If there is one trend really exploding in the HR/Management space right now, it is the wave of companies getting rid of their annual performance reviews – i.e., the process where all employees’ performance is rated once a year on a standardized scale, according to standardized criteria, usually by their immediate supervisor. When software giant Adobe declared that they had thrown out their entire annual performance review in 2013, they seemed to open Pandora’s box: Since then, companies like Gap, Accenture, Deloitte, and even the rating pioneer GE have followed. HR representatives, managers, and employees have all testified to their satisfaction with finally being rid of the unpopular, time-consuming performance ratings. The issue is now sparking heated debates at both scientific conferences and industry meetings.
In one way, you could say that the change was long overdue. It is well known that performance ratings in general, and the annual performance review in particular, are highly unpopular among practitioners. 95 percent of American managers think performance ratings are too time-consuming and do not contribute enough value to the organization (CEB Corporate Leadership Council, 2002; 2012). A Deloitte study from 2014 showed that only eight percent of companies agree that their performance management process contributes substantially to their success. This is quite remarkable for a process that the average manager of a large American company spends 210 hours a year working on (Corporate Leadership Council, 2012). In addition, many of the practitioners I meet are emphasizing that traditional performance ratings no longer meet the demands of modern work life. It is a far too rigid process for today’s fast-paced, flexible, and fluid world of work.
To add to this, psychological research has long pointed to a number of problems with performance ratings. For one, there is very little research showing any consistent increases in motivation or work effort following performance ratings (e.g. Aguinis, Joo & Gottfredson, 2011; DeNisi & Smith, 2014). Numerous studies have also shown that the accuracy of the ratings is generally far from good (Levy & Williams, 2004; Murphy & Cleveland, 1995). Furthermore, anyone with rudimentary knowledge of behavioral psychology knows that feedback given once a year has a scant chance of directing or changing employees’ everyday actions.
So, to sum up: We have here a practice that is disliked by most if not all important stakeholders, that is afflicted by various problems in both accuracy and value creation, and that is a bad match with today’s work life. Shouldn’t it be a no-brainer to throw it out, then? Well, I think it is safe to say that the traditional performance management practice, with its annual review and complex rating forms, is a legacy of the industrial era and was bound to be revised sooner or later. However, the story does not end with getting rid of ratings. The real interesting question to ask is: Where do we go from here? Just because the annual performance review gets the boot, it does not mean that performance management as a whole has become any less important. Rather the opposite, actually. Now we need to ask ourselves: What deeper challenges is our discontent with ratings a symptom of? Well, for one, we are back to the classical issue of how to fairly judge other people’s performance. We are also back to the ever-present issue of managers’ unwillingness to bring up performance problems. These issues will not resolve themselves just because we drop the annual performance review – but it could be a start. So now that things are really moving in the performance management space, it seems like a good time to revisit some of the broader and more fundamental issues that a modern, well-designed performance management system must be able to handle. We will spend the three following posts digging into just those issues.