Everybody Hates Performance Appraisals – What to Do?

Author:
Warren Heaps – Birches Group LLC

I read an article today from the Wall Street Journal by Dr. Samuel Culbert of the Anderson School of Business at UCLA.  In the article, the author states:

“This corporate sham [performance appraisal] is one of the most insidious, most damaging, and yet most ubiquitous of corporate activities. Everybody does it, and almost everyone who’s evaluated hates it.  It’s a pretentious, bogus practice that produces absolutely nothing that any thinking executive should call a corporate plus.”

I recommend you read the rest of the article.  You also might want to refer to this video interview with the author from 2008 – you can find it here.

It is true that most folks dislike the performance management rituals that exist in their organizations.  For the most part, few managers are very good at providing meaningful feedback, and there is a “check the box” attitude from managers and staff alike.  And the problem is with the whole concept — it’s not just a question of making a better form, or applying the latest Web 2.0 technology to automate a bad process.  That just results in a very efficient, but no more effective, bad process.

I will leave it to Dr. Culbert to describe what else is wrong with performance appraisals.  Instead, I would like to challenge you to think about a couple of concepts which could actually improve performance management for everyone.

At Birches Group, we did some research a few years ago for a client, which involved interviewing staff in every corner of the world about their  company’s performance management system.  We asked employees if they liked performance appraisals as they were conducted in the organization; they did not.  Then we asked if they could identify the “good” and “bad” performers; without exception, they could.  So we started investigating how it was possible they could figure out who was a strong performer and who was not, despite the formal performance management system they disliked so much.

The answer was incredibly simple.  For the “good” performers, the answers to these questions were YES:

1. Do you have good ideas?
2. Do you listen and adapt your ideas to client/customer needs?
3. Can I count on you to deliver?
4. Are you an effective team player?

That’s it.  Our research indicated that if we could answer these four questions we would have enough information to evaluate the performance of an individual in any organization.

Think about it.  Apply it to your company.  Does it work?  Can you think of anyone in your company that can answer yes to all of these questions?  Are they a good performer?  Imagine the implications of such a simple approach.

We built a system, called Community™, which is based on this simple model. With just four questions to evaluate performance, we gather feedback from employee, manager and peers (inside or outside the company).  The system is straightforward and requires no training (it has to be, since non-employee peers are invited to participate in the process, and there is no way they could be trained).  And, surprise, it actually works!

Another key issue with performance management is how it is used in tandem with rewards – usually merit pay and short-term incentives.  “Pay for Performance” is the rule now in most organizations, but stop and think about how performance really influences pay.

In most companies, salary ranges or bands are defined using a combination of external market data and internal equity issues.  Once these bands are defined, the range of base salary is locked in. Performance management is then used to help determine the following:

• An annual “merit” increase – this is an annual increment based on an employee’s performance.  In many developed countries, merit budgets have been hovering around 3% or less for many years.  So, companies are expending tremendous resources to determine if an employee should be eligible for 2.5% to 5.0% (approximately) based on their performance rating.  Is it worth it?
• Annual short-term incentives – these bonus payments are likely based primarily on company financial results.  There is usually an individual component too, but often it’s very small.  Again, is it meaningful?

Should all staff be treated equally when it comes to performance management? Certainly all employees should receive feedback on their performance from their supervisor.  But should performance ratings be used for “pay for performance” across the board?

We sometimes think about this as a wedding cake.  As you know, the base of a wedding cake is tall and wide.  Additional tiers of the cake are shorter and narrower, and as you go higher and higher up the cake the tiers get even smaller.  We can draw an analogy between a wedding cake and broad organizational categories.

For example,  the lowest tier might correspond to support staff, for whom rewards could easily be designed based primarily on basic metrics such as attendance, coupled with tenure-driven increases.  Yes, a lot like civil service, but perhaps more appropriate for these positions.

The next level of the cake covers core professionals.  For this group, the primary reward mechanism could be related not to attendance or tenure, but the demonstration of new competencies related to their job requirements.  This group would benefit from clearly defined competency milestones and peer feedback, for example.

The next level (or two) would be reserved for managers and executives – the folks who are managing the business operationally and strategically.  For this group of staff, some pay should be at risk, and rewards should be based on how well the company does in meeting it’s overall performance objectives.  Primarily financial objectives, but also consideration of leadership strengths and other key decisions made by the management team need to be considered.  Clearly, though, it is these groups that have the most direct influence over company results.  In other words, perhaps when it comes to pay for performance, one size does not fit all.

All employees deserve regular, constructive feedback about their performance.  This is not a function of the system you use or the form design; rather, it needs to be embedded into the culture of your organization, to encourage frank conversation, open and honest exchanges between managers and staff, with the aim to celebrate the good (as opposed to focusing exclusively on the best).  Rethinking how performance ratings are used to administer pay and rewards is long overdue in most organizations.

What do you think?  Please share your comments and thoughts!

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