I have read a couple of blog posts (here and here) recently that talk about the de-motivating impact of performance appraisals. There is certainly debate to be had about the “goodness” and “badness” of performance reviews. It did start me thinking though. What if performance appraisals did not exist?
Hiring/Onboarding – Performance review scores can provide insight into who was a good hire or not. Without them, some feedback would still be required to understand if a new hire was a good hire.
Learning/Development – Performance reviews can be useful for identifying developmental opportunities, but a rating is (or subsequent calibration of ratings are) not required to do this.
Career Path/Planning – Reviews can be useful to discuss next steps in careers and what career path/plan makes sense. However, again, a rating is not required to do this.
Succession Planning – Performance reviews by their nature designate top performers. This is useful for determining who is a candidate to be in a succession pool. However, a talent review and/or nomination process does not need to include a formal performance rating that is shared with the employee (this point is arguable because some insist that successors know that they are successors).
Compensation – This is the primary area where a performance rating is used. Performance ratings enable equitable distribution of scarce compensation funds. At least, that is the theory. However, if the performance reviews are not perceived as fair, it makes the rewards either also seem unfair (if the guidelines are strictly enforced) or it makes the review process look like a sham (people get paid at rates that are higher or lower than the performance rating warrants). So, it is unclear if tying pay to performance really achieves the objective of fairness and differentiating rewards between high and low performers, especially when forced rankings (for more on this see “Thinking of Forced Ranking Your Employees? Tread Carefully”, Gartner subscription required) are involved.
So, where does that leave us? There is still a need for performance feedback. Individuals need get benefit from feedback for development (though it does not need to be differentiated - high performers vs. low performers). It is also needed for other processes (hiring effectiveness, succession pool creation, etc.). This feedback does need to be differentiated. So, we could call it something different, but the net result would be the same.
The answer, to me, is not to get rid of the performance review. It is to do a better job of appraising performance and communicating with employees. What might you do?
Get rid of forced ranking, but keep calibration – It is possible to have performance not fall in a normal distribution without grade inflation. If you only hire top performers, you should expect to have a higher percentage of top performers. Calibration keeps you honest. It forces managers to have a good justification for a rating and ensures consistent grading (to prevent grade inflation).
Make sure that total compensation aligns with performance, value delivered, and the market – If you have more high performers, there will be less differentiation in compensation because there are finite pools to allocate for merit increases and variable pay. That is ok because it at least is fair. The key is to make sure you understand market pay (it may not be just the market rate for a specific job, but also other jobs that have similar qualifications) and reward appropriately. There is a lot of data freely available to individuals about market pay rates that was not available even a few years ago.
Find other ways to recognize the highest performance other than just compensation – This can happen in a myriad of ways, but would include promotions, development opportunities, additional job responsibilities, etc.
Keep an ongoing performance dialogue going – If you are discussing performance just once or twice a year, then you likely do not have a very effective performance management process. Frequent communication, expectation setting, and support are crucial to keeping employee engagement high.
The bottom line is that I do not think performance reviews will go away because the feedback loop is critical to talent management success. What needs to improve is the performance conversation. Technology can help in some respects, but managers and executives need to step up their game.