Fixing Performance Management
Nearly all our clients report that their “performance management system is a complete waste of time.” They are not alone:
80% of organizations are considering making a major change to their performance management programs, or already have[1]
95% of managers are dissatisfied with their companies’ performance management systems [2]
90% of HR professionals don’t believe their companies’ performance reviews provide accurate information[3]
58% of executives believe that their current performance management approach drives neither employee engagement nor high performance[4]
To understand why performance management is so broken, we need to start by understanding: what is performance management supposed to be doing?
Ultimately, company performance depends on individual performance, especially key strategic roles. The organization will thrive when individuals understand their role in executing the organization’s strategy, what skills are required to meet that expectation, and are engaged in developing those skills, they can build a fundamental belief in self-efficacy. According to Jennifer Beatty with the People Analytics group at the University of Pennsylvania’s Wharton School: “self-efficacy may help to build the autonomy for individuals to effectively contribute to an organization’s strategy”. Building these foundations is the purpose of performance management.
So what gives? It would be hard to disagree with these desired outcomes for a performance management process, so why is there such a gap between these ideals and the above statistics? Are organizations maliciously designing inefficient and ineffective performance management processes on purpose? Doubtful. More likely is that organizations don’t sufficiently value this incredibly important process. As a result, it often becomes one of the largest time-sinks of the year instead of one of the most valuable ways to align your people to strategy and achieve competitive advantage.
Alright, so what (specifically) is broken about this process? While the answer will be different from organization to organization, we have seen a few commonalities:
1. Little or no connection to the strategy
In the majority of cases, the performance management process is seen as an HR imposed headache rather than an opportunity to link a strategy to the people required to execute it.
2. Lack of quality communication about the why of the process vs. the process itself
When an organization kicks off its annual performance management cycle, it is often seen as pointless, bureaucratic busy-work, one without a clear benefit for those taking part in it.
3. Inspires extrinsic vs. intrinsic motivation
In many organizations, the performance review process is dominated by looking backward and assessing and rating individual’s performance on some very subjective scale. What impact does this have? It causes people to become “externally located” in their reviewer / manager – looking to them for approval and a good score rather than giving them the tools to be “internally located” – or to feel that they are in control of their own performance and accountable for their actions.
4. Little to no investment in training managers to conduct performance management – Often, managers are promoted into their roles due to technical skill vs. management capability. Think of Joe the salesman who has reached his quota for 6 straight quarters. He’s killing it, so his managers decide to promote him to sales leadership. Congratulations Joe, you now have three direct reports. Does Joe magically have the skillset to teach, guide, and inspire his team? Not necessarily, and all too often organizations don’t invest in teaching Joe the skills he will need to be successful in this new role.
5. The rating and ranking system is biased and poorly executed
Most performance rating systems are as clear as mud, even with the most well-articulated rating scales, there is a tremendous amount of rater bias in the process. Most of us has experienced this in some point in our lives – the boss has his favorite employees who can do no wrong, and with the rest, the rose-colored glasses are removed. In one study in the Journal of Applied Psychology[5], a study of 2,350 managers found that idiosyncratic rater effects accounted for 62% of rating variance, whereas ratee (employee) performance accounted for only 21%. This bears repeating – who was rating the individual accounted for triple the impact on their rating than what their performance was!
6. Too complicated, takes too much time, poor ROI
Mark Twain is reputed to have said “sorry I didn’t have time to write a short letter”. Creating something simple and meaningful is a hard task. This is why many organizations revert to accepting the status quo of an overwrought performance management rubric and process that is heavy in process and light on content. Consider this data point: in a study done by Deloitte of its own performance management process, they found that over 2 million hours annually were spent on performance management. How much time does your organization spend? Is it getting the return commensurate with this investment?
Okay, okay, enough already. Performance management is broken. So, what do we do about it? While there is no one right solution for every organization, we will endeavor to introduce a few common principles to combat these issues, principles we will expand upon in future articles.
1. Make it a business process, not an “HR thing”
We need to treat performance management like any other initiative to be invested in. You wouldn’t build a new factory if the long-term return on investment (ROI) was negative, so why do we with performance management. Too often this incredibly important process is delegated solely to HR, with the business absolving itself of responsibility. While we are certainly not advocating for reduced HR involvement, business leaders should work closely with HR to ensure the performance management system is effectively optimizing the organization’s most important asset, it’s people. If the ROI equation is tangible benefits over the number of hours and dollars spent – how can we impact both sides of this equation. First, we need to measure both investment and return. Investment is a bit easier than the intangibles of return, but at the very least we can survey our people on the perceived effectiveness of the process. Once we understand this equation we can seek to simplify the process, and to improve its efficacy
2. Create clear ties to strategy
If you have a strategy and you have a performance management process that doesn’t support it, then you may as well use your waste basket for what it’s designed for. We often say that there are two keys to executing strategy – your people must understand a) what the strategy is, and b) what it means for them. And there is no more effective way of making the strategy meaningful to employees than in their own performance management. “Great!” you say, “we ask all employees to link their SMART goals to our pillars of organizational excellence, customer centricity, etc.!” No. Let’s get specific. Let’s get strategy out of the boardroom, and into the hands of the people who need to execute. Let’s use tools such as Strategy Maps to get clear about what the drivers of organizational performance are so that people can align specific goals to a detailed strategy. Consider both leading indicators that help drive the right activities and behaviors, and lagging indicators that recognize results achieved.
3. Simplify, simplify, simplify
Despite the best of intentions, year after year organizations add more and more complexity to their performance management process. Some have started to rebel against this trend. Take Netflix for example. Under their former Chief Talent Officer, Patty McCord, they eliminated formal performance reviews altogether.[6] To some, this would be considered lunacy. To Netflix, they saw the lack of return on their investment, so they moved to a platform that emphasized and supported regular performance conversations with managers, but did not mandate any formal process, seeing this process as primarily a guard against wrongful termination litigation. Rather than investing in a poor performance management process, they spent that same money on generous severance packages (along with tight severance contracts) to combat this threat. Others have echoed this sentiment, noting that the most valuable feedback is given in the moment rather than waiting for some formal annual performance review process. While this extreme change may not be right for your organization (e.g., due to state and federal laws), it does illustrate what’s in the realm of possibility. Where can you remove complexity from your process? Perhaps simplifying the reams of performance rating scales into something clearer and more logical? Perhaps reducing the overall number of performance measures per employee?
Jordana Kammerud, SVP CHRO at Core-Mark International, suggests that the key is in knowing your intent. “In order to effectively simplify your process, you should be really clear about the objective of your performance management system. If you are using it to tie pay to performance, then that linkage should be well designed. If you are using it to identify talent and develop it, then that is where you want to focus your energy. Know what you really want to get out of your performance management system so you can better simplify and focus.”
4. Communicate
At best, organizations communicate the process that they use for individual performance management, at worst, they communicate nothing at all – relying on managers to “run with the process”. This leaves employees filling in the gaps for themselves, and generally not with sunshine and roses. Organization’s need to develop a communications plan that explains why this process exists, what’s in it for the individuals involved, what the process is, and how they individually should participate. Consider how different groups need to be communicated to differently and at different points in time vs. the mass communication strategy popular at many organizations. We need to avoid the “ask your manager” syndrome, since without the proper communication plan, they will know nothing more than their managees.
5. Invest in training for your managers
As noted above, all too often managers are promoted into positions of increasing authority and responsibility without the commensurate managerial skills. While organization’s dictate the process they should follow, there is a wide variance between a skilled and unskilled manager when it comes to having effective performance management conversations. Taking the time to upskill your people in this important area is worth its weight in gold. And this doesn’t necessarily mean hiring expensive consultants either. A well thought out peer to peer skill sharing network can be a great start to this endeavor, as can investing in upward feedback. Google, for example, invests in its upward feedback by having its employees fill out a simple 13 question feedback form semi-annually for subordinates to give feedback to their manager, which is then anonymized and used for development (not for evaluation / promotion decisions), thus providing managers invaluable learning opportunities.[7] This work can and should also be enabled by a culture of “radical feedback”. In a recent podcast[8] from Adam Grant, Professor at the Wharton School at The University of Pennsylvania, he explored the idea of creating a “challenge network” with Ray Dalio, Founder of Bridgewater Associates. A challenge network is the group of people that you go to for constructive feedback, rather than what most of us do: going to our friends, peers, family for reassuring positive feedback.
6. Combat bias
The bias mentioned above is no easy problem to solve, but there are a few ways that organizations have made strides to defeat this beast. First – invest in training such as unconscious bias workshops to make biases more front and center in managers’ minds as they rate their employees. Second, use effective calibration meetings. All too often, this can become an exercise in “which manager has the most political clout to push their promotions through.” In a recent study in Harvard Business Review[9], one multinational organization was profiled that used a calibration committee that was comprised of senior executives, who would receive preliminary ratings from individuals’ managers, but those same managers were not allowed to be present at the calibration committee meetings, so that the senior executives could look dispassionately at the results that employees had achieved in order to determine the appropriate course of action for each cohort. To take a different approach, Deloitte[10] simplified their process by asking what each manager would do with each individual vs. what they thought of each. In essence, starting with the end in mind. With questions such as “Given what I know of this person’s performance, I would always want him/her on my team”, the organization is able to get more directly to the “so what” out of this exercise and determine the path forward for different sets of employees. We hear this echoed from Irma Lockridge, Chief People and Systems Officer at CoorsTek, she states: “Calibrating performance among leaders allows for consistent use of ratings but more importantly it provides the opportunity to receive real-time feedback on their people from their peers. This is the best approach to gain valuable real-time feedback and to ensure consistent language in the process.”
In conclusion, while performance management may be broken in many organizations, it is an area ripe with opportunity, and the upside of “getting it right” is huge. We encourage you to ask yourself a few key questions: which of these issues presented do you see in your organization? Which ideas for improvement resonate most? We encourage you to write in the comments what you agree with, would add to this paper, and how you intend on improving the process in your organization.
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