It’s Rating Season. Time to Play “The Game”

It’s that time of year again, time for the most important part of performance management.  It’s rating season.  The time for playing nice is over—for optimistic plans, feedback, coaching, and development.  It’s time for cold, hard, reptilian evaluation.  Ratings are the raison d'êtreof traditional performance management (PM).    And employees aren’t just rated, they are differentiated.  Organizations grade on a curve.  Regardless of the similarity of employee efforts and contributions, supervisors must differentiate them, however fine the distinctions, on whatever basis is necessary.

As someone who lived through more than 30 years of these cycles inside organizations, I can say with some confidence that most employees and supervisors dread this time of year.  Supervisors dread delivering bad news, and lots of employees will receive bad news.  In one study we conducted, 40% of employees received a lower rating than they felt they deserved.

 Bad news is an inevitable consequence of “PM math.” 

Only a small percentage of employees can get top ratings; reward budgets are fixed.  Low ratings are required in order to give those with high ratings disproportionate rewards.  And since most people believe they are above average anyway, they are disappointed when they don’t get them.  Employees work hard all year and their rating seems almost random.  They don’t feel they have control over the rating they receive, and they don’t feel the process is fair.

Most supervisors actually keep score all year.  Every employee has a scorecard that is continuously updated during the year with check marks and demerits.  Employees get feedback on how they are trending, and this feedback is predominantly negative.  Because top ratings are rationed and because so many employees will get bad news, supervisors monitor employee performance for signs of weakness.  Any sign of weakness is used to justify lower ratings.  In fact, some supervisors secretly breathe a sigh of relief when they find them and can justify low ratings.

While the past several years has seen widespread calls for an end to the practice of performance ratings and evaluations, few companies actually made the move.  And recently, it feels like the pendulum is swinging back the other way, with writers concluding that going ratingless didn’t work or that it was just another fad that has run its course.  Never mind the fact that it seems odd to call a practice a fad that very few companies actually adopted.  So, while people complain about ratings and PM at this time of year, most believe there is little that can be done about it, that pain and suffering are an inevitable part of a functioning meritocracy.  

PM creates a “headwind” in organizations, and while it is annoying and irritating, it isn’t fatal, like a small pebble in your shoe.  

Organizations learn to tolerate the noise from employees and supervisors and PM is something to be endured this time of year.  No PM process will please everyone right?  After all, the only thing worse than ratings, PM and meritocracy are the alternatives, right?   Which leaves us where we started, a painful process, with lots of rationalization and fatalism, and no suitable alternatives.

Not so fast.  

Let’s step away from the pendulum and examine the arguments being made to and stick to performance ratings and the status quo:

• Organizations that abandoned ratings never really did.  They pushed them downstream or they went underground.  This lack of transparency isn’t fair to employees, so we should bring them back into the open.
• Organizations need ratings.  Decisions need to be made about employees, chief among them rewards distribution.  These decisions depend on ratings and ratings provide concrete feedback to employees on how they are doing.
• Ratings are fairer than the alternatives.
• Employees want to be rated; they want to know where they stand.
• Ratings motivate employees to work hard.

“The Game”

At the heart of these arguments to maintain the status quo is the presumption of a “game” organizations play with employees. The game goes something like this:  Employees work for rewards.  Rewards are distributed on the basis of individual performance.  Performance is measured by supervisor ratings.  Employees compete with one another for ratings and rewards.  The winners get top ratings and a disproportionate share of the rewards, the losers resolve to try harder next year.

The game is predicated on a set of familiar assumptions and principles from classical economics, behavioral psychology, and labor economics:  

• Behavior is controlled by its consequences--rewards and punishments, extrinsic motivators.  Money is the chief consequence, the chief motivator.
• People are self-interested; they maximize their returns and minimize their efforts.
• The efforts of self-interested employees need to be aligned with the goals and interests of the company.  This is done through external forces like performance contracts with reward contingencies, threats, and regular monitoring and surveillance.
• Rewards motivate when they are tied to individual performance and supervisor ratings are the only way to measure performance for most jobs.
• Rewards must be differentiated to motivate employees.
• Reward budgets are fixed so the game is a zero-sum game.  These budgets must be allocated efficiently and effectively; they cannot be overspent.
• Competition for limited rewards motivates employees to work hard and employees need a transparent scorecard to know how they are doing.

Given this is the game (and there is little debate about this), arguments made by proponents of ratings make sense.  Of course, organizations need ratings, the primary goal of traditional PM is to differentiate rewards, which requires ratings.  It also makes sense then that few companies abandoned ratings and those that did struggled. And it makes sense that employees say they want ratings (how else would you distribute rewards?) and transparency (if there is a game, employees need to know the score and they need to understand the rules).  It also makes sense that organizations try to improve ratings, tinkering with rating scales, training raters, and adding raters through 360-degree reviews.  And finally, it makes sense that companies adopt practices like mechanical rules translating ratings into rewards, forced/guided distributions, and calibration.  These practices increase the predictability of rewards distribution and mitigate the risk of overspending massive rewards budgets.  

While all these arguments make sense, we are still left with the fact that the game isn’t working.  The problem with our approach to fixing PM is we have accepted the game as a given.  Chris Argyris called this approach “single-loop” learning.  When you try something, and it doesn’t work, you try something different.  Organizations have tried for 70 years to improve the game with little to show for it.  Companies are as unhappy with PM as they were 70 years ago when famed organizational scholar Douglas McGregor wrote “An uneasy look at performance appraisal.” His original article was published in 1957 and then published again in 1972.  Maybe this article should be published every 15 years until the “uneasiness” disappears.

To fix PM, we need what Argyris called “double-loop” learning.  When something doesn’t work, especially after repeated attempts to fix it (and 70 years of attempts ought to be enough), you step back and examine the values, assumptions, and beliefs behind your practices.  

When you engage in double-loop learning, you don’t just question the practices, you question the game itself. 

Our practices are breaking because the principles on which the game is based are decades if not centuries old.  Scientists abandoned these principles decades ago.  Scientific evidence supporting our practices is increasingly lacking.  I won’t take space to review that evidence in detail here as I have thoroughly documented it in other places.   Let it suffice to say that human beings are not tape measures; they are flawed measuring instruments and the judgments (ratings) they make can be problematic, inaccurate, and inconsistent.  And what organizations are asking supervisors to do is nearly impossible.   Performance ratings are far too inaccurate to be the basis for distributing the estimated $345B in merit pay and bonuses each year (and this is just in the US). And there is ample evidence showing employees don’t really want to be rated (despite what they say), and that comparing employees’ performance with one another can be harmful to performance, especially when collaboration and innovation are important.  Other elements of the game also lack widespread support in the scientific literature.  Basing rewards on individual performance, differentiating rewards, and creating large inequalities in pay have not been widely supported as effective ways to increase individual motivation and improve individual performance and organizational effectiveness, and they have side-effects that are often worse than the diseases they are intended to cure.

And research shows the game has additional, deeper consequences that should concern us.  The game teaches our employees to value money.  Research shows people are already biased to believe most people are motivated by extrinsic motivators like money.  And research shows playing the game changes our employees, teaching them to be extrinsically and instrumentally focused, destroying their natural intrinsic motivation, changing their values, making them more competitive and less cooperative.  And playing the game creates a vicious loop, its effects make playing the game more necessary, increasing our reliance on it to motivate employees.  The game and the principles behind it are self-fulfilling, shaping our practices, creating the behaviors it predicts. 

The New World

It is problem enough that scientific evidence no longer supports the game and that the game may be changing our employees for the worse, and these should be reasons enough to abandon it.  

The bigger problem however, may be the fact that the old game doesn’t fit the new world. 

 The old game works best with simple, routine, and stable jobs where detailed performance contracts can be established, and performance can be measured quantitively.  It works best in hierarchical organizations with small spans of control, clear and distinct responsibilities, and co-located employees that the organization “owns.”  It works best with bountiful, stable rewards budgets and with employees who accept the game. 

Unfortunately, the new world of work isn’t like this.  Simple jobs are gone; they have been outsourced or automated.  Jobs that remain are more complex and dynamic because organizations face environments that are more volatile, uncertain, complex, and ambiguous (VUCA).  It is difficult to establish detailed performance contracts that remain relevant for more than a few weeks or months for many jobs.  For many employees today, the only constant is priorities will change, the work will change, and reward budgets will get cut.  Agile is the rule for today’s organizations, and the old game depends on predictability.  Organizations today are flatter with larger spans of control, making it difficult for supervisors to monitor the performance of all of their employees, especially when many of them may work virtually.  

Complicating this picture further is the fact that organizations today don’t own all of the talent they need. Supervisors today manage the performance of gig workers, contractors, vendors, partners and fixed-duration employees along with full-time employees.  You can’t play the old game with people you don’t own. And gone are the days when individual employees worked independently, and when organizations could rely on a few exceptional employees to drive their success. The old game is tailored to individuals, but the new world calls for teamwork.  Work today is increasingly being done in teams and in teams of teams.  Given the complexity of the problems organizations face today, they need everyone in order to be successful, not just the top 10%.  And finally, the players are different today.  They want different things and they have higher expectations that aren’t satisfied by old game.

The New Game

The science of organization design, motivation and high-performance points to a new game.  The new game doesn’t emphasize ratings and it doesn’t make PM a slave to rewards.  It puts PM to work for the business, redefining it as a management process that translates business strategy and organizational goals into real work.  It provides purpose, direction and alignment for employees and facilitates progress toward organizational goals.  The new game isn’t about ratings, differentiation, and rewards, it’s about performance…for individuals, teams, and organizations.  The new game is based on contemporary principles and practices from psychology (cognitive, social, and positive psychology), behavioral economics, and neuroscience.  There is strong scientific evidence supporting these principles and practices. I won’t take space to here to present it since I have thoroughly documented it in other places.

In the new game, employees are not coerced into performing, they are unleashed.  Employees work for more than a paycheck.  The new game taps into more powerful motives like purpose, progress, belonging, and mastery.  Employees work hard for many reasons; lots of things beyond money are “rewarding.”  They work hard because their work is meaningful, it has a larger purpose that is articulated through an effective PM process.  Goals and the meaning they provide are at the center of the new game.  Employees work hard because their efforts make a difference for the organization and its customers.  They work hard because they are a part of something bigger than themselves.  

The new game puts a premium on progress and positivity, reinforcing progress, celebrating success and leveraging strengths.  And the new game is a team game.  Employees have a deep-seated need to belong, so the new game emphasizes team goals, cooperation, and collaboration.  Employees work hard because they don’t want to let their colleagues down.

And while compensation is an important part of the new game, motivation does not equal money.  

In the new game employees are paid fairly relative to the market, their pay grows over time, and they share in the successes of the team and organization. In the new game, when we win, I win.

With the new game defined, arguments to keep ratings and traditional PM ring hollow. Organizations don’t need ratings. Rewards (and other) decisions can be made without traditional PM ratings.  Compensation can be managed effectively without ratings, pay-for-performance and differentiation.  Employees don’t need ratings because they aren’t playing the old game.  They don’t need to know the score because compensation isn’t tied to an individual score.  What employees want is to make progress in meaningful work, and this doesn’t require ratings.  What it does require is support from supervisors and the organization.  Progress requires feedback, information, problem solving, and resources.

Employees don’t need ratings; they need supportive managers and real leadership from the organization.  

Now I’m not na?ve.  I realize abandoning the old game won’t be easy, even if we admit it doesn’t work.  In fact, it will be terrifying, and many business leaders and HR professionals would rather not go there.  But ratings aren’t better than the alternatives because the alternative is a different game, and the new game is a better alternative.