Performance Appraisals: Not Dead

We probably don’t need another survey of companies around the world to tell us that current approaches to Performance Management are not delivering their intended outcomes. A number of studies, including Willis Towers Watson’s, have shown that employers and employees are both unhappy with the state of affairs. Based on our experience working with clients, we know of a number of challenges:

  • Time-consuming process with an uncertain ROI
  • Limited meaningful differentiation of high performers, in an era of tightening compensation budgets
  • The element of subjectivity and bias in the measurement and rating system
  • Backward looking with focus on historical performance, rather than forward-looking focus on building high performance
  • Over-reliance on ratings, leading to missed opportunities for feedback and developmental inputs
  • Managers with unclear roles, under-developed capability and competing priorities
  • Insufficient integration with other talent and rewards programs and processes

In recent times, the discourse on Performance Management has focused almost singularly on the issue of Performance Ratings. With more and more well-known companies making a shift to the “rating-less” world, several clients from the “ratings” world have wondered what would be the right path to follow.

It appears that “rating-less” has become the default “best practice” – a panacea that is expected to work in across organisations, geographies, cultures, business maturity levels and managerial capability levels. I would like to point out three factors for companies to consider while they re-evaluate their approach to performance measurement and management.

Contextual Design Linked to Strategic Priorities

Willis Towers Watson’s work with high-performing companies around the world has shown that these companies focus on 1-2 of 5 key strategic priorities that organisations pursue – Efficiency, Quality, Customer Service, Innovation and Brand / Image. While all of these are important ingredients of success, high-performing companies accord relentless focus on the most critical ones among these. For instance, a consumer technology company’s strategic priority may be innovation or a full-service airline might be trying to get the right balance of customer service and efficiency. A company’s strategic focus should have a bearing on how it measures, manages and builds performance. A less formal approach with goals aligned with long-term vision, coupled with a measurement approach devoid of ratings but rich with feedback could work well in an innovation-focused company. However, in an efficiency-focused environment, the approach might require clear performance components and associated measurements. Without clear goals and measurement, it would be difficult for the efficiency-focused organisation to measure and manage the work and the workers.

Managerial Capital is a Key Enabler

Often when redesigning the approach to Performance Manager, the focus has been on the process mechanics like appraisal forms, rating system, bell-curve ranking, reducing administrative time etc. However, critical success factors like managerial capital, employee capability, culture change etc. don’t get as much attention.

No matter what kind of Performance Management approach you have, using ratings or other elements, the ultimate determinant of success is how managers deliver. Any performance management approach requires managers to have the right level of experience and expertise in setting meaningful goals, assessing performance, providing on-going feedback and delivering the outcomes of the process i.e. linkages to rewards, learning, career development etc. In a rating-less world, the onus on managers is huge. They need to be deft at these tasks, otherwise we go back to the problems that were reported in the world of ratings. Our survey data across hundreds of companies around the world shows a wide variation in managerial effectiveness. Hence, anyone considering to adopt a rating-less system needs to go beyond the mere mechanics of the system to considering their managerial capital and if they are willing to invest in growing this capital.

Identifying and Managing Top Talent

Many clients we work with consider performance and potential while identifying High Potential employees. They consider above-average or high performance a primary filter for looking at their talent pool and supplement it with potential assessment to zero down on their High Potential employees (a typical 9-box talent matrix).  In a rating-less world, this could get a bit trickier. How do we do this in the absence of formal ratings? If we use any form of “shadow ratings”, then are we going against the fundamental issue we were getting rid of?

There are other talent risks too, which we may not fully understand yet or which may not be fully manifested yet. For instance, your top talent may start asking questions on how are rewards being differentiated in the absence of ratings. Or how their performance track record is connecting up with their career progression.

Summary

These are still early days and there is a lack of conclusive research on what performance management approach works better. But, before a practice becomes established wisdom, business and HR leaders need to think about their performance management systems comprehensively, not just focusing on the artifacts of the system, but focusing broadly on issues like strategic context, culture change, investments in managerial capital and inter-connections with other HR programs.

As Peter M. Senge, the author of The Fifth Discipline, reminds us “Systems thinking is a discipline for seeing wholes. It is a framework for seeing inter-relationships rather than things, for seeing patterns of change rather than static snapshots.” If we don’t think about the current issues with Performance Management holistically, we may be left wondering why our greatest problems are still unresolved.

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