In Search of Workforce Performance Excellence

Why annual reviews have to go

Published: Tuesday, March 1, 2016 - 15:44

Even before the landmark publication of In Search of Excellence in 1982, bosses realized that operational excellence gets accomplished through dedicated employees. Yet, to this day, many organizations stifle high performance through the annual performance evaluation process for each employee. This problem is twofold, and the solution is in every organization’s grasp, but it requires a changed approach to engaging employees.

The twofold problem, as I see it, is
1. The annual performance review concept and process
2. The pay-for-performance compensation system

In recent years, this topic has been addressed in various forms by publications such as The Wall Street Journal, Harvard Business Review, and The Huffington Post, which run the gamut from financial/business to academic and popular news. I’ll address the twofold problem here by explaining what creates the challenges, and provide supporting data, then conclude with the solution that an increasing number of organizations are adopting.

First, permit me to share a bit of my personal history and early appreciation of the basis for the twofold problem.

My history

Around 1998, we made the decision to restructure the Baldrige Program staff into self-managed teams. We stumbled in our early attempts, created too many matrixed teams, and quickly became a learning organization. However, right from the start we recognized a significant barrier to developing high-performance teams: It was our annual process for employee performance reviews. Everything about it was wrong. With self-managed teams, there were only two bosses—the program director and the program deputy director. Although the two of us were responsible for performance, we supervised the employees only on paper, since they were self-managed. We couldn’t oversee individual performance without interfering with empowered teams. Furthermore, our parent organization’s pay-for-performance system, based on a rank-order list of all employees, forced us to pit one employee against another on our teams. This encouraged competition rather than cooperation.

At the outset, we tried to reorient the pay-for-performance system to meet our needs by suggesting that we put all our pay increases at risk, based on accomplishing specified goals, with the potential for exceeding our allotted pay pool if we reached stretch goals. However, because our parent organization’s system was embedded in Federal Register-mandated processes, we couldn’t adapt the system to meet our needs.

Although we realized then that rating and ranking employees annually was counterproductive to accomplishing our mission, I didn’t realize how significant this barrier was until I learned more about the problems, had the opportunity to study the data that supported our early thoughts, and more recently, observed the solution that a growing number of organizations are adopting.

The problem: annual performance review

In 2008, Samuel Culbert, a professor of management at UCLA, wrote an article in The Wall Street Journal titled “Get Rid of the Performance Review!” In it he outlined numerous problems associated with the annual employee performance review, including:
• It is a “one-side-accountable, boss-administered review.” It sets up an unintended environment of confrontation and intimidation rather than cooperation, preserving the boss’s authority and power advantage.
• The review generally involves assessment against a generic checklist or performance agreement. Competent employees in different positions have different responsibilities, and they don’t fit the same generic checklist. Indeed, recently, Scott McIntyre of PricewaterhouseCoopers talked about two major classes of contributors in his consulting environment, performers and producers. The performers are the people “who bring in money every day,” and the producers are the “people who produce big ideas... who are true visionaries,” explained McIntyre. Both types of people are critical to business success, yet performance evaluations are frequently skewed toward the responsibilities and accomplishments of performers, who generate daily revenue and customer engagement.
• Frequently, performance reviews are political, and they are definitely subjective, thus creating a further boss-employee schism.
• Employees are hesitant to share their development needs and desires with their boss. This is because sharing needs for improvement could come back to haunt the employee by being recorded as a weakness at performance review time. As a result, an opportunity is lost for the employee to learn and for the organization to benefit.
• Instead of creating an employee-boss partnership for the benefit of all stakeholders, the review sets up a confrontational situation. Although personal improvement is each employee’s responsibility, a trusting relationship allows for mutual commitment to the improvement.

There are other problems with the annual performance review. In addition to the review process setting up the boss as judge and jury, research from the CEB (formerly known as the Corporate Executive Board) shows that individual performance ratings have zero correlation with actual business results. The CEB reports that recent neuroscience research shows that the dynamic of the review puts employees so much on the defensive that the process results in worse performance, even for high performers. Because of organizational requirements or fear of grievances, the review may involve a scripted conversation in which the majority of employees are told they merely “met expectations.” (This despite a year of extremely dedicated work and project success.)

Often, setting goals once a year, maybe with a midyear check-in, results in agreements that are out of sync with the organization’s business cycle. Furthermore, commitment to the agreement can discourage the employee from setting even bigger or revised goals based on changes or new opportunities discovered during the year.

Finally, due to the very nature of performance plans, setting them at the beginning of the year focuses employee commitments on activities rather than outcomes. Yet outcomes are what matter for organizational and personal accomplishment. This is well illustrated by the 2009 Dilbert cartoon, where Dilbert’s boss tells him at his annual appraisal that he needs to get better at anticipating problems (an activity), and he responds, “If I could anticipate problems, I wouldn’t have agreed to work for you.”

Pay for performance

A pay-for-performance system is widely used to “equitably” distribute the assigned allotment for pay increases and bonuses. As I described above, its focus on individual performance encourages competition rather than collaboration. For one employee to get more than the average, another employee has to get less than the average. No employee wants to be the person getting less than the average.

The system is further exacerbated by the forced distribution curves that many organizations use. This generally results in more than 40 percent of employees being relegated to a middle group of performers—no matter how significant their accomplishments. For years GE was known for its “rank and yank” system. Managers were given a rigid scale for evaluating employees, and the bottom 10 percent of employees got fired. While GE has abandoned this system, according to BloombergBusiness, many companies still use some type of regimented system to determine pay, promotion, and firings. Is this a road to improving overall company performance or to instilling internal suboptimization through competition?

Perhaps the most damaging criticism of pay for performance is that in the end it frequently isn’t true. Budget shortfalls, lack of profitability, or growth below targets limit the amount of pay raise and bonus money an organization has available. With a rigid rating system, all employees are rated lower than they deserve in order to match funds availability. Admitting this during an employee review could lead to grievances, and in any case, almost certainly serves as a disincentive to improve performance during the next cycle.

Relevant data

According to Dan Heckle, former vice president of human resources for The Gap, in 2014 the company’s managers put 130,000 hours into annual reviews at a cost of $3 million. In a recent survey by CEB, managers said they spend an average of 210 hours a year on performance management and that employees each spend 40 hours a year. In addition, a CEB representative stated that 77 percent of human resources executives believe performance reviews don’t accurately reflect employees’ contributions. The same study found nine out of 10 managers dissatisfied with how their companies conduct annual reviews, with almost nine out of 10 saying the process doesn’t yield accurate information. In a 2014 survey conducted by the Society for Human Resource Management, almost 75 percent of respondents gave their own companies grades between a “C” and a “B” on their handling of annual reviews.

The good news is that the CEB reports that 12 percent of Fortune 1000 companies have gotten rid of annual rankings, and many are doing away with annual performance reviews completely because they aren’t appropriate to today’s workplace. According to Fast Company, half of the Fortune 1000 companies are expected to eliminate rankings and numeric ratings during the next three years.

The solution

The obvious answer is that we need to build a partnership between bosses/managers and employees. We also need to encourage collaboration and focus on common goals in organizations—goals that benefit the organization and engage employees for the long term through a sense of accomplishment and personal growth.

High-performing organizations are eliminating annual performance reviews and numeric ratings. In their place are more frequent coaching sessions and check-ins. According to BetterWorks, employees who check in regularly on their progress toward goals are up to 24 times more likely to achieve them.

Check-ins should include a focus on strengths and growth opportunities for the employee and the organization to reach the next level of performance. Constructive feedback should focus on things the employee is likely to change. The feedback should avoid discussions of personality traits.

Check-ins are designed to be frequent communications that are conversational, not authoritarian. There are no forms. They build partnerships. They allow both the boss and employee to grow through open dialog and mutual commitment.

According to Culbert, the boss becomes a “guide, coach, tutor” who provides oversight and assistance so that the boss and employee can reach jointly accountable goals.

What about compensation and bonuses? I’d recommend that they be based on achieving and exceeding organizationwide and business or work-unit goals. During the evaluation, a part of achieving unit goals would be how well the unit contributes to the success of its internal customers and suppliers, and how well it collaborates with them. When appropriate, individual bonuses would also be given for unique personal accomplishments.

How is the solution embedded in the Baldrige framework?

The solution is totally compatible with the Baldrige Excellence Framework (including the Criteria for Performance Excellence) for managing organizational performance. Here are some of the touchpoints:
• The definition of performance excellence, which we learned early on from Baldrige Award recipients, must include personal and organizational learning.
• The Baldrige core concepts/values of systems perspective and valuing people address cooperation and inclusion.
• The Criteria items 5.2 and 7.3 address performance management and workforce development in a process that encourages workforce engagement.
• The Baldrige Criteria scoring guidelines are always aimed at achieving the next-higher level of performance.

Of course, a key premise for this whole model of workforce performance excellence is smart hiring at the outset. But that is the subject for another column.

First published on the NIST Insights blog.

About The Author

Harry Hertz

Harry Hertz retired in June 2013 from the National Institute of Standards and Technology (NIST), where he had served as director of the Baldrige Performance Excellence Program since 1995. For more than 15 years he was the primary architect of the Baldrige Criteria for Performance Excellence, responsible for expansion of the Baldrige Program and Award to healthcare, education, and nonprofits, including government. Hertz serves on the advisory group for VHA’s Center for Applied Healthcare Studies, and on the adjunct faculty of American University. He has a bachelor’s degree in chemistry from Polytechnic Institute of Brooklyn, and a Ph.D. from M.I.T.