ASSESSING PERFORMANCE The Performance Management Revolution by Peter Cappelli and Anna Tavis FROM THE OCTOBER 2016 ISSUE W hen Brian Jensen told his audience of HR executives that Colorcon wasn’t bothering with annual reviews anymore, they were appalled. This was in 2002, during his tenure as the drugmaker’s head of global human resources. In his presentation at the Wharton School, Jensen explained that Colorcon had found a more effective way of reinforcing desired behaviors and managing performance: Supervisors were giving people instant feedback, tying it to individuals’ own goals, and handing out small weekly bonuses to employees they saw doing good things. Back then the idea of abandoning the traditional appraisal process—and all that followed from it— seemed heretical. But now, by some estimates, more than one-third of U.S. companies are doing just that. From Silicon Valley to New York, and in offices across the world, firms are replacing annual reviews with frequent, informal check-ins between managers and employees. As you might expect, technology companies such as Adobe, Juniper Systems, Dell, Microsoft, and IBM have led the way. Yet they’ve been joined by a number of professional services firms (Deloitte, Accenture, PwC), early adopters in other industries (Gap, Lear, OppenheimerFunds), and even General Electric, the longtime role model for traditional appraisals. Without question, rethinking performance management is at the top of many executive teams’ agendas, but what drove the change in this direction? Many factors. In a recent article for People + Strategy, a Deloitte manager referred to the review process as “an investment of 1.8 million hours across the firm that didn’t fit our business needs anymore.” One Washington Post business writer called it a “rite of corporate kabuki” that restricts creativity, generates mountains of paperwork, and serves no real purpose. Others have described annual reviews as a last-century practice and blamed them for a lack of collaboration and innovation. Employers are also finally acknowledging that both supervisors and subordinates despise the appraisal process—a perennial problem that feels more urgent now that the labor market is picking up and concerns about retention have returned. But the biggest limitation of annual reviews—and, we have observed, the main reason more and more companies are dropping them—is this: With their heavy emphasis on financial rewards and punishments and their end-of-year structure, they hold people accountable for past behavior at the expense of improving current performance and grooming talent for the future, both of which are critical for organizations’ long-term survival. In contrast, regular conversations about performance and development change the focus to building the workforce your organization needs to be competitive both today and years from now. Business researcher Josh Bersin estimates that about 70% of multinational companies are moving toward this model, even if they haven’t arrived quite yet. The tension between the traditional and newer approaches stems from a long-running dispute about managing people: Do you “get what you get” when you hire your employees? Should you focus mainly on motivating the strong ones with money and getting rid of the weak ones? Or are employees malleable? Can you change the way they perform through effective coaching and management and intrinsic rewards such as personal growth and a sense of progress on the job? With traditional appraisals, the pendulum had swung too far toward the former, more transactional view of performance, which became hard to support in an era of low inflation and tiny merit-pay budgets. Those who still hold that view are railing against the recent emphasis on improvement and growth over accountability. But the new perspective is unlikely to be a flash in the pan because, as we will discuss, it is being driven by business needs, not imposed by HR. First, though, let’s consider how we got to this point—and how companies are faring with new approaches. How We Got Here Historical and economic context has played a large role in the evolution of performance management over the decades. When human capital was plentiful, the focus was on which people to let go, which to keep, and which to reward—and for those purposes, traditional appraisals (with their emphasis on individual accountability) worked pretty well. But when talent was in shorter supply, as it is now, developing people became a greater concern—and organizations had to find new ways of meeting that need. TIMELINE Talent Management The tug-of-war between accountability and development over the decades Accountability Development A hybrid “third way” WWI The U.S. military created merit-rating system to flag and dismiss poor performers. WWII The Army devised forced ranking to identify enlisted soldiers with potential to become officers. 1940s About 60% of U.S. companies were using appraisals to document workers’ performance and allocate rewards. 1950s Social psychologist Douglas McGregor argued for engaging employees in assessments and goal setting. 1960s Led by General Electric, companies began splitting appraisals into separate discussions about accountability and growth, to give development its due. 1970s Inflation rates shot up, and organizations felt pressure to award merit pay more objectively, so accountability again became the priority in the appraisal process. 1980s Jack Welch championed forced ranking at GE to reward top performers, accommodate those in the middle, and get rid of those at the bottom. 1990s McKinsey’s War for Talent study pointed to a shortage of capable executives and reinforced the emphasis on assessing and rewarding performance. 2000 Organizations got flatter, which dramatically increased the number of direct reports each manager had, making it harder to invest time in developing them. 2011 Kelly Services was the first big professional services firm to drop appraisals, and other major firms followed suit, emphasizing frequent, informal feedback. 2012 Adobe ended annual performance reviews, in keeping with the famous “Agile Manifesto” and the notion that annual targets were irrelevant to the way its business operated. 2016 Deloitte, PwC, and others that tried going numberless are reinstating performance ratings but using more than one number and keeping the new emphasis on developmental feedback. FROM “THE PERFORMANCE MANAGEMENT REVOLUTION,” OCTOBER 2016 ©HBR.ORG From accountability to development. Appraisals can be traced back to the U.S. military’s “merit rating” system, created during World War I to identify poor performers for discharge or transfer. After World War II, about 60% of U.S. companies were using them (by the 1960s, it was closer to 90%). Though seniority rules determined pay increases and promotions for unionized workers, strong merit scores meant good advancement prospects for managers. At least initially, improving performance was an afterthought. And then a severe shortage of managerial talent caused a shift in organizational priorities: Companies began using appraisals to develop employees into supervisors, and especially managers into executives. In a famous 1957 HBR article, social psychologist Douglas McGregor argued that subordinates should, with feedback from the boss, help set their performance goals and assess themselves—a process that would build on their strengths and potential. This “Theory Y” approach to management—he coined the term later on—assumed that employees wanted to perform well and would do so if supported properly. (“Theory X” assumed you had to motivate people with material rewards and punishments.) McGregor noted one drawback to the approach he advocated: Doing it right would take managers several days per subordinate each year. By the early 1960s, organizations had become so focused on developing future talent that many observers thought that tracking past performance had fallen by the wayside. Part of the problem was that supervisors were reluctant to distinguish good performers from bad. One study, for example, found that 98% of federal government employees received “satisfactory” ratings, while only 2% got either of the other two outcomes: “unsatisfactory” or “outstanding.” After running a well-publicized experiment in 1964, General Electric concluded it was best to split the appraisal process into separate discussions about accountability and development, given the conflicts between them. Other companies followed suit. Back to accountability. In the 1970s, however, a shift began. Inflation rates shot up, and merit-based pay took center stage in the appraisal process. During that period, annual wage increases really mattered. Supervisors often had discretion to give raises of 20% or more to strong performers, to distinguish them from the sea of employees receiving basic cost-of-living raises, and getting no increase represented a substantial pay cut. With the stakes so high—and with antidiscrimination laws so recently on the books—the pressure was on to award pay more objectively. As a result, accountability became a higher priority than development for many organizations. Three other changes in the zeitgeist reinforced that shift: First, Jack Welch became CEO of General Electric in 1981. To deal with the long-standing concern that supervisors failed to label real differences in performance, Welch championed the forcedranking system—another military creation. Though the U.S. Army had devised it, just before entering World War II, to quickly identify a large number of officer candidates for the country’s imminent military expansion, GE used it to shed people at the bottom. Equating performance with individuals’ inherent capabilities (and largely ignoring their potential to grow), Welch divided his workforce into “A” players, who must be rewarded; “B” players, who should be accommodated; and “C” players, who should be dismissed. In that system, development was reserved for the “A” players —the high-potentials chosen to advance into senior positions. FURTHER READING Second, 1993 legislation limited the tax deductibility of executive salaries to $1 million but exempted performance-based pay. That led to a rise in outcome-based bonuses for corporate leaders—a change that trickled down to frontline managers and even hourly employees—and organizations relied even more on the appraisal process to assess merit. Reinventing Performance Management Magazine Article by Marcus Buckingham and Ashley Goodall How Deloitte is rethinking peer feedback and the annual review, and trying to design a system to fuel improvement Third, McKinsey’s War for Talent research project in the late 1990s suggested that some employees were fundamentally more talented than others (you knew them when you saw them, the thinking went). Because such individuals were, by definition, in short supply, organizations felt they needed to take great care in tracking and rewarding them. Nothing in the McKinsey studies showed that fixed personality traits actually made certain people perform better, but that was the assumption. So, by the early 2000s, organizations were using performance appraisals mainly to hold employees accountable and to allocate rewards. By some estimates, as many as one-third of U.S. corporations— and 60% of the Fortune 500—had adopted a forced-ranking system. At the same time, other changes in corporate life made it harder for the appraisal process to advance the time-consuming goals of improving individual performance and developing skills for future roles. Organizations got much flatter, which dramatically increased the number of subordinates that supervisors had to manage. The new norm was 15 to 25 direct reports (up from six before the 1960s). While overseeing more employees, supervisors were also expected to be individual contributors. So taking days to manage the performance issues of each employee, as Douglas McGregor had advocated, was impossible. Meanwhile, greater interest in lateral hiring reduced the need for internal development. Up to twothirds of corporate jobs were filled from outside, compared with about 10% a generation earlier. Back to development…again. Another major turning point came in 2005: A few years after Jack Welch left GE, the company quietly backed away from forced ranking because it fostered internal competition and undermined collaboration. Welch still defends the practice, but what he really supports is the general principle of letting people know how they are doing: “As a manager, you owe candor to your people,” he wrote in the Wall Street Journal in 2013. “They must not be guessing about what the organization thinks of them.” It’s hard to argue against candor, of course. But more and more firms began questioning how useful it was to compare people with one another or even to rate them on a scale. So the emphasis on accountability for past performance started to fade. That continued as jobs became more complex and rapidly changed shape—in that climate, it was difficult to set annual goals that would still be meaningful 12 months later. Plus, the move toward team-based work often conflicted with individual appraisals and rewards. And low inflation and small budgets for wage increases made appraisal-driven merit pay seem futile. What was the point of trying to draw performance distinctions when rewards were so trivial? The whole appraisal process was loathed by employees anyway. Social science research showed that they hated numerical scores—they would rather be told they were “average” than given a 3 on a 5point scale. They especially detested forced ranking. As Wharton’s Iwan Barankay demonstrated in a field setting, performance actually declined when people were rated relative to others. Nor did the ratings seem accurate. As the accumulating research on appraisal scores showed, they had as much to do with who the rater was (people gave higher ratings to those who were like them) as they did with performance. And managers hated doing reviews, as survey after survey made clear. Willis Towers Watson found that 45% did not see value in the systems they used. Deloitte reported that 58% of HR executives considered reviews an ineffective use of supervisors’ time. In a study by the advisory service CEB, the average manager reported spending about 210 hours—close to five weeks—doing appraisals each year. As dissatisfaction with the traditional process mounted, high-tech firms ushered in a new way of thinking about performance. The “Agile Manifesto,” created by software developers in 2001, outlined several key values—favoring, for instance, “responding to change over following a plan.” It emphasized principles such as collaboration, self-organization, self-direction, and regular reflection on how to work more effectively, with the aim of prototyping more quickly and responding in real time to customer feedback and changes in requirements. Although not directed at performance per se, these principles changed the definition of effectiveness on the job—and they were at odds with the usual practice of cascading goals from the top down and assessing people against them once a year. So it makes sense that the first significant departure from traditional reviews happened at Adobe, in 2011. The company was already using the agile method, breaking down projects into “sprints” that were immediately followed by debriefing sessions. Adobe explicitly brought this notion of constant assessment and feedback into performance management, with frequent check-ins replacing annual appraisals. Juniper Systems, Dell, and Microsoft were prominent followers. CEB estimated in 2014 that 12% of U.S. companies had dropped annual reviews altogether. Willis Towers Watson put the figure at 8% but added that 29% were considering eliminating them or planning to do so. Deloitte reported in 2015 that only 12% of the U.S. companies it surveyed were not planning to rethink their performance management systems. This trend seems to be extending beyond the United States as well. PwC reports that two-thirds of large companies in the UK, for example, are in the process of changing their systems. Three Business Reasons to Drop Appraisals In light of that history, we see three clear business imperatives that are leading companies to abandon performance appraisals: The return of people development. Companies are under competitive pressure to upgrade their talent management efforts. This is especially true at consulting and other professional services firms, where knowledge work is the offering—and where inexperienced college grads are turned into skilled advisers through structured training. Such firms are doubling down on development, often by putting their employees (who are deeply motivated by the potential for learning and advancement) in charge of their own growth. This approach requires rich feedback from supervisors—a need that’s better met by frequent, informal check-ins than by annual reviews. Now that the labor market has tightened and keeping good people is once again critical, such companies have been trying to eliminate “dissatisfiers” that drive employees away. Naturally, annual reviews are on that list, since the process is so widely reviled and the focus on numerical ratings interferes with the learning that people want and need to do. Replacing this system with feedback that’s delivered right after client engagements helps managers do a better job of coaching and allows subordinates to process and apply the advice more effectively. Kelly Services was the first big professional services firm to drop appraisals, in 2011. PwC tried it with a pilot group in 2013 and then discontinued annual reviews for all 200,000-plus employees. Deloitte followed in 2015, and Accenture and KPMG made similar announcements shortly thereafter. Given the sheer size of these firms, and the fact that they offer management advice to thousands of organizations, their choices are having an enormous impact on other companies. Firms that scrap appraisals are also rethinking employee management much more broadly. Accenture CEO Pierre Nanterme estimates that his firm is changing about 90% of its talent practices. The need for agility. When rapid innovation is a source of competitive advantage, as it is now in many companies and industries, that means future needs are continually changing. Because organizations won’t necessarily want employees to keep doing the same things, it doesn’t make sense to hang on to a system that’s built mainly to assess and hold people accountable for past or current practices. As Susan Peters, GE’s head of human resources, has pointed out, businesses no longer have clear annual cycles. Projects are short-term and tend to change along the way, so employees’ goals and tasks can’t be plotted out a year in advance with much accuracy. At GE a new business strategy based on innovation was the biggest reason the company recently began eliminating individual ratings and annual reviews. Its new approach to performance management is aligned with its FastWorks platform for creating products and bringing them to market, which borrows a lot from agile techniques. Supervisors still have an end-of-year summary discussion with subordinates, but the goal is to push frequent conversations with employees (GE calls them “touchpoints”) and keep revisiting two basic questions: What am I doing that I should keep doing? And what am I doing that I should change? Annual goals have been replaced with shorter-term “priorities.” As with many of the companies we see, GE first launched a pilot, with about 87,000 employees in 2015, before adopting the changes across the company. The centrality of teamwork. Moving away from forced ranking and from appraisals’ focus on individual accountability makes it easier to foster teamwork. This has become especially clear at retail companies like Sears and Gap— perhaps the most surprising early innovators in appraisals. Sophisticated customer service now requires frontline and back-office employees to work together to keep shelves stocked and manage customer flow, and traditional systems don’t enhance performance at the team level or help track collaboration. Gap supervisors still give workers end-of-year assessments, but only to summarize performance discussions that happen throughout the year and to set pay increases accordingly. Employees still have goals, but as at other companies, the goals are short-term (in this case, quarterly). Now two years into its new system, Gap reports far more satisfaction with its performance process and the best-ever completion of store-level goals. Nonetheless, Rob Ollander-Krane, Gap’s senior director of organization performance effectiveness, says the company needs further improvement in setting stretch goals and focusing on team performance. Implications. All three reasons for dropping annual appraisals argue for a system that more closely follows the natural cycle of work. Ideally, conversations between managers and employees occur when projects finish, milestones are reached, challenges pop up, and so forth—allowing people to solve problems in current performance while also developing skills for the future. At most companies, managers take the lead in setting near-term goals, and employees drive career conversations throughout the year. In the words of one Deloitte manager: “The conversations are more holistic. They’re about goals and strengths, not just about past performance.” FURTHER READING How Netix Reinvented HR Magazine Article by Patty McCord Trust people, not policies. Reward candor. And throw away the standard playbook. Perhaps most important, companies are overhauling performance management because their businesses require the change. That’s true whether they’re professional services firms that must develop people in order to compete, companies that need to deliver ongoing performance feedback to support rapid innovation, or retailers that need better coordination between the sales floor and the back office to serve their customers. Of course, many HR managers worry: If we can’t get supervisors to have good conversations with subordinates once a year, how can we expect them to do so more frequently, without the support of the usual appraisal process? It’s a valid question—but we see reasons to be optimistic. As GE found in 1964 and as research has documented since, it is extraordinarily difficult to have a serious, open discussion about problems while also dishing out consequences such as low merit pay. The end-of-year review was also an excuse for delaying feedback until then, at which point both the supervisor and the employee were likely to have forgotten what had happened months earlier. Both of those constraints disappear when you take away the annual review. Additionally, almost all companies that have dropped traditional appraisals have invested in training supervisors to talk more about development with their employees—and they are checking with subordinates to make sure that’s happening. Moving to an informal system requires a culture that will keep the continuous feedback going. As Megan Taylor, Adobe’s director of business partnering, pointed out at a recent conference, it’s difficult to sustain that if it’s not happening organically. Adobe, which has gone totally numberless but still gives merit increases based on informal assessments, reports that regular conversations between managers and their employees are now occurring without HR’s prompting. Deloitte, too, has found that its new model of frequent, informal check-ins has led to more meaningful discussions, deeper insights, and greater employee satisfaction. (For more details, see “Reinventing Performance Management,” HBR, April 2015.) The firm started to go numberless like Adobe but then switched to assigning employees several numbers four times a year, to give them rolling feedback on different dimensions. Jeffrey Orlando, who heads up development and performance at Deloitte, says the company has been tracking the effects on business results, and they’ve been positive so far. Challenges That Persist The greatest resistance to abandoning appraisals, which is something of a revolution in human resources, comes from HR itself. The reason is simple: Many of the processes and systems that HR has built over the years revolve around those performance ratings. Experts in employment law had advised organizations to standardize practices, develop objective criteria to justify every employment decision, and document all relevant facts. Taking away appraisals flies in the face of that advice—and it doesn’t necessarily solve every problem that they failed to address. Here are some of the challenges that organizations still grapple with when they replace the old performance model with new approaches: Aligning individual and company goals. In the traditional model, business objectives and strategies cascaded down the organization. All the units, and then all the individual employees, were supposed to establish their goals to reflect and reinforce the direction set at the top. But this approach works only when business goals are easy to articulate and held constant over the course of a year. As we’ve discussed, that’s often not the case these days, and employee goals may be pegged to specific projects. So as projects unfold and tasks change, how do you coordinate individual priorities with the goals for the whole enterprise, especially when the business objectives are short-term and must rapidly adapt to market shifts? It’s a new kind of problem to solve, and the jury is still out on how to respond. Rewarding performance. Appraisals gave managers a clear-cut way of tying rewards to individual contributions. Companies changing their systems are trying to figure out how their new practices will affect the pay-forperformance model, which none of them have explicitly abandoned. They still differentiate rewards, usually relying on managers’ qualitative judgments rather than numerical ratings. In pilot programs at Juniper Systems and Cargill, supervisors had no difficulty allocating merit-based pay without appraisal scores. In fact, both line managers and HR staff felt that paying closer attention to employee performance throughout the year was likely to make their merit-pay decisions more valid. But it will be interesting to see whether most supervisors end up reviewing the feedback they’ve given each employee over the year before determining merit increases. (Deloitte’s managers already do this.) If so, might they produce something like an annual appraisal score—even though it’s more carefully considered? And could that subtly undermine development by shifting managers’ focus back to accountability? Identifying poor performers. Though managers may assume they need appraisals to determine which employees aren’t doing their jobs well, the traditional process doesn’t really help much with that. For starters, individuals’ ratings jump around over time. Research shows that last year’s performance score predicts only onethird of the variance in this year’s score—so it’s hard to say that someone simply isn’t up to scratch. Plus, HR departments consistently complain that line managers don’t use the appraisal process to document poor performers. Even when they do, waiting until the end of the year to flag struggling employees allows failure to go on for too long without intervention. We’ve observed that companies that have dropped appraisals are requiring supervisors to THIS ARTICLE ALSO APPEARS IN: HBR’s 10 Must Reads 2018 + HBR IdeaCast Audio Interviews Book by Harvard Business Review $49.99 Add to Cart immediately identify problem employees. Juniper Systems also formally asks supervisors each quarter to confirm that their subordinates are performing up to company standards. Only 3%, on average, are not, and HR is brought in to address them. Adobe reports that its new system has reduced dismissals, because struggling employees are monitored and coached much more closely. Still, given how reluctant most managers are to single out failing employees, we can’t assume that getting rid of appraisals will make those tough calls any easier. And all the companies we’ve observed still have “performance improvement plans” for employees identified as needing support. Such plans remain universally problematic, too, partly because many issues that cause poor performance can’t be solved by management intervention. Avoiding legal troubles. Employee relations managers within HR often worry that discrimination charges will spike if their companies stop basing pay increases and promotions on numerical ratings, which seem objective. But appraisals haven’t prevented discriminatory practices. Though they force managers to systematically review people’s contributions each year, a great deal of discretion (always subject to bias) is built into the process, and considerable evidence shows that supervisors discriminate against some employees by giving them undeservedly low ratings. Leaders at Gap report that their new practices were driven partly by complaints and research showing that the appraisal process was often biased and ineffective. Frontline workers in retail (disproportionately women and minorities) are especially vulnerable to unfair treatment. Indeed, formal ratings may do more to reveal bias than to curb it. If a company has clear appraisal scores and merit-pay indexes, it is easy to see if women and minorities with the same scores as white men are getting fewer or lower pay increases. All that said, it’s not clear that new approaches to Can You Take Cognitive Bias Out of Assessments? performance management will do much to A classic study by Edward Jones and Victor Harris in the 1960s demonstrated that people tend to attribute others’ behavior to character rather than circumstances. getting rid of performance scores increased When a car goes streaking past us, for instance, we think that the driver is a jerk and ignore the possibility that there might be an emergency. A good workplace example of this cognitive bias—known as the “fundamental attribution error”—is to assume that the lowest performers in any year will always be the worst performers and to fire them as a result. Such an assumption overlooks the impact of good or poor management, not to mention business conditions that are beyond employees’ control. information that decision makers consider. Of course, this model is highly flattering to people who have advanced into executive roles—“A” players whose success is, by definition, credited to their superior abilities, not to good fortune. That may be partly why the model has persisted so long in the face of considerable evidence against it. mitigate discrimination either. Gap has found that fairness in pay and other decisions, but judgments still have to be made—and there’s the possibility of bias in every piece of qualitative Managing the feedback rehose. In recent years most HR information systems were built to move annual appraisals online and connect them to pay increases, succession planning, and so forth. They weren’t designed to accommodate continuous feedback, which is one reason many employee check-ins consist of oral comments, with no documentation. The tech world has responded with apps that enable supervisors to give feedback anytime and to record it if desired. At General Electric, the PD@GE app (“PD” stands for “performance development”) allows managers to call up notes and materials from prior conversations and Even when “A” players seem to perform well in many contexts (and that’s rarely measured), they may be coasting on the “halo effect”—another type of bias, akin to self-fulfilling prophecy. If these folks have already been successful, they receive more opportunities than others, and they’re pushed harder, so naturally they do better. summarize that information. Employees can use Biases color individual performance ratings as well. Decision makers may give past behavior too much weight, for that supervisors can easily review all the the app to ask for direction when they need it. IBM has a similar app that adds another feature: It enables employees to give feedback to peers and choose whether the recipient’s boss gets a copy. Amazon’s Anytime Feedback tool does much the same thing. The great advantage of these apps is instance, or fall prey to stereotypes when they assign their ratings. discussion text when it is time to take actions But when you get rid of forced ranking and appraisal scores, you don’t eradicate bias. Discrimination and faulty assumptions still creep into qualitative assessments. In some ways the older, more cumbersome performance systems actually made it harder for managers to keep their blinders on. Formal feedback from various stakeholders provided some balance when supervisors were otherwise inclined to see only the good things their stars did and failed to recognize others’ contributions. and job reassignments. Anytime you exercise judgment, whether or not you translate that to numerical ratings, intuition plays a part, and bias can rear its head. to help or hurt colleagues. (At Amazon, the such as award merit pay or consider promotions Of course, being on the receiving end of all that continual coaching could get overwhelming—it never lets up. And as for peer feedback, it isn’t always useful, even if apps make it easier to deliver in real time. Typically, it’s less objective than supervisor feedback, as anyone familiar with 360s knows. It can be also “gamed” by employees cutthroat culture encourages employees to be critical of one another’s performance, and forced ranking creates an incentive to push others to the bottom of the heap.) The more consequential the peer feedback, the more likely the problems. Not all employers face the same business pressures to change their performance processes. In some fields and industries (think sales and financial services), it still makes sense to emphasize accountability and financial rewards for individual performers. Organizations with a strong public mission may also be well served by traditional appraisals. But even government organizations like NASA and the FBI are rethinking their approach, having concluded that accountability should be collective and that supervisors need to do a better job of coaching and developing their subordinates. Ideology at the top matters. Consider what happened at Intel. In a two-year pilot, employees got feedback but no formal appraisal scores. Though supervisors did not have difficulty differentiating performance or distributing performance-based pay without the ratings, company executives returned to using them, believing they created healthy competition and clear outcomes. At Sun Communities, a manufactured-home company, senior leaders also oppose eliminating appraisals because they think formal feedback is essential to accountability. And Medtronic, which gave up ratings several years ago, is resurrecting them now that it has acquired Ireland-based Covidien, which has a more traditional view of performance management. Other firms aren’t completely reverting to old approaches but instead seem to be seeking middle ground. As we’ve mentioned, Deloitte has backpedaled from giving no ratings at all to having project leads and managers assign them in four categories on a quarterly basis, to provide detailed “performance snapshots.” PwC recently made a similar move in its client-services practices: Employees still don’t receive a single rating each year, but they now get scores on five competencies, along with other development feedback. In PwC’s case, the pushback against going numberless actually came from employees, especially those on a partner track, who wanted to know how they were doing. At one insurance company, after formal ratings had been eliminated, merit-pay increases were being shared internally and then interpreted as performance scores. These became known as “shadow ratings,” and because they started to affect other talent management decisions, the company eventually went back to formal appraisals. But it kept other changes it had made to its performance management system, such as quarterly conversations between managers and employees, to maintain its new commitment to development. It will be interesting to see how well these “third way” approaches work. They, too, could fail if they aren’t supported by senior leadership and reinforced by organizational culture. Still, in most cases, sticking with old systems seems like a bad option. Companies that don’t think an overhaul makes sense for them should at least carefully consider whether their process is giving them what they need to solve current performance problems and develop future talent. Performance appraisals wouldn’t be the least popular practice in business, as they’re widely believed to be, if something weren’t fundamentally wrong with them. A version of this article appeared in the October 2016 issue (pp.58–67) of Harvard Business Review. Peter Cappelli is the George W. Taylor Professor of Management at the Wharton School and a director of its Center for Human Resources. He is the author of several books, including Will College Pay Off? A Guide to the Most Important Financial Decision You’ll Ever Make (PublicAffairs, 2015). Anna Tavis is a clinical associate professor of human capital management at New York University and the Perspectives editor at People + Strategy, a journal for HR executives. This article is about ASSESSING PERFORMANCE  Follow This Topic Related Topics: Developing Employees | Personnel Policies | Giving Feedback Comments Leave a Comment Post Comment 18 COMMENTS Asitha Goonewardena 3 years ago The trend of organizations moving away from traditional milestone-based long-term assessments models were inspired globally with leading industrial giants taking the leading role. Though still majority of the organizations are in favor of the traditional method due to various reasons or rigidity, the transition is happening with booming of many agile practices in organizations to deliver their services to market at increasing speed. Traditional approach of goal assessment can be split into shorter time spans and also allow the users to provide feedback or update the status of the fulfillment in-the-go rather than formal assessment discussion. Co-workers or leaders refer to the real-time updates while giving constant feedback and coaching rather than waiting a year to have a discussion. Good assessment models do not isolate the employee. It creates an environment for speed, collaboration, appreciation and engagement across the board for the employee to get inspire and achieve the goals as expected. Ultimately this is what any organizations would want. Not to criticize the employee at the end of year but rather create an positive assessment culture that nurture and guide the employee to exceptionally achieve the goals that drives the business edge for the organization.   Reply 30  Join The Conversation POSTING GUIDELINES We hope the conversations that take place on HBR.org will be energetic, constructive, and thought-provoking. To comment, readers must sign in or register. And to ensure the quality of the discussion, our moderating team will review all comments and may edit them for clarity, length, and relevance. Comments that are overly promotional, mean-spirited, or off-topic may be deleted per the moderators' judgment. All postings become the property of Harvard Business Publishing. EPG SHRM Foundation’s Effective Practice Guidelines Series Building a High-Performance Culture: A Fresh Look at Performance Management By Elaine D. Pulakos, Rose A. Mueller-Hanson, Ryan S. O’Leary, and Michael M. Meyrowitz Sponsored by Halogen Building a High-Performance Culture: A Fresh Look at Performance Management This publication is designed to provide accurate and authoritative information regarding the subject matter covered. Neither the publisher nor the author is engaged in rendering legal or other professional service. If legal advice or other expert assistance is required, the services of a competent, licensed professional should be sought. Any federal and state laws discussed in this book are subject to frequent revision and interpretation by amendments or judicial revisions that may significantly affect employer or employee rights and obligations. Readers are encouraged to seek legal counsel regarding specific policies and practices in their organizations. This book is published by the SHRM Foundation, an affiliate of the Society for Human Resource Management (SHRM©). The interpretations, conclusions and recommendations in this book are those of the author and do not necessarily represent those of the SHRM Foundation. ©2012 SHRM Foundation. All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the SHRM Foundation, 1800 Duke Street, Alexandria, VA 22314. Selection of report topics, treatment of issues, interpretation and other editorial decisions for the Effective Practice Guidelines series are handled by SHRM Foundation staff and the report authors. Report sponsors may review the content prior to publication and provide input along with other reviewers; however, the SHRM Foundation retains final editorial control over the reports. Editorial decisions are based solely on the defined scope of the report, the accuracy of the information and the value it will provide to the readers. The SHRM Foundation does not explicitly or by implication endorse or make any representations or warranties of any kind regarding its sponsors or the products, services or claims made by its sponsors. The SHRM Foundation does not assume any responsibility or liability for the acts, omissions, products or services offered by its sponsors. The Foundation is governed by a volunteer board of directors, comprising distinguished HR academic and practice leaders. Contributions to the SHRM Foundation are tax-deductible. The SHRM Foundation is a 501(c)(3) nonprofit affiliate of the Society for Human Resource Management (SHRM). For more information, contact the SHRM Foundation at (703) 535-6020. Online at www.shrmfoundation.org 15-0187 Table of Contents iii Foreword v Acknowledgments vii About the Authors 1 Building a High-Performance Culture: A Fresh Look at Performance Management 2 Common Strategies—and Why They Fail 3 Challenging Assumptions 4 Where’s the Disconnect? 5 Building a High-Performance Culture 6 Step 1: Motivate Change 10 Step 2: Lay Foundation 13 Step 3: Sustain Behavior 14 Step 4: Monitor and Improve 17 14 Old Thinking Versus New Thinking 15 Legal Considerations Summary and Conclusion 19 Sources and Suggested Readings 27 References Building a High-Performance Culture: A Fresh Look at Performance Management FOREWORD Dear Colleague: Decades of research and practice have been devoted to understanding and improving performance management in organizations. Yet the traditional performance review process continues to be painful and ineffective for both managers and employees. In many cases, the focus on improving formal systems has not achieved the desired results. In fact, research shows that what truly increases employee performance and engagement is not annual reviews, but the day-to-day process of managers communicating expectations, providing feedback and leveraging employee talents. This new SHRM Foundation report, Building a High-Performance Culture: A Fresh Look at Performance Management, goes beyond the formal review process to explore how leaders can create a performance-based culture using strategies such as improved communication and better relationship skills. Summarizing the latest research and thinking on high-performing workplace cultures, the report identifies specific tools to develop more effective performance management behavior in organizations. The SHRM Foundation created the Effective Practice Guidelines series in 2004 for busy HR professionals. It can be a challenge for practitioners with limited time to keep up with the latest research results. By integrating research findings on what works with expert opinion on how to conduct effective HR practice, this series provides the tools to successfully practice evidencebased management. Other recent reports include HRM´s Role in Corporate Social and Environmental Sustainability, Promoting Employee Well-Being and Onboarding New Employees. This report is the 16th in the series. To ensure the material is research-based, comprehensive and practical, the reports are written by subject-matter experts and then reviewed by both academics and practitioners. Each report also includes a “Suggested Readings” section as a convenient reference tool. All reports are available online for complimentary download at www.shrmfoundation.org. The Effective Practice Guidelines series is just one way the SHRM Foundation supports lifelong learning for HR professionals. In addition to creating educational resources used in hundreds of classrooms worldwide, the SHRM Foundation is a major funder of original, rigorous HR research. We award more than $150,000 annually in education and certification scholarships to SHRM members. And all this good work is made possible by the generous support of donors like you. I encourage you to learn more. Please visit www.shrmfoundation.org to find out how you can support the SHRM Foundation. Mary A. Gowan, Ph.D. Chair, SHRM Foundation Research Evidence Committee Professor of Management Martha and Spencer Love School of Business Elon University iii Building a High-Performance Culture: A Fresh Look at Performance Management ACKNOWLEDGMENTS The SHRM Foundation is grateful for the assistance of the following individuals in producing this report: CONTENT EDITOR PROJECT MANAGER Lynn McFarland, Ph.D. President Human Capital Solutions, Inc. Beth M. McFarland, CAE Manager, Special Projects SHRM Foundation REVIEWERS Robert Cardy, Ph.D. Chair, Department of Management College of Business University of Texas at San Antonio Carol J. Cooley, SPHR Vice President of Human Resources Total Community Options Tracye Mayolo, SPHR AVP of Human Resources Church Street Health Management Major funding for the Effective Practice Guidelines series is provided by the HR Certification Institute and the Society for Human Resource Management. v Building a High-Performance Culture: A Fresh Look at Performance Management ABOUT THE AUTHORS As vice president of PDRI’s Systems and Information Technology Services division, Mike Meyrowitz provides business, technical and strategic leadership to PDRI. Under his leadership, the IT Services division provides integrated information technology solutions, systems and services in all areas of human capital management, including performance management. Mr. Meyrowitz has over 15 years of experience in the management, design and development of information systems supporting the missions of commercial, nonprofit and government organizations. He has worked with federal government clients such as civilian and Department of Defense agencies, as well as the intelligence community. Prior to joining PDRI, Mr. Meyrowitz directed Lockheed Martin’s Internet Applications division. Mr. Meyrowitz holds a Master of Science in information technology and a Bachelor of Science in business from Virginia Tech. Mr. Meyrowitz also serves on PDRI’s Board of Directors. Dr. Rose Mueller-Hanson is director of Leadership and Organizational Development Consulting at PDRI, an SLH Company, where she leads a team of consultants to conduct applied research in performance management, leadership development and organizational design. She has presented her work at numerous national conferences and publications and is a co-recipient (with colleagues from PDRI) of the M. Scott Myers Award for Applied Research in the Workplace, granted by the Society for Industrial and Organizational Psychology. Prior to joining PDRI in 2002, Dr. MuellerHanson worked as a human resource manager for a nonprofit organization and served in the U.S. Air Force. She received her doctorate in industrial/organizational psychology from Colorado State University. She currently is the president of the Personnel Testing Council of Metropolitan Washington, DC. Dr. Ryan O’Leary is manager of hiring assessment services at PDRI, an SHL Company, where he leads a team of consultants developing performance management and selection and assessment programs. He has developed performance management systems for numerous federal government agencies covering a range of scientific, technical and administrative occupations. Dr. O’Leary has presented his work at numerous national conferences and has published on performance management and assessment best practices. He was named a 2011 Game Changer by Workforce Management magazine. Dr. O’Leary holds a doctorate in industrial/organizational psychology from Auburn University and a Bachelor of Science in psychology from Emory University. Elaine D. Pulakos is president of PDRI, an SHL Company, and past president of the Society for Industrial and Organizational Psychology. A Fellow of the American Psychological Association and the Society for Industrial and Organizational Psychology (SIOP), she is a recognized author and speaker, having published numerous articles, books and best practice guidelines on various talent management topics, most notably performance management and hiring. Dr. Pulakos earned SIOP’s 2009 Distinguished Professional Contributions Award for career achievement. She has spent her career consulting with public and private sector organizations to improve their talent management practices by designing, developing and successfully implementing largescale hiring, career development, performance management and leadership development systems in organizations. She received her doctorate in industrial/organizational psychology from Michigan State University. vii Performance management is the “Achilles’ heel” of human capital management— often viewed as ineffective by employees and managers alike. Despite the time, effort and resources devoted to it, performance management rarely achieves its intended purpose—improving performance. Building a High-Performance Culture: A Fresh Look at Performance Management BUILDING A HIGH-PERFORMANCE CULTURE: A FRESH LOOK AT PERFORMANCE MANAGEMENT Managing employee performance is a key part of effective leadership. Research has shown that managers who engage in effective performance management produce extraordinary business results compared with those who do not. One study demonstrated 50 percent less staff turnover, 10 to 30 percent higher customer satisfaction ratings, 40 percent higher employee commitment ratings and double the net profits.1 But many organizations struggle to realize these benefits. When asked what purpose performance management should serve in organizations, employees, managers and HR professionals alike cite important outcomes such as improving performance effectiveness and results, developing employees, and facilitating communication and information exchange between employees and managers. However, when a slightly different question is asked—what purpose does performance management serve—the responses are quite different. Most people say that in reality, performance management serves primarily administrative purposes. These include helping managers make pay decisions, providing documentation for the organization to defend itself in court and enabling the organization to deal with poor performers. The Business Case Effective performance management behavior leads to better: Bottom line results Employee engagement Retention of key staff When asked, “How well does performance management work to achieve its purpose?” managers and employees agree: It does not work very well. Overall, attitudes toward performance management are consistently poor. No more than 30 percent of those surveyed reported that their performance management system effectively establishes goals, provides feedback and actually improves performance. These perceptions have earned performance management the distinction of being the “Achilles’ heel” of human capital management. 2 After decades of research and practice devoted to improving performance management systems in organizations, the reality is that most of them neither drive effective performance and development nor serve administrative purposes. It is time to take a fresh look. 1 Building a High-Performance Culture: A Fresh Look at Performance Management Given the current negative perceptions, should organizations continue to invest in performance management? The answer to this question is yes! When done right, performance management yields higher levels of engagement, retention and organizational performance. A strong business case exists for improving the effectiveness of performance management, but how is this task accomplished? The key is to change the focus. Concentrate on establishing effective performance management behaviors first, and then make sure that the performance management system reinforces and supports those behaviors. Performance management must be more than a formal appraisal system: It should be an everyday part of a high-performance culture. This report will offer new ideas for using performance management tools and concepts more productively to achieve the desired results. It will first examine what has been tried unsuccessfully in the past and will then present different strategies that hold real promise for increasing performance management effectiveness. Finally, it will present a model to help organizations build a high-performance culture through effective performance management. Common Strategies— and Why They Fail Most performance management strategies focus on developing improved rating tools and processes— including various rating formats, different rating criteria, more elaborate process steps and using raters with disparate points of view. An implicit assumption is that specific tools and carefully prescribed steps in a formal system will lead to effective performance management. In the end though, these attempts to improve performance management have ended up reducing it to an administrative drill that lacks real value.3 Unfortunately, negative attitudes among managers and employees toward their performance management systems have spawned the vicious cycle of attempting improvements, followed by disappointing results, leading to continuous reinvention of these systems. The great amount of research that has been devoted to performance management without yielding success speaks volumes about how inherently difficult it is. Figure 2 graphically demonstrates a common pitfall: Although performance management processes are designed to drive effective behavior, they more often end up motivating intermittent spurts of activity, spiking a few times a year. This pattern is actually at odds with effective performance management (see Figure 3), which requires regular and ongoing activity: Figure 1. Examples of Past Attempts to Improve Performance Management 2 Change what is rated Objectives, results, individual competencies, behaviors, contributions Change the rating scale Differentiated 3, 5, 7, or 9-point scales, pass-fail scales, developmental scales or narratives Change who rates Supervisors, peers, customers or the employees themselves Change the goals SMART, HARD, cascaded, team, individual or none Building a High-Performance Culture: A Fresh Look at Performance Management Figure 2. Poor Performance Management Behavior Set Goals Mid-term Review Final Appraisal Activity Level High Low Begin Cycle ■■ Communicating expectations on a regular basis. ■■ Providing feedback in real time whenever exceptional or poor performance is observed. ■■ Helping employees develop expertise that maximizes their potential. If our systems are working, they will create a pattern, showing performance management as a regular part of daily work. The fact that this is rarely the case suggests there is plenty of room for improvement. Even beyond failing to drive effective, ongoing behaviors, performance End Cycle management for administrative purposes has become synonymous with burdensome requirements that detract from important goals. is no clear connection between consistently high ratings given to most employees and the more variable pay increases awarded to them. Many managers report that they do not arrive at pay decisions by following the detailed rating processes their performance Assumption #1. Performance management systems prescribe, management helps managers but instead retrofit their ratings to make pay decisions. fit the pay increases they want to Reality: Performance ratings usually give. Pay increases are affected by do not sufficiently differentiate among many factors beyond the employee’s employees to support gradations performance, including the in pay, unless managers use competitiveness of the market, where 4 forced distributions. This failure to employees sit within their pay bands differentiate can leave organizations and even whose turn it is to get a in a vulnerable situation if there CHALLENGING ASSUMPTIONS Figure 3. Effective Performance Management Behavior Set Goals Mid-term Review Final Appraisal Activity Level High Low Begin Cycle End Cycle 3 Building a High-Performance Culture: A Fresh Look at Performance Management How to Drive Results ■■ Set clear expectations for employees—so they can deliver. ■■ Help employees find solutions to problems. ■■ Play to employees’ strengths rather than their weaknesses in work assignments. ■■ Acknowledge employees’ strengths while also addressing development needs. ■■ Provide regular, informal feedback. larger increase this year—a factor that often comes into play when base pay increases are small overall. Assumption #2. Performance management provides documentation that organizations need to defend themselves. Reality: A common belief is that documentation is needed to defend administrative decisions, such as promotions, separations and pay raises in the face of legal challenges. However, in most cases, formal performance management systems do a poor job justifying ratings and aligning ratings and outcomes. What is documented in performance management systems often ends up being more helpful to employees challenging the organization than it is to the organization defending itself. Assumption #3. Performance management provides a mechanism to deal with poor performers. Because employees are hardly ever rated less than “meeting expectations,” most systems have 4 little information that can be used to address performance issues. Most organizations have an entirely separate system for dealing with unsatisfactory performers. Employees are often given formal notice when they do not meet expectations, and specific expectations are outlined in “performance improvement plans” or “opportunity periods.” Once employees are placed on a performance improvement plan, managers maintain extensive documentation to justify any subsequent actions, such as separation or reduced compensation. These separate systems are used to deal with unsatisfactory performers because the main performance management system usually does not contain enough accurate rating information. WHERE’S THE DISCONNECT? Most employees and managers view their performance management systems as largely ineffective and incapable of delivering results. But research performed by the Corporate Leadership Council (CLC) has shown that over half of the most important drivers of employee engagement and performance are precisely the behaviors that define effective performance management: setting clear expectations, helping employees accomplish work, providing regular feedback, and finding new opportunities for employees to succeed and develop. 5 These behaviors are clearly valuable, yet our performance management systems are not seen as producing these. Why? What can firms do to improve results? At Google the answer came in the form of Project Oxygen, an attempt to build better bosses. By analyzing performance reviews, feedback surveys and nominations for managerial awards, Google identified eight habits of highly effective managers and three pitfalls that hamper success. Google found that what its employees valued most were even-keeled bosses who made time for one-on-one meetings, helped them solve problems by asking questions rather than by dictating answers, and took an interest in their lives and careers. One surprising result was that the manager’s ability to perform technical work ranked last among the top eight behaviors. 6 Google discovered that bosses have a great impact on employees’ performance and job attitudes. Simply put, better bosses translate into bottom-line results. This thinking reflects the old HR adage that “people don’t quit their jobs, they quit their managers.”7 Google’s best managers— those who embraced the habits and avoided the pitfalls—had teams that performed better, stayed longer and maintained positive attitudes. Eight Habits of Highly Effective Google Managers ■■ Be a good coach. ■■ Empower your team, and do not micromanage. ■■ Express interest in team members’ personal success and well-being. ■■ Don’t be shy; be productive and results-oriented. ■■ Communicate and listen to your team. ■■ Help your employees with career development. ■■ Express a clear vision and strategy for the team. ■■ Demonstrate technical skills so you can help advise the team. Building a High-Performance Culture: A Fresh Look at Performance Management Google’s Three Pitfalls of Managers ■■ Have trouble transitioning to the team. ■■ Lack a consistent approach to performance management and career development. ■■ Spend too little time managing and communicating. The factor over which companies have the most control in terms of retaining employees is the quality of managers. Google began teaching managers the eight habits in a variety of settings. This practice paid off quickly. Seventy-five percent of the firm’s least competent managers showed significant performance improvement as a result. 8 Taken together, the implication of the CLC and Google studies is that effective leadership is synonymous with effective performance management. Although managers often do not recognize it, performance management is what good leaders do naturally, each and every day. These behaviors are essential tools that enable managers to accomplish work through others. For employees, performance management is the primary way of understanding what they are supposed to do and developing and advancing their careers. Both managers and employees should view performance management not as a formal administrative system but as a broader tool that helps employees accomplish work and organizations retain key talent. Communicating what employees are expected to do, providing feedback and helping employees contribute the most they can to organizational success are the essential behaviors managers must engage in to achieve the outcomes that drive a company’s success. Building a HighPerformance Culture Several factors influence the likelihood that managers and employees will practice effective performance management behavior: ■■ The extent that they believe performance management is essential to getting work done. ■■ The quality and trust of the manager-employee relationship. ■■ How well the company reinforces successful performance management behavior as a key business strategy. Figure 4 shows a four-step process to help organizations trying to build and sustain a high-performance culture. The steps focus on changing perceptions and training, reinforcing, and ensuring that effective behavior is integrated into the corporate culture. Figure 4. Four Steps to Developing a High-Performance Culture Motivate change Lay foundation • Assess current culture. • Shift performance management mindset. • Scale back burdensome demands. • Introduce new concepts. • Put the right people in managerial jobs. • Provide tools and resources to drive behavior. Sustain behavior Monitor and improve • Hold leaders accountable for continuous improvement. 5 Building a High-Performance Culture: A Fresh Look at Performance Management Rather than trying to improve performance management tools and processes, focus instead on creating a high-performance culture by improving the frequency and effectiveness of performance management behavior. Changing perceptions and integrating new behaviors into the culture are the most important—and unique—aspects of the approach described here. Unfortunately, most organizations do very little to make a compelling business case for the value of performance management or to solidify effectual behavior on the job. STEP 1: MOTIVATE CHANGE Assess the Current Culture An important first step in building a high-performance culture is to assess where the organization currently stands. Does the company already have a culture that values excellence, strives for success, seeks feedback, and embraces continuous learning and development? The second step is to evaluate the extent to which both managers and employees currently engage in effective performance management behavior. In organizations that already embrace a high-performance culture, employees will more readily understand these concepts, making changes in behavior easier to achieve. Organizations that do not have a performance mindset will require more time and effort before they are able to demonstrate significant improvements in behavior. Assessing a firm’s culture provides a roadmap to the extent and type of change needed. Culture assessments also provide a benchmark for tracking progress during and after implementation, serving as a helpful tool for organizational feedback. Shift Performance Management Mindset Research and practice show that successful organizational change depends on management commitment—the stronger the commitment, the greater the potential for success. 9 Executives who believe in the value of Figure 5. Examples of Strategies to Improve Performance Management Benefits for Managers Communicate the big picture Provide ongoing expectations and feedback Develop others through experience 6 Benefits for Employees Employees contribute more when they understand the big picture, meaning less work for managers. Employees feel more connected and make wiser decisions, increasing engagement and results. Managers gain higher-quality work from staff more quickly with less rework. Employees perform better work and feel more confident about their contributions Managers accomplish more, succeed faster and focus on what they want to do. Employees grow, develop and advance more quickly. Building a High-Performance Culture: A Fresh Look at Performance Management New Mindset Both managers and employees must engage in performance management behavior to accomplish anything at work, so this mindset benefits everyone. performance management and communicate this to lower-level managers and employees can help drive change. However, because success relies on both managers and employees engaging in effective performance management behavior, they must be convinced of its value for them personally. In other words, managers and employees must internalize a new mindset about performance management. One way to begin to shift mindsets is to remind people that they engage in performance management behavior every day—with their children, spouses, co-workers, friends and vendors. Once people make this connection, they can better grasp the meaning of performance management in the workplace. Three actions should be targeted in the workplace: 1) ensuring employees understand the “big picture” and their role and contribution to the mission, 2) setting clear expectations and providing feedback so employees can succeed, and 3) developing individual employees so they achieve their maximum potential. All three actions, reviewed in greater detail below, are clear positives for both managers and employees. #1: Communicate the Big Picture Leaders need to be able to describe how the work of each employee relates to the company’s overall mission. Employees who understand the big picture and deliver work that meets expectations can operate more independently and effectively, freeing managers to grow the group, implement strategy or take on higherlevel responsibilities. Once managers and employees understand these benefits, they will be motivated to pursue them, rather than seeing performance management as a burdensome administrative drill. Employees who have a clear understanding of the big picture make more informed decisions and can more readily connect with what is happening in the larger environment, rather than needing continual step-by-step guidance from their managers. One strategy to communicate the big picture is to cascade goals from the top of the organization through each level until they reach individual employees. Theoretically, this approach enables employees to see how their work fits into the organization’s mission and priorities.10 However, the process of cascading goals has proven challenging in practice. Organizational goals are frequently complex and can be difficult to propagate to all levels and jobs. In addition, cascading requires meetings at each level that depend on higher levels completing their cascades. As a practical matter, cascaded goals rarely make it down to individuals, and even partial cascades can take months to complete. Because this process is timeconsuming and difficult to execute well, especially in large organizations with many levels, it is unsustainable in many firms.11 An alternative to cascading goals is for managers to provide a plainlanguage description of how the team and each employee contribute to the overall mission. Engagement, productivity and autonomous work are all facilitated by understanding how one’s work fits into the unit, how the Recommendations ■■ Clearly articulate the organization’s mission and priorities. ■■ Discuss how the work fits into the overall mission. ■■ Provide regular updates so employees understand context and outside factors affecting their work. Recommendations ■■ Tailor the type of expectations to the particular job—behaviors, results or SMART goals. ■■ Set ongoing expectations in real time throughout the rating period. unit contributes to the whole and what organizational issues are influencing the work. #2: Provide Ongoing Expectations and Feedback Most formal performance management processes begin with planning that entails communicating expectations to employees for the upcoming rating period. A popular practice is to set SMART (specific, measurable, attainable, relevant, timebound) goals or to identify KPIs (key performance indicators) that provide customized, meaningful expectations and criteria based on what each employee is expected to achieve. Establishing goals at the beginning of the rating period can work well for jobs with static performance requirements and defined metrics, such as sales jobs.12 However, goal setting for knowledge and servicebased jobs, which are fluid and 7 Building a High-Performance Culture: A Fresh Look at Performance Management Behavioral Standards • Can be used in most jobs. • Most relevant for knowledge work. • E xample: Treat others with professionalism and respect; communicate clearly. unpredictable, is frequently more challenging.13 Further, some jobs in fields such as R&D do not lend themselves to goal setting at all, because predicting when and what discoveries will occur is impossible.14 So goal setting processes overall are fairly disappointing. Goals often read more like generic task statements rather than SMART goals, and their difficulty varies so greatly even within a given job or level that employees raise concerns about fairness.15 Most work situations evolve and change over time, some significantly. Therefore, effective performance management behavior requires setting ongoing expectations and near-term goals as situations change. This point raises questions about the utility of formal goal setting processes conducted at the beginning of the rating period, which are incorporated into most of today’s performance management systems. Managers also have an important ongoing role in goal setting that is not captured well in most formal systems; they help employees translate higher-level objectives into more specific plans, activities, milestones and interim deliverables that they will accomplish day-to-day. The table above shows different types of expectations a manager can establish with employees—behavioral standards, objective results and task or project goals—and the 8 Objective Results • Best for jobs with clear, readily measured outcomes. Task or Project Goals • Best for jobs that are dynamic, but in which nearer-term activities and milestones can be defined. • Measure what matters, not just what can be measured. • Closest thing to SMART. • E xamples: sales quotas, production rates, error rates. • E xample: Complete XYZ report by Tuesday. circumstances under which each tends to work best. The idea is that a combination and balance of different types of expectations will likely be needed at different times during the rating period, based on the specific demands of each employee’s job. Regarding feedback, most formal performance management systems mandate midyear and year-end reviews to provide feedback on what has occurred during the rating period. During these meetings, managers discuss their evaluations and the rationales for them with employees.16 A great deal of worry accompanies formal performance reviews for both managers and employees. In a recent survey, over 50 percent of respondents reported that they believe performance reviews do not provide accurate appraisals of their work, and nearly 25 percent said they dread performance reviews more than anything else.17 These results are not surprising in light of a 2008 Mercer survey of 350 major U.S. companies, in which almost 25 percent of respondents revealed that their managers are only “marginally skilled” at doing performance evaluations, and only 12 percent indicated that their managers were “highly skilled.” Poor attitudes toward performance reviews have led to calls for improvements that will better motivate and develop employees, and some have argued that formal review sessions should simply be eliminated.18 Sitting down only once or twice a year for a perfunctory feedback review is not enough, especially for today’s younger career-minded workers. Both technology and the growing number of Millennials entering the workforce are driving demand for more meaningful feedback and development strategies. But it is not just young Millennials; high performers also tend to seek regular feedback, regardless of their age.19 To be effective, feedback needs to be provided regularly when it makes sense to do so, not only once or twice a year during formal reviews. Unfortunately, many managers are not skilled at providing feedback. They frequently avoid giving feedback because they do not know how to deliver it productively and in ways that will minimize defensive reactions. Even when managers do provide feedback, it is often superficial and of little value. Research has consistently shown the importance of regular feedback for effective performance management, 20 future performance 21 and job attitudes. 22 Informal, continuous feedback is the most valuable type. 23 If feedback is provided immediately following good or poor performance, it helps employees make real-time alterations in their behavior and enables them to perform their work more efficiently. 24 Building a High-Performance Culture: A Fresh Look at Performance Management Figure 6. Comparison of Formal and Informal Feedback Informal Feedback Formal Feedback Occurs in formal sit-down meetings (infrequent). Occurs spontaneously whenever discussion is needed. Covers work conducted over time: multiple performance events and competencies. Covers a specific incident—what went right or wrong and what to do differently. Relies on two-way accountability and interaction. Initiated, led and controlled by the manager. Figure 7. Leader Behaviors to Build Trust/Employee Responses to Trust Leader Behaviors to Build Trust Employee Responses Trust 1. Make realistic commitments 1. W illingness to follow manager lead 2. F  ollow through on promises 2. W  illingness to take feedback 3. Keep others informed 3. P  erception of fair treatment 4. S  how support and avoid blame 5. Share information 4. Increased innovation and creativity 6. Protect those not present 6. Increased effectiveness Many managers and employees naturally engage in informal feedback, such as discussing how a presentation went, but these discussions tend to be more intuitive than intentional, and they are often not recognized as feedback events. Understanding the value of informal feedback and recognizing 5. Higher satisfaction opportunities for it helps managers and employees take advantage of “teachable moments.” These moments are learning opportunities that occur as part of day-to-day work. Unfortunately, training for informal feedback is rare, but it is critical to successful performance management. The effectiveness of the feedback process—informal or formal—is contingent on the manager-employee relationship. 25 In fact, the strength of the relationship between managers and employees influences employee job satisfaction, organizational citizenship, engagement and performance. 26 Trust is a key element of the quality of this relationship and an essential prerequisite for effective feedback and coaching. 27 While some managers naturally create trusting relationships with employees, attitude surveys reveal that many employees have very poor relationships with their managers and do not trust them. 28 Without a basic level of trust, it is unlikely that communication and engagement between a manager and employee will be sufficiently productive to lead to positive outcomes. Trust can be developed between managers and employees by training managers to engage in trustbuilding behaviors, like those shown in Figure 7. As trust increases between managers and employees, they become more comfortable with each other and are more willing and able to participate in valuable communication and feedback. 9 Building a High-Performance Culture: A Fresh Look at Performance Management #3: Develop Others Through Experience In most formal performance management systems, the year-end review is used as an opportunity to plan the employee’s development for the upcoming year. Development should be ongoing and in real time as learning opportunities arise, not restricted to one or two formal sitdown discussions yearly. In fact, if ongoing performance conversations, candid feedback and development occur day-to-day, formal review sessions will not really be needed, because there will be no new information to exchange. Because identifying development areas is easier than knowing how to address them, “Development Guides” are often provided to help managers and employees select appropriate learning activities. 29 These guides typically suggest onthe-job experiences, formal training and other resources, such as books or websites, targeted to different competencies. They provide roadmaps for addressing development needs. At the year-end review, managers and employees usually select one or two competencies toward which the employee will direct development effort, typically taking some type of formal training. What many managers and employees do not realize is that employees usually gain the most learning and development by engaging in readily available job experiences day-today. 30 In fact, 80 to 90 percent of learning occurs on the job. If, for example, an employee needs to improve her briefing skills or customer service skills, she should have many opportunities to practice and acquire these skills on the job. When making assignments, however, managers often neglect to think about which employees need particular experiences and instead assign work 10 to employees who are already highly skilled. Assigning tasks to those who can clearly accomplish them presents less risk and potential for redoing work, but this strategy is shortsighted. Forgoing opportunities to develop employees’ skills leaves managers with fewer staff members who can perform the full array of job tasks with a high degree of effectiveness. The most beneficial approach to development is for managers and employees to continually look for opportunities that will help enhance skills, so employees can contribute more fully. Development as a continuous process helps employees acquire the experience they need and also encourages a developmentoriented mindset, so that acquiring experience and enhancing skills become an integral part of day-today work. This strategy focuses both managers and employees on taking advantage of naturally occurring development opportunities, which accelerates learning. STEP 2: LAY FOUNDATION Scale Back Burdensome Demands Regarding what system or process to implement, the key is to ensure that the associated tools and steps support the ultimate goals of the organization. By focusing on completing forms and steps within prescribed time frames, current performance management processes tend to detract from effective behavior. In fact, achieving a high-performance culture that reinforces day-to-day behavior means de-emphasizing, streamlining and minimizing administrative requirements. We offer several examples below of how current formal systems could be scaled back to better support effective performance management behavior. Recommendations ■■ Use job experience as the primary means of developing employees. ■■ Continually seek job experience that builds performance. • Stretch outside comfort zone. • Provide opportunities to make mistakes. • Entail deliberate practice and feedback. • Make relevant to role. Most formal performance management systems contain a number of steps and processes that have been shown to be difficult and time-consuming to implement well. These include things like cascading goals, SMART goals set at the beginning of the rating period, numerical ratings on a large number of competencies, and mandatory review meetings, among others. Although these activities can add value in certain situations, they generally tend to contribute to intermittent and cyclical behavior rather than to the ongoing, day-today behavior that is necessary for a high-performance culture. To combat this problem, evaluate each step of an organization’s formal process for the results it is producing, with an eye toward eliminating steps, activities and requirements that fail to reinforce key leadership behaviors. For example, many organizations base performance ratings on competencies, which are often defined by standards that reflect different levels of responsibility, complexity and difficulty at various job levels. Competencies are advantageous because they provide a job-relevant, fair and consistent basis for evaluating Building a High-Performance Culture: A Fresh Look at Performance Management employees. Some performance management systems contain a large number of competencies, which can take a long time to rate, especially for managers with many employees. But given that little differentiation in ratings exists among employees, there is no compelling practical reason to rate a large number of competencies. In the spirit of streamlining formal system requirements to make way for increased daily performance management behavior, we recommend collecting ratings on as few competencies as are necessary to capture the job’s critical requirements. This method can amount to as few as three or four—for example, technical performance, teamwork and initiative. Although five- and seven-point scales are commonly used in rating systems, simpler scales with three points are often sufficient because most employees are rated at the top end of whatever scale is used. See Figure 8 for an example. Another strategy for streamlining is to eliminate weighting of competencies. An overall rating based on weighted competencies tends to result in the same rank order of employees as using unweighted competencies. So the added burden of weighting has no practical impact on results. A final streamlining strategy is to reduce or eliminate requirements for narratives. If effective, ongoing feedback is occurring in real time, narratives typically add little value and in fact often undermine candid information exchange, due to reticence on the part of managers to put negative information in writing. Also, because narratives are often misaligned with ratings or rewards, they do not provide credible justification for either. The value of performance narratives in many situations is unclear. The necessity of rating or “grading” employees is an unquestioned assumption in most organizations. Recommendations ■■ Eliminate formal system steps that do not add value or undermine effective performance management behavior. ■■ Use the smallest number of rating factors possible to cover job requirements. ■■ Simplify rating scale and requirements. ■■ Identify tools that will be well received and that effectively drive desired behavior. However, whether formal numerical ratings are actually needed in a given situation is useful to evaluate. As discussed earlier, ratings do not necessarily support the administrative purposes they are designed for. The more performance management can be disentangled from these administrative purposes, the easier it Figure 8. Example of a Simplified Rating Scale ❑ ✔ ❑ ❑ Unacceptable Failed to meet technical quality standards; work was incomplete, poorly conceived, error-ridden or not well targeted; work performed unsatisfactorily or in an unresponsive manner. Successful Products and services met expectations, were complete, well targeted and understandable; work performed was responsive and competent. Outstanding Surpassed quality standards and expectations; products were thorough, error-free, ideally targeted and maximally responsive to needs. 11 Building a High-Performance Culture: A Fresh Look at Performance Management Figure 9. Traditional Training/Behavior Change Traditional Training • Typically manager only • Primarily on navigating the formal process •F  ocuses on knowledge acquisition, not skill building •O  ften disconnected from on-the-job realities • No accountability for learning or application • No reinforcement on the job will be to motivate effective behavior. Administrative purposes actually undermine effective performance management by inhibiting honest feedback and development discussions.31 If organizational decision makers can abandon their numerical ratings altogether or possibly use summary strengths and development areas in lieu of them, a high-performance culture is likely to evolve more quickly. If policy dictates that a rating of record is needed, there are clear advantages to implementing the least burdensome requirements that will meet the organization’s needs, as this will minimize the effort associated with making formal ratings that add little practical value. Introduce New Concepts Employees and managers need to be able and motivated to engage in effective performance management. Training can be helpful, but traditional training is more of an introduction to concepts and must then be followed by a solid strategy to ensure behavior change. 12 Behavior Change • Training provided for both managers and employees • Deeper dive, focusing on the knowing/ doing gap • More individualized, using assessment results as baseline • Uncovers underlying fears and attitudes that prevent change • Accountability for learning and application • Tools to facilitate change One difference between the training model proposed here and typical training is that the latter focuses primarily on formal system steps, while lip service—at most—is paid to engaging in effective behavior. Even when more extensive behavioral training is offered, supports are rarely in place to reinforce training on the job. Below we discuss the beginning of the training process, designed to introduce concepts. To build a high-performance culture, training needs to be effectively delivered and transferred to the job through the use of environmental cues, tools and reinforcers that drive behavioral change. For initial training, in-person sessions are recommended to better convey the advantages of this new approach. Although more expensive, the training can then include hands-on exercises and interactive discussions to facilitate understanding. If feasible, it is best to train intact manager and employee teams to carry out ongoing performance management activities to allow them to understand, practice and become comfortable with their roles in the feedback and development process. clear expectations) can be offered to support behavioral change. An advantage of web-based training is that participants can complete programs at their own pace. Advanced forms of online training can also provide highfidelity simulated practice exercises. The biggest disadvantage of webbased training is that managers and employees can ignore it easily. Following initial training, web-based modules on selected topics (e.g., setting Put the Right People in Managerial Jobs A final important component of Building a High-Performance Culture: A Fresh Look at Performance Management creating the foundation for a highperformance culture is ensuring that managers with the potential or skills to perform effectively are in place. Many are promoted into managerial positions because of their technical competence, even though the job of a manager is not to perform technical work. One of the more interesting findings from the Google study is that in an organization that relies on technical innovation and competence, the ability to provide advice on technical issues was the least critical of the eight good boss habits. These results further support what we already know—namely, that the essence of a manager’s job is to direct and develop others successfully. Managers need particular aptitudes, skills and dispositions to be able to learn their leadership roles and effectively accomplish work through others. So selecting managers who are well suited for the job is the first step in driving effective performance management behavior. reinforce productive behaviors. On-the-job performance management aids are useful to strengthen skills learned in training. For example, an aid might be developed that lists a manager’s primary responsibilities in the performance management process. Such aids tend to be succinct “at a glance” tools, and as such, they are usually most beneficial following formal training. The advantage of such aids is that they can be used at an employee’s discretion. Other tools that help keep performance management at the forefront of employees’ and managers’ minds on a daily basis include things like cartoons-of-the-day and messages from leadership, which can be sent to employees’ desktops, laptops and mobile devices. Over the past several years, many organizations have implemented automated systems to ease administrative demands. The typical automated performance management system is a stand-alone system that is separate Obviously, if attention has not been from other automated systems that are paid to selecting managers with strong used daily. As such, they require separate leadership skills, more effort will need logins, and most get used only at peak to be devoted to training and training required activity times: the beginning transfer. Because many organizations of the cycle, when most performance will not displace managers once they management processes require goals are selected, there may be limits on how to be recorded in the system, toward well some managers will be able to learn the end of the cycle, when employees effective performance management are often required to record their behavior. Selecting managers with the accomplishments or self-ratings, and potential to perform satisfactorily makes at the very end, when managers are a long-term contribution to building a required to record ratings. high-performance culture. STEP 3: SUSTAIN BEHAVIOR Provide Tools and Resources to Drive Behavior After introducing the concepts underlying effective performance management through formal training, the next crucial step is to incorporate tools and features that build and If performance management tools that facilitate feedback and development were incorporated seamlessly into the standard IT systems and workflows that employees use every day, they would help drive more regular behavior. Simply put, making tools easily accessible makes it more likely people will use them. One organization tagged e-mails to flag them as development or feedback Recommended Topics For both managers and employees: ■■ Building trust. ■■ Learning strategies for communication. ■■ Ongoing expectations and feedback. ■■ Developing through experience. For managers: ■■ Communicating the big picture. ■■ Diagnosing and addressing performance issues. ■■ Deep-diving on feedback and coaching skills. For employees: ■■ Ensuring clear expectations. ■■ Seeking feedback. ■■ Reacting well to feedback. events. Another organization provided an easily accessible tool to provide feedback to others with a click. Tools that incorporate social networking concepts to drive feedback are especially helpful for engaging younger employees in the performance management process. Some organizations provide a performance management hotline to facilitate learning and to provide coaching support for managers and employees. Callers can ask questions about performance management issues they are experiencing. While such hotlines can add value in building a performance culture, organizations must be willing to staff them with capable people who can competently offer advice. This type of hotline requires a different skill set than do hotlines focused on procedural, administrative and automated system support. 13 Building a High-Performance Culture: A Fresh Look at Performance Management Menu of Environmental Reinforcers ■■ “At a glance” aids. ■■ Automated tools that drive feedback and development embedded in enterprise systems. Google, not only evaluate manager effectiveness but also provide coaches for those who need additional support. In turn, managers should periodically check in with employees, assessing and discussing how well they are engaging in the process. as perceptions about the value of performance management. Old Thinking Versus New Thinking While some have suggested that performance management is so broken that formal processes should ■■ Attention-grabbing messaging be eliminated entirely, this is not pushed out via automated necessary. Rather, substantial changes systems. should be made to redirect current performance management systems ■■ Performance management What will help drive a highand approaches so they focus on hotlines and coaches. performance culture are ongoing reinforcing the critical behaviors—for evaluation, feedback and improvement both managers and employees—that ■■ Social networking tools and of the system as a whole. Pulse supports to share experiences ensure performance management surveys directed to individual and lessons learned. success. Having formal processes managers can be aggregated so in place also provides a valuable that metrics can be tracked at an safety net to ensure that at least A final strategy to reinforce effective enterprise level. Reporting these some performance information is behavior is to create communities of results should further motivate the communicated to those employees interest or practice, in which members frequency and effectiveness of with poor managers who may can exchange information, experiences the leadership behaviors we have otherwise neglect their performance and lessons learned to help each been discussing. In addition, we management responsibilities. other. Performance management recommend evaluating the extent portals, blogs, forums or collaboration The table on the next page to which the new performance tools can easily be made available to summarizes key differences between management practices are affecting facilitate this. the traditional “old” approach and bottom-line business results as well the “new” approach discussed in Building a performance management culture is not something that will happen overnight. Rather, it can take considerable time, even years, for enculturation of sustainable change. STEP 4: MONITOR AND IMPROVE Hold Leaders Accountable for Continuous Improvement To drive enculturation of performance management behavior, short pulse surveys are useful for collecting feedback about the extent to which employees believe that their managers are providing them with growth opportunities on the job, setting expectations that make performance requirements clear and providing effective feedback that helps them develop. Providing the results of these surveys to managers drives accountability and helps guide behavior adjustments. Organizations serious about building high-performance cultures, like 14 Figure 12. Sample Evaluation Metrics Business results (decreased turnover, improved outcomes) Behavior change from existing state (pulse surveys/360s) Employee and leader views (surveys, focus groups) Building a High-Performance Culture: A Fresh Look at Performance Management Performance Management “Old Thinking” Performance Management “New Thinking” Organizational Alignment Cascading goals Mission articulation and discussions of fit Goals SMART goals at the beginning of the cycle Ongoing expectations as work evolves Development Reluctance to discuss; primarily formal training Part of daily routine; acquiring experience, mentoring Feedback Once or twice a ...
Purchase answer to see full attachment