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Part I
Laying the Foundation for Change
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1
The Case for Change
Every year a familiar ritual takes place in organizations around the worldâthe annual performance management review. It often involves hours of filling out forms, somewhat uncomfortable conversations between employees and managers, and numerous meetings to decide how to allocate rewards. Like many rituals, its original purpose has become somewhat obscured, but we continue to do it nonetheless.
It doesnât have to be this way. Performance management has the potential to drive significant business results. Done well, it can improve individual and organizational performance, inspire employees to find meaning and purpose in their work, and promote career development. Done poorly it can hurt performance, reduce morale, and waste everyoneâs time. Too often performance management is done poorly.
We need good performance management now more than ever. CEB, a leading advisory company, estimates that organizations globally need an average of a 27% increase in employee performance just to meet current goals, but current practices are only likely to improve performance by 3â5%, leaving a significant gap (CEB, 2012, 2014). If performance management reached its full potential, we might be able to close this gap; however, current approaches fall short. As one human resources (HR) leader recently told us, âIf we could only get performance management right, it would be a game-changer in our organization. Unfortunately, we canât seem to get it right, despite years of trying.â
Why Change
Performance management is a straightforward concept. It is the collection of activities designed to improve individual and organizational performance, such as setting goals and expectations, monitoring progress, providing feedback and coaching, and measuring and evaluating results. Data produced from this process are often used to make decisions about people, including pay, job assignments, training, promotions, and terminations.
These activities appear consistent with standard business practices, so why do they fail to provide value when they are done collectively as âperformance management?â It is not the activities themselves that are the problem. It is the overly bureaucratic and complicated way they have been implemented in most organizations. Performance management tends to focus heavily on documentation and processâsetting goals in compliance with organizational policies, completing rating forms on time, and determining how ratings are translated into rewards. This approach largely ignores the most important drivers of performance, however, which are effective relationships and ongoing communications between managers and employees that allow for real-time performance feedback, coaching, and development (Pulakos & OâLeary, 2011).
While most HR professionals acknowledge that effective, ongoing performance conversations and feedback are critical for driving performance improvements, these ideals are hard to achieve at scale and are even harder to sustain. Many companies revert to what they can implement and track easilyâdocumenting each performance management step. They reason that documentation at least ensures that some basic performance-related communications are occurring, even though documentation does not necessarily indicate high-quality performance conversations. Over-emphasis on process has resulted in some unintended consequences: (1) performance management activities cost organizations too much, (2) employees and even many managers have come to hate performance management requirements their organizations impose, and (3) the data generated from formal performance management documentation often cannot be trusted.
High Costs
Performance management is a time-intensive process in many organizations. Typical activities include:
- Reading communications from HR and attending required training.
- Cascading goals, in which organizational objectives are cascaded down through every level of the company before getting translated into individual objectives.
- Setting team and individual goals that meet SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) criteria.
- Conducting mid-year reviews to check in on progress.
- Completing employee self-assessments, which may include rating oneself on performance criteria and writing narrative justifications to support the ratings.
- Collecting, reviewing, and providing 360-degree feedback (e.g., from peers, subordinates, customers, etc.) to use as input for performance reviews.
- Supervisory performance assessments once, and sometimes twice, a year, which may include rating each subordinate on several performance criteria and writing narrative justifications to support the ratings, along with completing self-assessments and collecting 360-degree feedback.
- Calibration sessions, in which managers meet to discuss employee ratings to ensure they are consistent and fair; these sessions may also include discussions of how to allocate raises and bonuses.
- Performance review conversations in which each manager meets with each of his or her direct reports to provide feedback and discuss performance ratings; conversations about raises and bonuses may be done as part of the review or separately.
These activities add up to a significant amount of time. According to one survey, the average manager spends about 210 hours per year and the average employee about 40 hours per year on required performance management activities (CEB, 2012). Managers in client organizations have often told us that the whole company focuses on performance management for weeks or even months, distracting everyone from getting âreal work done.â
All this time adds up to substantial costs. Using these time estimates at an average cost of $52 an hour for managers and $22 for individual contributors (Bureau of Labor Statistics, 2010), performance management costs $10,920 a year for each manager and $880 a year for each individual contributor. A large organization with 10,000 employees can spend up to $35 million a year on performance management (CEB, 2012). The question then becomes what return on investment (ROI) are organizations receiving for this level of effort? As one example, Deloitte found that they were spending a total of 2 million hours per year on performance management activities that most executives thought had very little value (Buckingham & Goodall, 2015), which then led to a major overhaul of their process.
This perceived lack of value is pervasive across most organizations. Satisfaction with performance management is consistently rated low on employee engagement surveys (e.g., OPM, 2016). It is important to analyze the costs of performance management against the perceived value because, in most cases, performance management has a very large cost with little return. If nothing else, it is worth considering how performance management processes can be streamlined to save time.
Criticisms From Employees and Managers
Complaints about performance management are as old as the practice itself. Just how much employees and managers dislike performance management depends on the specific activity in question. Many cite dissatisfaction with the entire process because the time invested is not seen as adding commensurate value. The most negative reactions consistently relate to the performance review, providing fodder for strong and vocal critics. For example, Samuel Culbert once described the performance review as a âpretentious, bogus practiceâ that should be âput out of its miseryâ (Culbert, 2010). A Washington Post headline perfectly captured the sentiment: âStudy finds that basically every single person hates performance reviewsâ (McGregor, 2014).
Managers also loathe performance reviews. Giving and receiving feedback, especially criticism, is awkward and uncomfortable. When the stakes are raised with pay decisions riding on the outcomes, tension and conflict are further heightened. Neuroscientist David Rock has offered one explanation for why everyone hates performance reviews. He and his colleagues assert that the act of being evaluated threatens oneâs self-esteem and social standing in the organization. This perceived threat activates the fight-or-flight center of the brain and causes higher-level processing to shut down as the employee goes into a defensive mode. This reaction happens even if the review is positiveâit is the very act of being judged that leads to defensiveness (Rock, 2008; Rock, Davis, & Jones, 2014).
Simple dislike of performance reviews is not the only problem. More concerning is that the dislike often translates into performance detriments. Research has shown that formal performance reviews are frequently demotivating to even the highest performing employees (Aguinis, Joo, & Gottfredson, 2011; Culbertson, Henning, & Payne, 2013) to the point that they can lead to apathy and less effective performance. This point is important because the demotivating effects of performance reviews, associated disengagement, and potential for decreased performance are not widely understood.
There are several reasons why formal reviews are often more demotivating than motivating, even beyond the general defensive reaction proposed by Rock. First, when an employee hears negative feedback for the first time in a formal performance review, it can cause resentment because this feedback was not shared until the review. Negative perceptions can be exacerbated when 360-degree feedback from peers and direct reports is shared for the first time in the formal review. Moreover, sometimes the performance management process is designed to constrain ratings or force a distribution. Arbitrary rules result in ratings and associated feedback that may be demotivating when there is a mismatch between actual employee performance and system-imposed rating guidelines.
Untrustworthy Data
Organizations often recognize the costs and dissatisfaction with performance management but still justify its use, citing the need for data to use in decision-makingâwhom to reward, promote, reassign, train, fire, etc. Is performance management data accurate enough to serve as a basis for these purposes? According to CEB, only 23% of HR leaders believe that performance data accurately reflects employeeâs contributions (CEB, 2012). This mistrust is well founded. In an examination of 23,339 performance ratings across 40 organizations, no relationship was found between business unit profitability and individual performance ratings in those units (CEB, 2012). Units with highly rated employees were no more likely to be profitable than units with low-rated employees.
Performance ratings may not relate to business performance for several reasons. In some companies, ratings are chronically inflatedâa cultural norm that comes with strong pressure for managers to adhere to it. In these situations, very few employees are rated on the low end of the scaleâmost are rated in the middle or aboveâeven when business unit performance fails to meet expectations. It is not uncommon for 98% of employees within an organization to be rated a âmeets expectationsâ or higher on a 5-point scale, with 80% rated as âexceeds expectationsâ or even higher. Alternatively, the rating system in other companies comes with arbitrary distributions, such as 80% of employees need to be rated as âmeets expectations,â 10% (and only those who are to be promoted) can be rated as âexceeds,â and 10% must be rated as âbelow.â In either case, neither cultural norms that lead to excessively high ratings nor system ârulesâ that lead to arbitrary rating distributions can be trusted to lead to accurate ratings for each and every employee.
A second factor that impacts rating quality is that managers are not always motivated to provide accurate ratings. Telling employees their performance is âbelow standardâ or even that it âmeets expectationsâ can be difficult for managers to do because many employees do not take this feedback well. Managers have little incentive to upset the very people they rely on to get the work done. Alternatively, admitting to having poorly performing employees can reflect badly on the managerâs leadership skillsâthat they selected a ...
