WHAT HAPPENS AFTER COMPANIES JETTISON TRADITIONAL YEAR-END EVALUATIONS?
The worst-kept secret in companies has long been the fact that the yearly ritual of evaluating (and sometimes rating and ranking) the performance of employees epitomizes the absurdities of corporate life. Managers and staff alike too often view performance management as time consuming, excessively subjective, demotivating, and ultimately unhelpful.
These aren’t new issues, but they have become increasingly blatant as jobs in many businesses have evolved over the past 15 years. More and more positions require employees with deeper expertise, more independent judgment, and better problem-solving skills. If we jettison year-end evaluations—well, then what? Will employees just lean back? Will performance drop? And how will people be paid?
Answers are emerging. Companies are changing their approaches on how to rate and evaluate employees, on how to compensate high performers at every level etc. The changes these companies are making are new, varied, and, in some instances, experimental. But patterns are beginning to emerge. Some companies are rethinking what constitutes employee performance by focusing specifically on individuals who are a step function away from average—at either the high or low end of performance—rather than trying to differentiate among the bulk of employees in the middle.
Many companies are also collecting more objective performance data through systems that automate real-time analyses. Performance data are used less and less as a crude instrument for setting compensation. Indeed, some companies are severing the link between evaluation and compensation, at least for the majority of the workforce, while linking them ever more comprehensively at the high and low ends of performance.
Better data back up a shift in emphasis from backward-looking evaluations to fact-based performance and development discussions, which are becoming frequent and as-needed rather than annual events.
How these emerging patterns play out will vary, of course, from company to company. The pace of change will differ, too. Some companies may use multiple approaches to performance management, holding on to hardwired targets for sales teams, say, while shifting other functions or business units to new approaches.
But change they must!
RETHINKING PERFORMANCE
Most corporate performance-management systems don’t work today, because they are rooted in models for specializing and continually optimizing discrete work tasks. These models date back more than a century, to Frederick W. Taylor.
Over the last 100 years, performance- management systems evolved but did not change fundamentally. A measure like the number of pins produced in a single day could become a more sophisticated one, such as a balanced scorecard of key performance indicators (KPIs) that link back to overarching company goals. What began as a simple mechanistic principle acquired layers of complexity over the decades as companies tried to adapt industrial-era performance systems to ever-larger organizations and more complicated work.
What was measured and weighted became ever more micro. Many companies struggle to monitor and measure a proliferation of individual employee KPIs—a development that has created two kinds of challenges.
First, collecting accurate data for 15 to 20 individual indicators can be cumbersome and often generates inaccurate information. (In fact, many organizations ask employees to report these data themselves.)
Second, a proliferation of indicators, often weighted by impact, produces immaterial KPIs and dilutes the focus of employees. We regularly encounter KPIs that account for less than 5 percent of an overall performance rating. Nonetheless, managers attempt to rate their employees as best they can.
What many companies have just done in a bid to improve performance are to have dropped ratings, rankings, and annual reviews, practices that had developed into a fine art in previous decades. What these companies want to build—objectives that are more fluid and changeable than annual goals, frequent feedback discussions rather than annual or semiannual ones, forward- looking coaching for development rather than backward-focused rating and ranking, a greater emphasis on teams than on individuals—looks like the exact opposite of what they are abandoning.
The point is that such companies now think it’s a fool’s errand to identify and quantify shades of differential performance among the majority of employees, who do a good job but are not among the few stars. Identifying clear over-performers and underperformers is important, but conducting annual ratings rituals based on the bell curve will not develop the workforce overall. Instead, by getting rid of bureaucratic annual-review processes—and the behaviour related to them—companies can focus on getting much higher levels of performance out of many more of their employees.
GETTING DATA THAT MATTER
Good data are crucial to the new processes, not least because so many employees think that the current evaluation processes are full of subjectivity. Rather than relying on a once-a-year, inexact analysis of individuals, companies can get better information by using systems that crowdsource and collect data on the performance of people and teams. Continually crowd-sourcing performance data throughout the year yields even better insights. Finally, performance- development tools can also identify the top performers more accurately, though everyone already knows subjectively who they are.
Relatively easy and inexpensive to build (or to buy and customize), such performance-development applications are promising—but challenging (see the exhibit for a generic illustration of such an app). Employees could attempt to game systems to land a spot among the top 10 percent or to ensure that a rival does not. (Artificial intelligence and semantic analysis might conceivably distinguish genuine from manicured performance feedback, and raters could be compared with others to detect cheating.) Some employees may also feel that Big Brother is watching (and evaluating) their every move. These and other real-life challenges must be addressed as more and more companies adopt such tools.
TAKE THE ANXIETY OUT OF COMPENSATION
The next step companies can take to move performance management from the industrial to the digital era is to take the anxiety out of compensation. But this move requires managers to make some counterintuitive decisions. Conventional wisdom links performance evaluations, ratings, and compensation. This seems completely appropriate: most people think that stronger performance deserves more pay, weaker performance less. To meet these expectations, mean performance levels would be pegged around the market average. Over- performance would beat the market rate, to attract and retain top talent. And poor scores would bring employees below the market average, to provide a disincentive for underperformance.
This approach, however, has a number of problems.
First, the cart sometimes goes before the horse: managers use desired compensation distributions to reverse engineer ratings. These practices, discredit the performance system and often drown out valuable feedback.
They breed cynicism, demotivate employees, and can make them combative, not collaborative.
Second, linking performance ratings and compensation in this way ignores recent findings in the cognitive sciences and behavioral economics. Although this idea is counterintuitive, linking performance with pay can demotivate employees even if the link produces only small net variances in compensation.
Since only a few employees are standouts, it makes little sense to risk demotivating the broad majority by linking pay and performance. More and more technology companies, for instance, have done away with performance-related bonuses. Instead, they offer a competitive base salary and peg bonuses (sometimes paid in shares or share options) to the company’s overall performance. Employees are free to focus on doing great work, to develop, and even to make mistakes—without having to worry about the implications of marginal rating differences on their compensation. However, most of these companies pay out special rewards, including discretionary pay, to truly outstanding performers.
Finally, the things that really motivate people to perform well according to research are feelings like autonomy, mastery, and purpose. Snapping the link between performance and compensation allows companies to worry less about tracking, rating, and their consequences and more about building capabilities and inspiring employees to stretch their skills and aptitudes.
Leaders shouldn’t, however, delude themselves into thinking that cutting costs is another reason for decoupling compensation from performance evaluations. Many of the companies that have moved in this direction use generous stock awards that make employees up and down the line feel not only well compensated but also like owners. Companies lacking shares as currency may find it harder to make the numbers work unless they can materially boost corporate performance.
COACHING AT SCALE TO GET THE BEST FROM THE MOST
The growing need for companies to inspire and motivate performance makes it critical to innovate in coaching—and to do so at scale. Without great and frequent coaching, it’s difficult to set goals flexibly and often, to help employees stretch their jobs, or to give people greater responsibility and autonomy while demanding more expertise and judgment from them.
Many companies and experts are exploring how to improve coaching—a topic of the moment. Experts say three practices that appear to deliver results are to change the language of feedback; to provide constant, crowdsourced vignettes of what worked and what didn’t; and to focus performance discussions more on what’s needed for the future than what happened in the past. Concrete vignettes, made available just in time by handy tools—and a shared vocabulary for feedback—provide a helpful scaffolding. But managers unquestionably face a long learning curve for effective coaching as work continues to change and automation and reengineering configure job positions and work flows in new ways.
Companies in high-performing sectors, such as technology, finance, and media, are ahead of the curve in adapting to the future of digital work. So it’s no surprise that organizations in these sectors are pioneering the transformation of performance management. More companies will need to follow—quickly. They ought to shed old models of calibrated employee ratings based on normal distributions and liberate large parts of the workforce to focus on drivers of motivation stronger than incremental changes in pay. Meanwhile, companies still have to keep a keen eye on employees who are truly outstanding and on those who struggle. It’s time to explore tools to crowdsource a rich fact base of performance observations. Ironically, some companies are using technology to democratize and re-humanize processes that have become mechanistic and bureaucratic. Others must follow.