As noted last time, one of the most flagrant trends in HR right now is the change going on in performance management. An increasing number of companies are throwing out their annual performance reviews, and often also their complex criteria and matrices for rating employees’ performance. An old paradigm thus seems to be on its way out. Why is this happening, and what broader underlying challenges are driving this change? Today, I thought we would dwell on one of the inherent difficulties of performance management: Combining development with evaluation.
First of all, we need to acknowledge that performance management serves at least three broad purposes in organizations today. First; to enable and motivate employees to improve their performance. Second; to feed systematic analysis and business intelligence, e.g. finding patterns in performance differences. And third, to inform decisions about promotion, talent nominations, layoffs, and – not least – compensation and benefits. This multi-purpose nature of performance management is absolutely central if we want to understand what is happening now – and what an up-to-date performance management system might look like.
So far, the discussion has mostly focused on the first purpose. And if that was the only one, the issue of throwing out performance ratings would indeed be pretty clear-cut: There is little evidence to suggest that ratings should be a central part of motivating or enabling employees to improve their performance (DeNisi & Smith, 2014). On the contrary, there is quite a lot of research pointing to the demotivating effects of ratings (Aguinis et al., 2011; Culbertson et al., 2013), or at least indicating that ratings only motivate a minority of employees (usually – surprise! – the top-rated ones). This should come as no surprise. We have long known that motivation at work is fueled by frequent feedback, challenging goals combined with the right resources to achieve them, and close contact with a supportive supervisor. A label or number put on your performance once a year has scant chances of affecting your everyday behavior and engagement at work.
Furthermore, we know that evaluation and human growth tend to be like oil and water: They are virtually impossible to combine in the same process (a fact noted already by Meyer, Kay, and French, 1965). Performance management as it has been carried out to date thus carries an inherent paradox: In one and the same process, supervisors are supposed to help the employee develop and grow, while at the same time giving an evaluative judgment of his or her performance over the past year. There is also a lot of research showing that the use of numbers or categories in that process actually works to aggravate this paradox (e.g. Murphy, Cleveland, & Lim, 2007 in Langhan-Fox, Cooper, & Klimoski (eds.)). By introducing a rating scale, you forcefully direct the employee’s attention to the rating itself and not to the qualitative feedback and discussion that go with it. No matter how much you emphasize that the process is forward-looking and developmental, the employee will tend to focus mainly on the rating.
Thus, you might say that many of the problems of performance management stem from its apparent janus face: It includes both a developmental and a judgmental focus. One clear practical implication can be drawn out of this: If you want to enable performance improvement among employees, try removing any talk about ratings and formal judgments from that conversation. Coaching or development sessions between supervisor and employee are best held with little focus on evaluation. In other words; the first of the above purposes with performance management is often best fulfilled when separated from the second and third. From that perspective, the scrapping of the performance review is a promising development.
As evident above, we actually know quite a lot about how to motivate employees at work. We definitely know enough to say that performance ratings seldom serve that purpose. But – and this is an important but – when it comes to the second and third purpose of performance management, the issue of ratings becomes a lot more complicated. The reason is, they relate to one of the most difficult issues that organizational psychology has to offer: How do you fairly evaluate another person’s performance? This daunting task does not go away just by getting rid of the annual performance review – and we will dig into it in depth in the next blog post.