Are Performance Appraisals Doomed?

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During the last year there has been a tsunami of interest among HR managers to revamp, redesign, or eliminate the performance appraisal process. And for good reason: our research shows that more than 70% of all organizations dislike the process they have and I have yet to talk with an employee or manager who likes it at all (one client calls it a “soul-crushing exercise”).

Is this process doomed? Well it’s definitely due for a major overhaul.

We started studying this area back in 2006 when people were very excited about topics like cascading goals, pay for performance, goal alignment, and automated performance management software. This all seemed very exciting and companies like SuccessFactors became billion dollar businesses (now part of SAP) selling automated tools to help companies put this entire process online.

But as companies snapped up software and automated goal-setting and appraisals, managers and HR have become more and more unhappy with the process itself.

The Deloitte 2013 Human Capital Trends research discovered that 1/3 of all global organizations want to revamp their performance management process in the next year and 2/3 within the next three years.

In fact the research we are gathering now shows that fewer than 30% of all organizations feel their existing process drives any level of performance or engagement at all (rather it simply helps evaluate people for compensation and promotion).

If you haven’t given your appraisal process serious thought, it’s probably time. Today, as the economy recovers, employee engagement and retention are among the most important drivers of success – and most traditional appraisals do little or nothing to make people feel good about their work.

Let me give you a few things to think about.

1. The traditional process of appraisal, giving people ratings, is based on an old-fashioned view of employment.

Appraisal forms were developed in the early 1900s when employees were “workers” and managers were “supervisors.” The supervisor rated and ranked people based on output.

While we certainly want to hold people accountable for goals, in today’s organizations more than 70% of workers are “knowledge workers” or “service providers.” These are people who become more productive and valuable over time .. so the more we coach and develop them, the more productive and happy they become. Hence the drive to move the process away from “competitive evaluation” toward what we call “coaching and development.”

I wont quote all the research on this topic, but it’s clear to most people that what people want from a manager is someone to help us improve – not someone to “evaluate us.” Company after company is starting to do away with “forced rankings” and shifting from “evaluation” to “development.” After all, the process is called “performance management” not “performance evaluation.”

Focusing on development really pays off. We did research a few years ago which showed that companies which provide high levels of development planning and coaching to their employees have a third less voluntary turnover and generate twice the revenue per employee of their peers. These are huge returns.

Why? Because these are companies that look at employees as high valued resources who should continuously be developed – and they give managers the tools and training to coach and develop people.

2. Managers don’t “supervise” people so they can’t assess performance like they used to.

The second big change which has taken place is the flattened, team-oriented, networked nature of companies. We often don’t see or work with our manager for days or weeks at a time, so our real “performance” should be evaluated and reviewed by all the people we work with – that is, our team-mates.

Software vendors often call this “social performance management” and a lot of startups have tried to build tools to make this work online. Most have failed to create a lot of traction, because this not a market of “online tools” but rather a change in the way the process works. While lots of interesting ideas are out there (Read “The Crowdsourced Performance Review” by Eric Mosely for lots of good ideas), they all get back to some basic things:

A) Feedback should come from multiple sources, not just the manager.

B) Teams should evaluate each other during projects, not only once per year.

C) Feedback should to be “developmental” – not just positive (which is very hard to do).

One consultant we hired used the phrase “feedback is a gift.” You give it as a gift and you receive it as a gift. Without a “feedback-rich culture” no amount of online software is going to make your organization start to talk openly about performance. And the more feedback people provide, the more performance goes up.

3. Goals change frequently.

The third reason traditional appraisals aren’t working is the dynamic nature of goals. MOre than 60% of companies set goals annually. These organizations are seeing less than 1/3 the impact of this process than companies which reset goals quarterly. And if you’re a believer in “agile management,” you know that managers should review goals with employees every week.

When we try to capture goals once per year in a complex “cascading” fashion we create a rigid process which gets out of date. A well known company who pioneered this model told me a few months ago that it was causing major problems: this particular company shifted its engineering team goals from “output” to “quality” in the middle of the year and nobody had a single goal focused in that area. It was a major challenge to get people to shift gears and move in a new direction.

So whatever process we use, not only do we need multiple people creating feedback, we also need to adjust and update goals more frequently.

4. Managers need to learn how to coach people well, leveraging recognition and feedback not just evaluation.

Anyone who has had an appraisal knows that it’s not a fun process. Not only do you seem to remember only the “bad things” but you feel nervous the entire time, which makes you somewhat unable to listen to the feedback.

And it’s just as hard for managers. When an individual is promoted to manager they suddenly take on a new job, they now must direct, coach, and evaluate people. That is a big change and most technical experts do not take to it immediately.

Unfortunately most companies don’t spend very much money on first line leadership training (it’s the lowest spending level in leadership development) and the nobility of management is often not rewarded. Being someone’s manager is an awesome and fairly intimidating experience – we have to respect this huge job and help managers learn to do it well.

Our research on employee recognition shows that companies with a “recognition rich culture” far outperform those which are more “punitive” or “evaluative” in nature. This is all about human nature: when we feel recognized and valued we are very willing to take more feedback and focus on improvement. If all we hear is criticism, most people stop listening and often leave.

So when we set up a process that includes a big box with “rating” at the end, we essentially encourage managers to focus on the “appraisal” and not the feedback, recognition, and coaching.

5. Boss-less teams often outperform manager led teams.

As organizations become flatter (companies like GE have reduced the number of levels by a factor of two over the last 20 years) more and more research shows that “boss-less teams” outperform those with “bosses.”

Have you ever been given an assignment to work with a team when there is no clear boss? It’s very empowering and lots of research shows that these teams far outperform those with strong leaders. Companies like GE, WL Gore, Valve, Github and others talked about their examples in the Wall Street Journal last year. In every case they found that “leaderless teams” outperformed those with a “boss.”

This is not to say that we don’t need strategic leaders in organizations – but rather it points out that a traditional “manager-led” appraisal may not be as valuable as we think. One of our clients put it to me this way: by giving our managers an “appraisal form” we tell them that we don’t think they’re smart enough to know how to coach and manage their teams, so we force them to do it a prescribed way.

I’ve had the opportunity to lead several organizations in my career and as I look back on my successes and failures in many cases the biggest problem I had was being “too prescriptive” and not empowering people enough. Performance appraisal is among the most “top-down” tools we have in management.

Where is this going?

We have done a lot of research on this topic over the last few years and nearly 45% of all the organizations we recently surveyed told us they are taking a serious look at their performance management (e.g. appraisal) process.

Our perspective is that this particular HR process needs to be “unlinked” from everything else. Too many HR strategies rely on the appraisal as the core tool to develop compensation, development, leadership potential, and every other activity in a person’s career. This makes it too onerous and difficult and shifts it away from coaching and development.

osh Bersin writes and researches corporate talent, learning, leadership, and HR best-practices around the world He is Principal, Deloitte Consulting LLP and founder of Bersin by Deloitte. You can follow Josh here or on twitter josh_bersin.