biases, most of which operate at an unconscious level. Behavioral scientists have developed models to identify and curb the effects of biases but their resilience is rather extraordinary.

Despite our best intentions and time spent on training and literature to become competent evaluators, we are simply not good raters of others. For instance, when we are evaluating competencies such as “collaborative relationships” or “forward thinking”, our objectivity is compromised by our tendency to rely on things such as our own understanding of a competency, or our own view of its importance, or how exigent (or easy-going) a rater we are, or whether we like (or don’t like) the employee being evaluated…..or something else. In other words, an evaluation reveals far more about us than it does about the person being evaluated.

The term used by behavioral scientists to define this occurrence is “idiosyncratic rater effect”. A comprehensive study – “Understanding the Latent Structure of Job Performance Ratings” – measured five factors influencing performance ratings by creating two separate groups totaling nearly 4,500 managers and having each group rated on three performance categories by different levels of employees. The results showed that the idiosyncratic rater effect accounted for over half of the variance in the performance ratings for both groups (62 percent and 53 percent).

Depending on the number of parts of an annual review, this distortion can be acutely magnified. In a scenario not uncommon to many companies, one’s “final rating” is calculated by aggregating the ratings provided by multiple sources – each of whom, unconsciously influenced by their own idiosyncratic proclivities, produced a rating divorced from reality by an order of more than 50 percent. Subsequently, committees are formed to “rank” employees against each other, with the mandate to forcibly distribute these employees along a set of arbitrarily defined categories – e.g., top performers (10% – 20%), regular performers (60% – 80%), and low performers (10% – 20%) – taking into consideration the “final rating” plus any additional observations committee members may want to bring to help determine one’s “final ranking”.   

Think for a moment about the madness of this recipe. An employee’s “final rating” – defined by averaging out the unreliable judgements of multiple sources – is baked with a “final ranking” – defined by the anecdotal musings from unrelated committee members – and is then fed to the employee by a manager insufficiently equipped to provide meaningful feedback. No wonder employees come out of these meetings with a profound sense of bewilderment, frustration, and a bad taste in their mouths.

These performance evaluation constructs are fraught with distortions and constitute a perversely imprecise mechanism to understand how people truly perform. 

 HOW DO WE FIX IT?

As a starting point, it is helpful to recognize three basic principles. First, fundamental change is necessary. Albert Einstein is widely credited with saying “The definition of insanity is doing the same thing over and over again, but expecting different results.” Second, there is no universal gold standard for performance management. The best programs are not defined by how similar they are to some standard but, instead, by how effective they are in generating higher levels of performance and engagement. Third, it will not happen quickly. It takes time and hard work for meaningful changes to become part of the corporate zeitgeist.   

Based on our practice and research, here are a few concepts threading their way through the marketplace of ideas tested and/or implemented by companies engaged in the redesign of their programs:

Don’t overload the purpose: Make it simple for people to understand the “why”.  Attaching multiple objectives may sound impressive on paper but it generates confusion and selective focus. 

Build on what is working: Incorporate the parts of your current program that are worth maintaining and build on them. No need to reinvent the wheel when you don’t have to.

Muscle up people-management competencies: Structure an array of methods – e.g., training, coaching, mentoring, rotations, group discussions, role-playing – focused on helping managers become more competent on critical performance management skills such as self-awareness, listening, coaching, communication, influence management, and collaboration.

Engage in frequent dialogue: Performance is not a static occurrence. It is part of a continuum which must adapt to constant shifts in direction, speed, volume, and other demands. As a result, increase the occurrence and quality of feedback during the performance management cycle in order to clarify expectations, adjust priorities, remove obstacles and increase collaboration.

Point to the future: Focus each feedback session more on the future rather than the past. Identify what is and is not working emphasizing what is being learned, what future success looks like and how to get there. This approach is far smarter and more effective than one fixated mostly on what went wrong.  

Eliminate ratings and rankings: the destructive effects of the flaws inherent in the construct of ratings and rankings far outweigh their presumed benefits. The gradual unfolding of the performance cycle during the year, supported by frequent, meaningful and future-oriented dialogues renders unnecessary, at best, the need for ratings and rankings.

Reduce complexity: Identify and systematically eliminate time-guzzling and process-clogging components such as voluminous forms, software bells & whistles, multiple committees, and unnecessary procedures.

Fred Machado is the founder and CEO of ExcelTrek.

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