We Wasted Ten Years Talking About Performance Ratings. The Seven Things We’ve Learned.

I can’t tell you how many meetings I’ve had talking with companies about changing their performance management process. Going back to 2015 articles were written by people like Marcus Buckingham and Ashley Goodall (both personal friends), and many others about the need to change year-end ratings, implement regular feedback practices, and reduce the power of the manager in the process.

Many people cite the research from Personnel Psychology in 1998 and Journal of Applied Psychology in 2000 that raters are biased and unreliable, and that almost 50% of the variation in performance ratings is based on the manager, not the employee. In other words, the year-end review is imperfect, and we need better data to make good people decisions.

Well here we are entering 2019, and the debate rages on. Deloitte Consulting LLP’s BersinTM recently published its High-Impact Performance Management study and found that the process is still “universally despised” (with a net promoter score of -60), yet 96% of companies do performance reviews and 86% use performance ratings in some form.[1]

I’ve been studying this topic for almost 20 years now, and while this is a problem that will never fully be solved, let me try to summarize where I believe we are.

1/ Driven By The Economy, the Purpose of Performance Management has Changed.

The most important question I ask leaders is “why are you doing this at all?” What is the outcome you’re trying to achieve?  After all, if managers are good at managing, shouldn’t they be “managing performance” all the time?

In 2006, when we first studied this topic, the research found that 80% of companies said the main goal of the performance process was “competitive assessment.”[2] In other words, the process was designed to put people on a 9-box grid (performance vs. potential), decide who would receive the most money, decide who was ready for promotion, and give managers a tool to coach people out of the business.

One of my clients put it this way:  “In some sense, the performance management process is designed to force our managers to have tough conversations. In our company everyone is always ‘nice,’ and we need to tighten the screws on accountability. So now they have no choice, they go through the process, we force the distribution of ratings, and we can really see who the high and low performers are.”

Good enough. I can’t disagree with this idea. Some companies do become complacent and it’s often when the numbers are weak that leaders realize a lot of people are misaligned, poorly trained, or just incapable of doing the work we want. And in that kind of situation, a “forced distribution” model acts as an injection of accountability. I always looked at it as a “temporary shock to the system” to get the company back on track.

Microsoft, by the way, used a force ranking model for many years and it fueled the company’s aggressive, highly competitive culture which helped it become the market leader in Windows and Office. People didn’t like it, but the company grew quickly and overpowered dozens of PC-based competitors in its first 20 years.

Today, however, if you ask companies the same question, they answer it quite differently. The highest performing companies surveyed in Bersin’s new study said the goal of performance management is “growth and development” – helping people perform better in their role and grow their career.[3] And this has been the new fad.

Today many companies have renamed the process to “performance development” or “performance coaching” or other positive terms, trying to get away with the “evaluative nature” of this process.

(The Bersin research showed that the lowest performing companies were 50% more likely to say their performance process was focused on “compensation and promotion”, not necessarily growth.)

Why this shift?  There are good reasons, and they’re largely because of the economy.

  • First, the “rank and yank” model is not very motivating for people, it assumes we operate in a bell curve of performance (which is not true), and it often reduces teamwork and creativity.
  • Second, in today’s job market if you can’t retrain, reskill, or remotivate a poor performer, you’re going to have a tough time finding a replacement. So the focus has changed.

2/ Feedback Has Become a Buzzword. It’s important But Not Everything.

The second thing that’s happened, which I have discussed in several articles (read “Feedback is the Killer App” ), is that we now believe performance management is all about feedback. (It always was, by the way.)

Jumping onto this trend, companies now have check-ins, conversations, checkpoints, and all sorts of other ways people can collect data at work. One of the pioneers in this space, BetterWorks, now has hundreds of thousands of “feedback sessions” in its customer base, and they are applying AI and sentiment analysis to figure out what kind of feedback correlates with the highest performing teams.

One of my favorite CHROs, Dean Carter at Patagonia, shared data which proves that employees who check-in more regularly with their managers are statistically higher performers. So, creating an environment where people can and do align with their leaders is very important.

When I talked with Cisco about this topic a year ago, Ashley Goodall mentioned that using a tool for feedback really helps. Since we are all so busy and can’t get face time with our managers (and we often have multiple managers), getting and giving feedback online helps. It’s as simple as asking “here’s what I’m working on, are these the right priorities?” or “can you give me a hand with this particular issue I’m having?” that really make a difference. (The Bersin research found that peer-to-peer feedback had a strong positive outcome as well – so this is not just employee-to-manager.)

But this is not as easy as it sounds. In the new Bersin study, only 22% of companies do this systemically[4], which is really a statement about culture. Some cultures promote open feedback in all directions; others do not. And this is often an issue driven by company maturity.

In the technology industry, for example, companies like Google enable massive amounts of feedback (witness the walkout this year), and nobody can argue with Google’s success over the last few decades. But in many other tech companies (Facebook, Uber) the stories about harassment or bad behavior leak out later, and it’s clear that people were not speaking up in an open way.

Even if you have a brilliant CEO who seems to know everything, the research is clear that feedback is an important tool. I just met with the CHRO of one of the fastest growing software companies in California and she told me their VP of engineering does talent reviews and compensation adjustments every month. Why?  He really wants to know how people are doing, and he is competing for top people every single day.

From the standpoint of HR, the word “feedback” is a bit problematic, because it has a negative connotation. So just telling people “we have a new feedback system so please use it” may or may not move the needle. The Bersin research found that the highest performing companies are much more likely to train their people on feedback, and they give them guides and tools to make it easier.[5]

I remember the performance appraisals I received in the 1980s when I was a young professional, and one of my managers was a big chicken. He never said a word about my performance until year-end, and then he handed me the form to read with an embarrassed look in his eyes. Despite IBM’s tremendous management training, it was always somewhat of a surprise. So I learned to toss the paper into the trash, say “oh well,” and get back to work.  (These day’s I’d probably be on LinkedIn looking for a job, but the world was different then.)

So think about feedback as a cultural thing, and it takes time to develop. Just buying a tool and saying, “let’s start giving each other feedback,” won’t really work. It takes a few years for people to feel safe giving good feedback, and your leadership team has to model and support this transition.

3/ Teams vs. Individuals Matter.

The third thing we’ve learned in the last decade is that teams are often more important than individuals. In some ways the whole idea of individual performance reviews is archaic: none of us can function alone, it’s the way we work within the company that defines our success. If I spend time helping my peer salesperson make their quota, do I get down-graded if I don’t hit my number?  You get the idea.

The Bersin research found that companies that include team, project, or company objectives in their process far outperform those that only focus on individuals.[6] I’ve seen this many times, and even in my IBM days in the 1980s we all had bonuses and goals based on “branch office performance.” We really felt like a team and people pitched in whenever there was a big proposal or other customer need. I remember spending many hours standing in front of the copy machine making copies of a proposal for my team-mates, just because it was the right thing to do. (I thought I’d share that for nostalgia.)

The best example of this is my meeting with the CHRO of Taj Hotels a few months ago in Mumbai. The Taj hotels, which are one of the most highly regarded Hotel chains in Asia, used to have an individual-focused performance process. The customer experience was inconsistent; turnover was too high; and the new CHRO found it hard to tie an individual’s goals to that of the company.

So he changed the whole model to focus on performance of the property. Every employee is now paid based on the performance of their property, and the result has been astounding.

Not only does Taj now have an open feedback app for employees to submit suggestions and feedback to local management, but individuals are recognized publicly and everyone feels proud to make their hotel a perfect experience. I spent time at the Taj in Mumbai and I was amazed at how attentive and welcoming every employee was in every interaction. And the property was spotless, joyful, and beautiful.

Many companies understand this well: IKEA, for example, recruits people based on their sense of collective thinking. They also evaluate people based on their store, their contribution to others, and their contribution to the environment and the company as a whole.

In today’s networked world of work, we have to promote and reward people for their collaboration, followership, and willingness to help others. The reward and performance system must support this.

4/ Fairness. Not Just Pay For Performance.

What about the issue of ratings and pay?  This is critically important.  No matter how “nice” and developmental we make this process, people want a raise and they want to know it’s fair and competitive.

Well I’ve looked at a lot of research on this topic and let me share some findings. First, it is important that the performance process does reflect itself in pay. The Bersin research found that various types of “pay for performance” (clear reward systems in place) do differentiate high value.[7]

But it’s not just a matter of having lots of goals and bonuses: its important to create a sense of fairness, transparency, and accountability.  McKinsey just published an excellent article on this topic and their research proves the relationship between pay-for-performance, fairness, and differentiated compensation.

What it shows is something I’ve talked with hundreds of companies about. While we want to “unhook” the pay discussion from the performance discussion (it gets people too focused on pay and not enough on development), we do not want to “unhook” the process. In fact, the opposite is true.

Nothing alienates people more than getting a sense that their pay is unfair, behind, or unrepresentative of their achievement and contribution. So, it’s critical to create a pay process that has clearly defined criteria, one that is transparent and easy to understand, and that managers are trained and supported in communicating it.

This is a big area to work on. Bersin’s High-Impact Rewards study just found that only 12% of companies “strongly agreed” that their pay practices are fully aligned with their business strategies. There are a lot of legacy issues holding back a more accountable, value-based reward systems in companies, so this is a big area to discuss. And I believe the culture of pay is getting in the way of income inequality solutions too, so this should be on your plate to discuss.

At Patagonia, for example, Dean Carter created a clear model. Base pay is evaluated on core job performance and contribution to the team; the bonus is based on your stretch goals and innovation projects. So you can get a raise in base pay but no bonus, or a bonus with no raise. Its clear what you’re being paid for, and people stretch themselves to do great things in the company.

You can pay people based on customer metrics; revenue targets; and many other goals. These are all good practices, as long as they’re clear, consistent, and fair.

And as the McKinsey research shows, the idea of “pay equity” should not be confused with “pay fairness.” It’s really a good thing to differentiate pay (I think most companies do not differentiate pay enough), since the highest performers will vastly often outperform their peers widely in most businesses.

If one salesperson performs another by 3 or 4 times, why wouldn’t they make twice as much money?  Ditto for an engineer or other working person. You just have to do it in a transparent, fair, and unbiased way, so everyone knows why an individual is paid as much as they are.

Today you have no excuse, by the way, to pay women less than men or discriminate on any other factors. All the modern HR tools point out bias in pay systems, so you need to pay attention.  Creating fairness is more important than giving people a raise.

5/ Goal Setting; OKRs, Understanding Intrinsic Motivators.

The fifth thing I’ve discovered over the years is that goal setting does matter, but doing it the old way (cascading from the top and locking them in during Q1) is no longer enough.

Yes, companies need budgets, targets, and financial goals. But most of us don’t think about these things every day, we think about the projects, customers, and work we have to do. So the goal setting process needs to be “bottoms up” and driven by collaboration between individuals, their teams, and their manager.

The OKR model, which I’m a big fan of, is quite a successful innovation in this area. While many HR managers are still not familiar with this approach, it’s a simple, agile, and easy to understand. And it focuses on some very simple and easy to understand practices:

  • Goals should have an outcome (objective leads to a result) and we should evaluate people based on a result, not just achieving a goal.
  • Goals should range from “simple and operational” to “stretch and developmental.” Everyone should have some goals for personal improvement and some aspirational goals each year.
  • Goals should be transparent so others know what you’re working on. In BetterWorks and other tools, employees can see who has viewed their goals. This promotes teamwork, alignment, and sensitivity to others.
  • Goals should be simple and understandable, so we can actually achieve them and measure them.
  • Goals should be updated and reviewed regularly. At many companies they are reviewed weekly in standup meetings, quarterly business reviews, and other management practices.
  • Goals should be aligned and supportive of the company goals (needs no explanation).

The problem we ran into in the last few decades was that goal management systems were clunky, complicated, and became an end in themselves. I interviewed many companies over the years who told me “our goal management system is a success because we got everyone to enter their goals and align them by the end of February.”

Come on… this is HR for HR’s sake. Yes, we need people to set goals and share them, but let’s make the process developmental and collaborative and then spend most of our time doing our jobs, not futzing with the goal management software. The new generation of performance management tools finally makes this possible, giving way to a big shift in what can be referred to as “performance management in the flow of work.”

Interestingly, the Bersin research found very little differentiation between the company who had lots of performance management software and those who had very little. However it did find that companies who implement performance management “in the flow of work” are outperforming others.[9] So evaluate tools based on their utility, not all their fancy HR features.

And let me also remind you of the importance of intrinsic motivation. Many studies have shown that while goals are important, paying people for goals can hold people back. Intrinsic motivators (doing work you love, serving others, innovating, creating) are far more powerful than simply getting a bonus for closing a deal, so make sure your goal setting process is expansive and not too linked to pay. 

6/ The Important Role of Technology – Integrated Into the Flow of Work.

Which gets me to the next point: many of the first generation performance management tools were huge projects which really got in the way.  I wont mention vendor names, but the pioneering tools of the last decade are now systems which companies abhor and just find hard to use.

Why?  People are just too busy; we interact on our phones and via text and chat; we use Slack, Teams, Jira, and other tools to get work done; and we just don’t want to depart our regular work environment, log into an HR tool, and update our goals just to make the HR department happy.

This is an epic shift in the way HR software is being developed, and the future is what I call HR in the Flow of Work. What I recommend you do is evaluate the new tools in the market, pilot them, and make sure managers and employees use them as “management and work tools” not “HR tools.” I’m excited about what’s been happening, and you can read more about them in the article I published earlier this year.

And the Bersin research also proves this. While the adoption of technology itself did not differentiate results at all, companies that integrate performance tools into the real workflow are much more likely to see positive results from the process. (That’s a message to vendors and consultants for sure.)

7/ Developing People and Managers Too.

The final thing we’ve learned in the last few decades is that development, coaching, and formal training is an integral part of performance management. There’s no point giving someone feedback without showing them how to improve.  The Bersin study proves that ongoing support, talking about mistakes, and rewarding managers for the development of their teams is integral to success.

One of the important trends, in fact, is the need to evaluate managers based on their ability engage their teams. Yes managers have to get work done; but that alone is not enough. We have to show them “how” to get work done well, and that means they need development too.

Years ago I talked with an HR leader about the idea of promoting managers for “talent production” instead of “talent consumption.” Her mandate to leaders was

You don’t own the people who work for you, I do. You’re just here to take care of them and develop them so I can move them to the next role when they’re ready.

This is a practice validated in the Bersin research and it’s critically important to engagement, agility, and talent mobility.

So think about how you train your managers, how you decide who is promoted, and how you evaluate your leaders. If development, engagement, and “talent production” is not in your reward system, you should rethink your approach.

Bottom Line: Ratings Are Not The issue

If I go back to the beginning of this article, let me simply say that after a decade of discussion on the topic, the concepts of ratings themselves are not the issue. Organizations need to make decisions about people: who will get promoted; who will get more money; who will take the new assignment; who is holding the team back. And these decisions themselves are essentially evaluative by nature.

The key today is to use lots of data and feedback to make these decisions; do them in a transparent and fair way; clearly communicate what is valued in the company; and give people visibility into others’ goals and projects.

Let me conclude with two final points.

First, while many of us grew up in the United States in the “rugged individualism” model of business, where a hero-CEO or superstar entrepreneur is glamorized, heralded, and richly rewarded, the world really doesn’t work this way. No company, no product, no team is successful because of only one person, so we have to find ways to reward collaboration, sharing, and helping others in the process. This “team oriented” dimension of performance management must be respected, and it’s something we probably don’t talk about enough.

Finally, let us remember that the performance management process we develop in HR is really only a means to an end. Good managers know how to build strong teams, empower and enable people to succeed, and deliver on results. Make sure you keep a light touch on all this, and build a process that delivers on the goal you want to achieve. If you want innovation; make sure it’s rewarded. If you want revenue growth; then focus there.

Performance management is a tool, not an end, and if done well it can be one of the most powerful practices for business success.

[1] Seven Top Findings for Enabling Performance in the Flow of Work, Bersin, Deloitte Consulting LLP / Kathi Enderes, PhD, and Matthew Deruntz, 2018.

[2] High-Impact Performance Management research, Bersin, Deloitte Consulting LLP, 2006.

[3] High-Impact Performance Management: Part 1: Designing a Strategy for Effectiveness, Bersin & Associates / Stacia Sherman Garr, 2011.

[4] High-Impact Performance Management: Part 1: Designing a Strategy for Effectiveness, Bersin & Associates / Stacia Sherman Garr, 2011.

[5] The Performance Management Maturity Model, Bersin, Deloitte Consulting LLP / Kathi Enderes, PhD, and Matthew Deruntz, 2018.

[6] Ibid.

[7] The Performance Management Maturity Model, Bersin, Deloitte Consulting LLP / Kathi Enderes, PhD, and Matthew Deruntz, 2018.

[8] High-Impact Total Rewards survey, Bersin, Deloitte Consulting LLP, 2018.

[9] Seven Top Findings for Enabling Performance in the Flow of Work, Bersin, Deloitte Consulting LLP / Kathi Enderes, PhD, and Matthew Deruntz, 2018.