For decades, organizations have been calling for a radical redesign of the traditional performance management model. While this may lead to a more humanistic approach to performance management, Korn Ferry Hay Group believes such a change requires thoughtful consideration.
Since the 1950s, performance management has followed a standard model: once or twice a year, managers are expected to speak with their subordinates and provide them with an evaluation of their performance. This often results in a numerical rating (usually between 1 and 5) which is tied to remuneration outcomes – short-term incentives, annual increases or both. This practice of “forced ranking” which comes with some level of biasness has since fallen out of favour.
While this appraisal process is standard in many companies, the underlying rationale and objectives for doing it is less clear. As a result, many companies aren’t quite sure what they are getting out of the process. But, they run it anyway as there is no widely accepted alternative. Until now.
Making the case for change
Recently, a number of high profile organizations including Microsoft, Yahoo, General Electric and Accenture publicly announced that they are doing away with the traditional performance management model. Most notably, ordinal ratings have been eliminated. The number of companies that are actually making the changes has not been confirmed, but the movement is sufficient to gain weekly news headlines. So why the sudden rush to abandon the traditional model?
Quite simply, new evidence has convinced many that the cost-benefit of the traditional model has tipped out of favour:
- The time and effort required to run a large scale, consistent performance appraisal process is huge, yet the benefits are unclear. Often, this investment provokes questions such as “why?” and “for what return?”
- The traditional process continues to dissatisfy both employees and managers. Despite more calibration, more communication, more information – more everything – most employees dislike (even dread) the process.
- Recent developments in brain science have shown that the act of being evaluated triggers a reaction that is interpreted by the brain as a threat and is associated with a fight-or-flight response. It is definitely not the best mindset you want your most competitive asset to be operating from when considering how to improve performance.
Faced with a very time-consuming process that nearly everyone dislikes and which makes little to no contribution to performance improvement, it now seems inevitable that the traditional practice of performance management will fall. Many companies have been quietly reviewing their processes and discussing alternatives for some time now. When a few American bellwethers such as Microsoft and Adobe took the bold leap, it seemed safe for others to take the plunge. Though ASEAN has yet to catch on with the trend, its neighbor Australia has seen large employers such as Deloitte Australia and National Australia Bank moving away from performance ratings.
So where to from here?
With the door finally open to a serious redesign, many companies are now evaluating the need to change, if for no other reason than to keep up. Suddenly, the risk of changing the traditional performance model is significantly lower than NOT taking action and continuing to maintain a process that is outdated and seemingly of no real value.
This doesn’t mean that thorny issues don’t remain. While attention has been focused on the desire to redesign performance management in a more humanistic way (one that actually has a chance at improving performance), there is one important factor to consider. The practice of “pay for performance” heavily depends on differential performance ratings. Organisations that have publicly announced changes to performance management have been thin on details regarding changes to their pay practices. Behind the scenes, most are looking to maintain differential pay outcomes through a combination of better performance metrics and at manager’s discretion. This undoubtedly has its own dangers – potentially introducing favouritism and a lack of fairness to the process of remuneration.
A thoughtful approach
While it seemed that these high profile companies eliminated the traditional performance model with changes that appear obvious and effortless, in Korn Ferry Hay Group’s experience, changes in performance management need to be done with thoughtful consideration to the design and change process. Here are three key things to consider:
1. Accept that separation is part of the solution
The term ’performance management’ is a bit of a misnomer. Organizations can’t really manage performance; if they could, why would so many organisations perform so poorly? But organizations can define what makes up performance management: the performance outcome they wish to have, how they measure it, how they evaluate it, and how to help people perform better. At Hay Group, the real essence of performance management is the last two – evaluating performance and helping people perform better.
For decades, it has been assumed that these are two sides of the same coin. They are not. Performance appraisal and performance development are separate and distinct, and should be treated as such. If employees are going to be evaluated in some form and also encouraged to develop in ways that improve their performance, organizations need to design and manage these two separate processes. We encourage organizations to define an overall performance model, yet recognise the important differences between appraisal and development.
For instance, one of Korn Ferry Hay Group’s US clients has moved from an annual meeting of goal-setting and performance ratings to a more informal monthly check-in with employees on priorities and behaviors. Ratings and formal “‘standing’ are not the focus of these meetings. While managers still evaluate employees to determine annual increments (through short periodic surveys), the process is less time-consuming and more engaging for both parties.
2. Treat the change like a significant one
Unlike other business processes, performance management is unique in that it goes to the heart of what organizations do. It is a process critical for business success – so while the traditional model has been unsatisfactory, it is still widely used and has even worked reasonably well for many companies. As a result, significantly changing the process won’t be easy.
- Discussing potential changes with senior leaders early and frequently. Performance management is the ultimate top-down process, so senior leaders must have the buy-in for the change to be successful.
- Taking the time to test and pilot alternatives. While the number of experiments in the market grows every day, the precise way in which performance is evaluated and enhanced in each organization is different. There is no one-size-fits-all solution – what might work for one organization won’t necessarily work for you.
3. Dismantle the loaded language that act as a barrier to change
The word ’performance’, and as a result ’performance management’, has become a loaded term. In many organisations, underperformance (or underperformer) equates to ‘no value’ rather than an opportunity to improve. No wonder everyone is so stressed out by performance management!
Organisations need to shift their language and unpack what they mean by these terms. Changing the vernacular will open the door to real changes rather than simply tweaking the same old approach. Two concepts associated with performance management are particularly troublesome:
- Pay for performance – this one is challenging because it sounds so good but can mean many different things. Does this mean individual performance, company performance or something in between? Is performance believed to be the sum total of individuals performing well or is it the result of collective efforts? If individual performance undermines the performance of the whole, is it still worth paying for?
- High performance culture – this one is puzzling because it is hard to find an organization where the underlying belief is that low performance is good or desirable. Many people interpret this to mean that any effort that doesn’t meet its objective is not tolerated and that competing and losing is unacceptable. The paradoxical effect can be that few risks are taken and the name of the game is to play it safe. In fact, this is at the heart of why individual goal-setting, particularly with pay consequences, does not always support employee development.
One of our clients based in the US eliminated confusing acronyms for more common language and terms to indicate the intent of the performance appraisal process. The monthly meeting was introduced as an opportunity for managers and employees to “touch base” and the overused and often threatening term of “performance” was not incorporated.
Within years, it may become inconceivable that employees were typically rated once a year in an ordinal number system. We may even discover that such systems worked well in certain contexts, but that its near universal use was misguided. In either case, organizations that are contemplating how to proceed will be well-served by stepping back, considering their objectives for employee performance processes, and carefully designing and testing new approaches.