Ditch Performance Management And Do This Instead

Most people hate performance reviews. They think reviews are unfair and a waste of time. According to Gallup, only 29% of employees strongly agree with the statement that their performance review is fair. That means a staggering 71% have a problem with the fairness of performance reviews. Employees often say that the performance reviews interfere with the actual performance or that it is not even relevant to their job.

Performance ranking can create unhealthy competition within the team. Especially when tied to a limited bonus pool. Those ranked at the top get a bigger percentage of the money, so there is less for those ranked below average. It would be good if you could make the system genuinely unbiased.

However, performance ranking also creates competition for social status. Here, men and women respond differently. Researchers conducted an experiment with students in Spain where they asked them to complete simple math problems and were told they would receive a monetary reward for every problem solved. One group was then told they would be ranked against each other, while the other group wasn't told anything. When the participants weren't told about ranking, men and women performed similarly. When they were told about the ranking, men performed better than those not told anything, and women performed worse. Under these conditions, men solved almost 40% more problems than women. And again, in the group that wasn't told about ranking, men and women performed equally, so it is not a question of skill.

Ranking Is Perceived Differently By Men And Women

Researchers suggest that the discrepancy between men and women when they are told about ranking is caused by deeply ingrained beliefs and gender stereotypes. Women subconsciously prioritize not harming others, while men subconsciously perform to outcompete women. These results were also replicated in the Netherlands and Italy, so it is not just some cultural fluke in Spain. However, culture plays a role. This effect is more pronounced in more masculine and competitive cultures and less in cultures where cultural beliefs about gender differences are less pronounced.

Interestingly, men behave differently depending on the gender of the ranker. If it is a man, their competitive tendency goes into overdrive, while they have less need to win when the ranker is a woman. This seems to be related to the masculinity threat when men have the need to show their masculinity when another man threatens it.

Comparing Employees Against Each Other

An alternative approach is not to rank employees against each other but compare their current performance to their past performance. Are the employees getting better over time or not? This temporal comparison leads to a higher perception of fairness. It has also the added benefit that employees can see that they are growing as individuals and feel good about their job and the company and therefore better performance, increase morale and higher engagement.

Another study looked at data collected from employees who were compared against each other and those whose current performance was compared to their past performance. Maybe not surprisingly, those whose performance was compared to their previous performance felt it was fairer than those who were compared against their colleagues. It is simply fairer and more motivating to hear “you improved, you did better than last time,” than “you did better than others,” as you have it more under your control. You can’t impact the performance of others. All you can do is do your best. If you do that, but someone else does a bit better and gets the reward instead of you, you won’t be happy.

Gallup’s review of a large database of 60 million employees and large-scale meta-analysis of hundreds of studies on performance management led to some interesting observations. Only 30% of employees strongly agree that they are involved in their own goal-setting. Only 21% agree that their performance metrics are under their control, and only 14% strongly agree that the performance reviews inspire them to improve. 29% of employees strongly agree that the performance reviews are fair, and 26% strongly agree that they are accurate. That doesn’t seem to be particularly motivating and unlikely to lead to stellar performance.

What’s worse, the tight coupling of performance reviews with pay means that employees who see performance management as useless, unfair, and uninspiring transfer the same attitude towards their pay. They assume that since their unfair performance review informs the compensation, then it also is unfair.

The Ever-Changing Performance Reviews

What is performance management about? You can look at it as a process or management practice designed to help with the effective management of individuals and teams to achieve a higher level of company performance. In fact, it should be less about management and more about development.

In 2020, a Gartner poll of HR professionals showed that 87% were thinking about changing performance reviews. This was an even higher percentage than a year before, driven mainly by the changes Covid-19 introduced to the workplace. It seems the culprit of unhappy HR professionals and, in fact of unhappy employees is not necessarily the effort related to the performance reviews but their seeming lack of usefulness.

You have two ways to go. Abolish the performance reviews, or make them useful. Getting rid of them may not always be easy as it has a downstream effect on other business processes. Making the performance reviews valuable and meaningful for both the employee and the company certainly has a less disruptive impact on the business.

Gartner suggests that increased performance reviews utility leads to 14% higher employee engagement, 24% higher workforce performance, and even 50% higher proportion of employees who report that performance management is fair and accurate.

Performance management needs to be business-driven. What one business needs may be different from what are the needs of another business. Even within a single company, each department or geography may have different business needs, and the performance management should reflect that. Each leader should understand when they expect performance management to deliver, get support from HR professionals, and communicate this “why” clearly to the employees.

The last part is important because employees need to own the process. Performance management owned by the human resources department rarely yields anything useful. I don’t mean to hurt the HR professionals, but it is simply not being taken seriously by the employees if they see it as “yet another bureaucratic process that brings no value to me.” To flip this mindset, you need to transfer the ownership to the employees. We are all architects of our own success. If employees have a say in how the performance management is designed and performed, there is a higher chance of increased utility.

Performance management needs to help employees understand what traits or values they need to exhibit and what actions and behaviors are rewarded. More importantly, there needs to be a clear understanding that the employee’s success is tightly linked to the team’s success and vice versa. Therefore, everyone needs to know how their actions impact those around them.

Feedback And Ratings

The truly important part of performance management for employees is regular and timely developmental feedback. It might be from their manager or their peers. It is forward-looking and critical to the continuous growth of the employees. That, in turn, is an important part of satisfaction with the job and career progression.

The second and, unfortunately, the questionable part of performance management is the ratings. They are used by various subsequent processes, and abolishing them has some repercussions down the road. So what are the pros and cons of having the rating system in place?

The pros are clear and have nothing to do with the employee. Ratings make the job of the manager easier and business more predictable. The manager can clearly indicate who is failing and who is the superstar and can avoid touchy-feely conversation by assigning a number. This number can then be used to plan salary increases, bonuses, and promotions. The number indicates who is worth the company’s attention and who is not, and if there are budget constraints, it helps to figure out where the money should go. Unfortunately, these pros for the company are at the cons for the employees. Ratings often lead managers to surrender their responsibility to have a meaningful conversation with the employee, rate the employees against each other, and shrug when asked for a salary raise.

What is the alternative? Abolishing ratings would force the managers to have a more meaningful conversation with the employees. It would also shift the conversation from managers defending the ratings to talking about future improvements. No ratings mean less bureaucracy as there is no need to calibrate the system between different managers, teams, and departments. The conversation pivots to comparing the employee with their best rather than with other employees. It then leaves more time and increases the need for informal feedback. And lastly, it leads to increased employee engagement.

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Somewhere in the middle sits the conversation and decisions about compensation. No ratings mean the managers have more discretion for differentiated pay between the employees. That is obviously a double-edged sword. On the one hand, it may lead to a better pay-for-performance system where the manager can better fine-tune what to pay for what level of performance. On the other hand, it leaves even more room for bias and unfair pay practices. So this part needs to be handled with care. This is the case anyway, even today where supposedly fair rating systems exist, yet the pay is often very discriminatory.

Companies Ditching Performance Reviews

It is a regular occurrence in many companies to change the performance management process every couple of years. It seems that almost everyone believes that the standard performance management systems simply don’t work.

More and more companies are ditching the historical rating systems that attach a number to the performance of each employee and then comparing it with others. You get somewhere between 1 to 5, where one means you are an underperformer, three means you are meeting expectations, and five means you are a superstar. For example, Adobe Systems Inc. used the scale of one to four but already in 2012 decided to abolish the system and replace it with a frequent conversation between a manager and the employee but without the actual rating. Everyone still has the opportunity to get feedback and keep improving, but they are not exposed to the soul-crushing and often demeaning and meaningless rating system.

Removing Ratings Is Not So Simple

Unfortunately, things are not that straightforward. Gartner’s survey from 2018 showed a decline in employee performance once the ratings were removed. This is caused by several unintended consequences. Without the rating, managers have trouble explaining how the compensation decisions are made and how they are linked to the actual performance. This leads to lower engagement as employees don’t believe that it is based on merit. Quality and time spent on the conversation between a manager and an individual contributor declines. Since managers struggle to explain what employees need to do to get better pay or promotion the next time, especially the top performers are dissatisfied. Not to mention that the time saved by the abolishing of ratings get rarely used for more frequent feedback. Overall the employee engagement gets lower. Ultimately, getting rid of ratings can only bring the desired benefits if the company has a strong and mature management team who can step up and truly lead people instead of managing numbers.

The Future Is In Performance Development

The future of work is not only about a paycheck but about purpose. It is not only about satisfaction but also about development and growth. It is not about having a nice boss but about having a manager-coach who is helpful. It is not about a boring annual review of your weaknesses but ongoing conversations about your strengths. It is less about performance management and more about performance development. Both the individual and the organization want to develop, right?

A manager needs to be a coach who provides frequent, focused, strengths-based, and future-oriented coaching. Together with involving employees in setting clear goals aligned with the rest of the organization, it leads to accountability, fair and achievement-oriented career progression, higher engagement, and better performance.

Modern performance development consists of several stages. Build a strong relationship with the employee to create trust. This means the employee needs to see that you care. Agree on a clear role description so there is no ambiguity about the responsibilities, constraints, and no-nos. Connect regularly, I mean daily, for quick informal check-ins. Provide developmental coaching as frequently as possible. With all this in place, you can have a candid conversation about progress to create accountability, and the discussion about compensation gets more manageable too.

More on topic of Management and Performance:

The Power of Dunbar's Number: Thriving in Groups of 150

Forget About People’s Potential, Focus On This Instead

How To Fight Employee Attrition: Employee Emotional Life Cycle

How To Increase Employee Engagement

Why Your Leadership Development Model Doesn’t Work

Why You Shouldn’t Evaluate Others

How To Build Employee Centric Culture

Great Leaders Turn Strengths Into Results

Employees Don’t Care About Perks, They Care About Respect

People Don’t Want Feedback, They Want Attention And Support

What is your take on managing performance? Do you believe the current systems work and are fair to individual people? Or do you believe they are in place to simplify management in big companies at the expense of individual employees?

Originally posted on my blog about management, leadership, communication, coaching, introversion, software development, and career TheGeekyLeader or follow me on Twitter: @GeekyLeader