New School Performance Process Design: Opportunities and Cautions
By Kyla Nicholson and Vincent Chow
Well known companies such as Microsoft, Motorola, Gap, Expedia and GE have made, or are in the process of making, the move away from rating past performance and toward more frequent, meaningful conversations aimed at driving ongoing improvement, development and realizing potential.1,2,3,8
With these organizations paving the way for a new trend in performance processes, curious companies of all sizes are asking, “should we follow the trend?” or “why should we bother with performance ratings?”
In Defence of Performance Ratings
Those in favour of performance ratings assert that employees want to know how they “measure up.” Ratings allow for maximum performance differentiation and establish clear links between performance and rewards.
Further, ratings supporters may assert, ratings are a communication tool for managers. Without ratings, employees may be unclear about where their performance stands if managers aren’t skilled at performance feedback.
What Neuroscience Shows Us
Really though, how different is a rating of 2.5 from a 2.75? Ratings reduce complex human behaviour and performance discussions to a single figure or label. In addition to what may be seen as “false” differentiation, those in favour of a shift away from performance ratings can look to the findings of neuroscientific research which demonstrates that performance ratings can be counterproductive for two reasons:
- Labeling employees with a rating or ranking results in a “fight or fight” response, shutting down the ability to engage in meaningful, productive conversations about performance; and
- A focus on past performance rather than future potential sends the unconscious message that performance levels are fixed and unlikely to change.2,8
Common Performance Rating Challenges
Furthermore, most HR professionals, managers and employees have experienced more than one of these common challenges associated with performance ratings:
- Ratings provide an “out” from the responsibility of having honest, direct and sometimes difficult performance conversations in a timely manner and/or crowd out room for discussions about development; 1
- Ratings fuel competition among employees rather than fostering collaboration among employees to compete with other companies;2
- Rating processes place pressure on supervisors/managers to differentiate employee performance or to boost their own performance ratings by improving their employees’ ratings, leading to misuse and scapegoating using ratings; 2
- There are high time and costs associated with rating processes. Deloitte found their previous performance system had employees and managers spending around two million hours a year on performance reviews.1,5,8
- Ratings cause employee reluctance to discuss their learning experiences, personal performance concerns and development needs for fear that they may be penalized; 8 and
- Overall, there are negative feelings and perceptions of unfairness by both managers and employees when ratings are part of the process.
Factoring the Shift to No Ratings
For the organizations that pioneer the transformation, front-line reasons for shifting to a no-ratings performance process include:
- A desire to shift the investment of time away from creating and discussing ratings and towards discussing and leveraging performance in a timely manner;
- A need to remove the “check box” approach to reinforce that managing performance is an ongoing, not a once a year, process;4 and
- A need to recognize high-performance behaviours rather than high performers. This mindset is growth-oriented and acknowledges that any individual is capable of, and should be recognized for, high-performance when appropriate.
Caveats for Consideration
So, while the general consensus around performance ratings tends to be frustration, if not outright disdain, there are a number of things to be carefully considered before jumping on the “no-ratings bandwagon,” the top three typically being:
- Management Capability—Do managers have the skills to deliver ongoing, meaningful performance feedback without the “crutch” of ratings?
- Legal Considerations—Can the performance process continue to have the ability to provide sufficient notification when a performance problem exists?
- Links to Rewards and Opportunities—How will the performance process link to pay and other talent decisions?
Pay and Promotion Pain Points
While the first two considerations can be addressed by some fairly straight-forward solutions, the link to compensation and promotion opportunities tends to be where organizations get tripped up. Companies may remove their ratings for very good reasons, but then find themselves challenged when it comes to clarifying how they are going to make pay and promotion decisions.
For organizations venturing to the new rating-free world, we advise taking time to truly contemplate what their organization means by “pay for performance” and to review the organization’s realistic ability to differentiate pay and career opportunities without ratings.
For example, if an organization is going to have an incentive (bonus) plan without performance ratings, when it comes time to decide incentive payouts, they may have to make a choice between no or less differentiation among employees—or create a discretionary bonus plan for managers to decide the payout within a pool. In a no ratings system, decisions regarding base pay, promotions, etc. are often done based on manager discretion supported by guidelines and HR support.
On the other end of the spectrum, when the CEO asks for “objective” or “black and white” criteria for the bonus plan—or your stakeholders insist you use a well-documented “balanced scorecard” to link to pay decisions—the new school no ratings system will not be able to align and the transformation will be very challenging, if it is even possible.
Middle Might Be Best of Both Worlds
Unwilling to go the no rating route, yet frustrated by complex ratings systems, many organizations choose to use the “middle of the road”—or dare we say, “best of both worlds” approach. For these organizations, one question is key: “How many ratings should you have in your performance process?”
We recommend you think about a marathon like the Vancouver Sun Run. Most finish, a select few “place” and some bail to hit the nearest Starbucks.
If in your organization most of your employees are performing, and the most important thing is that they cross the finish line, then moving to a no ratings system may work. If it is important to distinguish between the top performers, those who successfully complete the run and those who do not finish, then a simple three-to-five-point rating scale will probably suit your needs.
Change the Narrative of Ratings
That said, if a simple rating scale is best suited to your organization, here are some shifts in practice to enhance the meaning of your ratings:
- Use narrative descriptors as opposed to numeric ratings or letter grades to facilitate meaningful performance conversations; and
- Consider listing your descriptors according to where you see the vast majority of employees performing. Traditional rating systems that place “meets expectations” in the middle of the rating scale tend to make performers feel adequate rather than successful, which is not the true intent. Listing descriptors in order of expected frequency sets up a different mindset regarding performance.
No Magic Potions Without Due Diligence
Performance ratings, if implemented correctly, can provide value; the challenge is that the costs often out-weigh the benefits. When rating systems are not working well, the movement away from performance ratings gains momentum. However, removing performance ratings without other changes and supports is not the magic potion for your performance process fixes.
Vincent Chow is a partner and Kyla Nicholson is a senior consultant at LoganHR. LoganHR is a full-service career transition, compensation and talent management firm and member of VF Career Management. For more information, visit www.LoganHR.com.
References & Additional Reading
1 PricewaterhouseCoopers, “10 Minutes On…Ending Performance Ratings: It Feels So Good But Is It Sustainable,” PWC, August 2015.
2 David Rock, Josh Davis, and Beth Jones, “Kill Your Performance Ratings: Neuroscience Shows Why Numbers-based HR Management is Obsolete,” Strategy + Business, Autumn 2014, Issue 76.
3 Max Nisen, “Why GE Had to Kill Its Annual Performance Reviews After More Than Three Decades,” Quartz, August 13, 2015.
4 William Atkinson, “Performance Management Without the Numbers?,” HR Executive Online, December 3, 2015.
5 David Rock and Beth Jones, “Why More and More Companies Are Ditching Performance Ratings,” Harvard Business Review, September 8, 2015.
6 David Rock and Beth Jones, “What Really Happens When Companies Nix Their Performance Ratings,” Harvard Business Review, November 6, 2015.
7 Boris Ewenstein, Bryan Hancock, and Asmus Komm, “Ahead of the Curve: The Future of Performance Management,” McKinsey Quarterly, May 2016.
8 Tom McMullen and Katie Lemaire, “Differentiating Pay without Performance Ratings,” Workspan, June 2016.
9 Brian Levine and Linda Chen, “Case Studies Show the True Value of Traditional Practices,” Workspan, June 2016.