For decades, organisations 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, Hay Group believes such a change requires thoughtful consideration. Ryan Dixon outlines three key recommendations for leaders considering making the leap.
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. The most controversial ranking was the practice of ‘forced ranking’ which has since fallen out of favour.
While this appraisal process is standard in many companies, the underlying rationale and objectives for doing them are less clear. As a result many companies aren’t quite sure what they are getting out of the process, but run the process anyway as there is no widely accepted alternative. Until now.
Making the case for change
Recently, a number of high profile organisations including Microsoft, Yahoo, General Electric and Accenture publicly announced the most significant departure from the standard model in decades. Most notably, ordinal ratings have been eliminated. The number of companies actually making changes has not been confirmed, but the movement has been 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 standard 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.
- If many had a gut feeling that ratings weren’t doing anything to improve performance, recent developments in brain science have shown why. We now know that the act of being evaluated triggers a reaction that is interpreted by the brain as a threat with the associated fight or flight response. Not the best mindset when considering how to improve performance. And not the mindset you want your most competitive asset to be operating from.
Faced with a hugely 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 took the bold leap, including Microsoft and Adobe, it became safe for others to take the plunge. In Australia, NAB and Deloitte have led the way as large employers moving away from performance ratings.
So where to from here?
With the door finally open to a serious redesign, many companies are now considering whether they need to change, if for no other reason than to keep up. Suddenly, the risk of changing the performance model is significantly lower than NOT taking action and continuing to maintain a process that is outdated and seems to provide 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. But behind the scenes, most are looking to maintain differential pay outcomes through a combination of better performance metrics and manager discretion. This of course has its own dangers, potentially introducing favouritism and a lack of fairness to the process of remuneration.
A thoughtful approach
While we read that these high profile companies have eliminated the traditional performance model with changes that appear obvious and effortless, in Hay Group’s experience, changes in performance management need to be done with thoughtful consideration to design and the 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. Organisations can’t really manage performance; if they could, why would so many organisations perform so poorly? But organisations can and do 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. In many cases they even work against each other. For instance, if performance improvement requires an employee to learn something new, the act of rating their performance may very well cause them to ’shut down‘. The implication is that if employees are going to be evaluated in some form and also encouraged to develop in ways that improve their performance, two separate processes will be required that organisations need to design and manage. We encourage organisations to define an overall performance model but recognise the important differences between appraisal and development.
One of Hay Group’s US clients moved from an annual meeting of goal setting and performance ratings to a more informal monthly check-in with employees on priorities and behaviours. Ratings and formal ‘standing’ are not the focus of these meetings. While managers still evaluate employees to determine annual increases (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 organisations do. It is a process critical for business success, so while the traditional method 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. We recommend:
- Discussing potential changes with senior leaders early on and frequently. Performance management is the ultimate top-down process, so senior leaders must have buy-in for the change to be successful.
- Taking the time to test and pilot alternatives. The stark reality is that for decades the vast majority of companies have been following a nearly identical process. While the number of experiments in the market grows every day, the precise way in which performance is evaluated and enhanced in each organisation is different. There is no one-size-fits-all solution – what might work for one organisation won’t necessarily work for you.
An organisation in the resources sector discovered that the senior HR executives in each division were key to understanding and influencing the change. With their input, it was decided that a pilot program would be implemented for the divisions that found the traditional process particularly onerous and of less-value. This enabled the more conservative divisions to see how the new process worked and to adopt it once key learnings from the pilot were incorporated.
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 so 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 organisation 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.
A client 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 over-used 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. Or we may discover that such systems worked well in certain contexts but that its near universal use was misguided. In either case, organisations 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.