Vincent van Ophem argues that there is merit to performance ratings based simply on basic human psychology: It's the need to know how you're doing. Instead of ditching ratings, employers are better served by improving the justification for the ratings which, in turn, drive staff engagement and, ultimately, performance.
As you undoubtedly have noticed, there has been a recent tendency among organizations to eliminate individual performance ratings as part of broader changes to the performance management approach. Prominent examples include GE, Microsoft, Deloitte, Accenture, GAP, Medtronic and Adobe.
These very successful companies have changed their approach to performance management and the reasons go beyond the fact that the context for performance management has changed:
Each of these reasons play an important role in driving changes to the performance management approach that may extend as far as eliminating performance ratings.
Then, add to this the push factor: Performance ratings are part of the dreaded and frustrating performance appraisal process. People do their best all year to achieve their goals, managers do their best to motivate their teams, and then at the end of the year there is an anti-climax â the performance appraisal â and everyone is unhappy.
Employees are frustrated because they feel good about themselves and their performance, but most will hear they are not in the top segment of performance and don't get the rating they expected. Managers are unhappy because they want to keep everyone motivated and recognized for their achievements, but they can't because they have to hand out performance ratings that demotivate the majority of their staff.
Clearly, something is wrong with the traditional approach, but how do we change it for the better? True, performance ratings are not ideal. They're a very rough way of categorizing the performance of people who have different jobs, roles and challenges throughout the year, sometimes with multiple and multi-year tasks or projects. However, we must ask ourselves: Are we doing ourselves a favor by eliminating ratings?
Consider a sports analogy: What would happen if we no longer measured results in sports? We have people participate in a race and at the end we say, "You ran very well, but we're not going to tell you the time you made and, taking into account it was a close finish with so many excellent participants, we're not going to announce who came in first, second or third because that would be so demotivating for the others. Also, you'll never know whether you ran a world record because we're not giving you the result."
It works the same way in a business environment, with the essential difference being that performance measurement is not as easy and exact as in sports, but the psychology remains the same. People simply want to know how they did and how they compare to others. Having the answers to these questions drives their engagement level. And because it's more difficult to measure, we should double our efforts to measure it well rather than giving up on measurement altogether.
In one of the first Fortune 500 companies to eliminate performance ratings, employees would tell their managers, "I know we got rid of them, but suppose we hadn't. What rating would you have given me?"
In short, the world screams for performance ratings. Athletes want to know the time they ran. Students want their grade. Politicians are hooked on approval rating polls. Companies want their customers to tell them how they're doing through customer satisfaction scores. They also need to show how they performed against their competitors in a thousand different ways or risk being discounted by investors and shareholders. So, why is it any different for the people working in these companies? After all, it's the people who drive company performance.
Of course, we should not view our colleagues as "competitors." They are teammates and we need strong collaboration to get the job done and beat the real, external competition. But it's also a reality that in business (as in team sports), there are differences in individual performance, value and potential, and these need to be rewarded differently to avoid a sense of unfairness and inadvertently pushing top performance and high potentials to leave the organization.
Let's Talk Rewards
Turn back to the sports analogy. Despite that fact that we didn't tell people the time they ran or whether they came in first, second or third, we do decide to hand out prizes to those who we know ran best (after all, we have the data). Runners will get their prizes on a one-to-one basis, but they won't know whether others received a bigger or smaller prize. And remember: Participating is more important than winning, so no one is competing against anyone else. They're all teammates, and they're all part of the athletics family.
How does that sound?
When companies get rid of performance ratings, do they also get rid of differentiation in the reward? Does everyone get the same salary increase and bonus? One would presume so because, without ratings, there is no way of knowing who should get more or less than anyone else. But it's not usually that way, and the reward is differentiated. So, how does that work?
Well, some people are just better than others, so they need to get more of the reward; after all, it would be unfair if we gave the same reward as we do to everyone else. What ends up happening is that the reward is differentiated by managers who use their judgment â which isn't necessarily wrong, but lacks transparency that might reduce the sense of fairness on the receiving end.
As total rewards professionals, we should recognize that, just because it's difficult to rate people's performance, it doesn't mean we should duck the issue by eliminating ratings altogether. That is the tail wagging the dog. Instead, we should focus on how we can better justify the ratings and train line managers to be better at enabling performance and employees on how to manage their own performance better. This requires a continuous process of asking for and delivering feedback, not only from direct supervisors, but also from peers, teammates and project team leaders. Done well, the build-up to arrive at the rating will be better and more gradual throughout the year. And the rating itself is more credible and feels fair.
At the end of the day, the objective of a performance management system must be to improve organizational and company performance. That is best achieved through engaged employees giving their best and self-driving their performance as well as by engaged managers enabling (not "managing") employee performance. Enabling performance has more to do with leadership, technology and personal choices than with a formal performance management system; however, in the end we need to be able to differentiate the reward in a transparent way. If used well, performance ratings are an essential tool in the engagement toolkit.
About the Author
Vincent van Ophem is the founder and lead consultant of Figtree International, an independent consultancy specializing in performance and rewards.
Read the December edition of Compensation Focus.
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