Is It Time to Put the Performance Review on a PIP?

More companies are choosing a qualitative approach to employee appraisals.

By Dori Meinert Apr 1, 2015
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Four years ago, Adobe Systems Inc. used the type of traditional performance review system that a vast majority of companies still use. Its 11,000 employees were ranked on a scale of 1 to 4 in what one Adobe manager describes as a “soul-crushing exercise.”

Right after review time each year, the HR team saw a disturbing spike in voluntary turnover as disheartened employees—many of them good workers—left the company.

“We hired the very best, and then we brought them into an organization and on an annual basis said, ‘You were exceptional when you came in, but now, relative to your peers, you’re only average.’ That doesn’t feel good,” says Donna Morris, Adobe’s senior vice president of global people and places.

So in 2012, with the support of the company’s leaders, Morris abolished the system. She replaced it with more-frequent, informal conversations between managers and employees—minus the annual ratings.

“We want to make sure everyone has a chance to make an impact. Our process wasn’t enabling us to do that because it was pitting person against person, and we are very team-oriented,” she says.

At the time, Adobe’s move was considered experimental, even risky. However, the number of employers that are either ditching the numerical ranking of employees or tossing out the entire performance review process has grown from 4 percent in 2012 to 12 percent in 2014, according to a Corporate Executive Board (CEB) survey of Fortune 1,000 companies.

“It’s gone from an interesting quirky thing that some companies do to a viable strategy that a good chunk of companies are pursuing,” says Brian Kropp, executive director of CEB’s HR practice.

The shift from the traditional angst-ridden numerical ranking system to a qualitative approach is occurring as companies recognize that the old way doesn’t work anymore. Work has become more collaborative, more knowledge-based and, as a result, more difficult to measure. At the same time, technological advances have made employees crave more real-time feedback.

“So many of the processes and functions in HR are practices that were adopted in a different era,” Morris says. “I think we need to re-evaluate some of our core practices and processes.”

Tossing out the traditional performance review system and numerical rankings might not be right for every organization, she acknowledges. But she says HR professionals should be asking themselves these questions: What impact does the performance review process have on the employees HR is trying to motivate, engage and retain? What impact does the process have on the company’s performance?

By the Numbers

In the 1980s, former General Electric CEO Jack Welch popularized the “rank-and-yank” practice of rating employees and weeding out the bottom 10 percent. While that may have worked for a while, critics say it eventually forced managers to get rid of talented people. GE phased out the practice in the mid-2000s, according to the Wall Street Journal. But many companies still use a less draconian form of stacked ranking in their performance appraisals.

“They purport to be objective. They’re not objective. The metrics they use have different meaning to different people,” says Samuel A. Culbert, author of Get Rid of the Performance Review! (Business Plus, 2010) and a professor of management and organizations at UCLA’s Anderson School of Management.

Moreover, rankings may prevent people from talking candidly to their bosses. Culbert notes that many corporate scandals might have been prevented if employees hadn’t been afraid to speak up: “You’ve got people who are getting 5s on their performance reviews who won’t go in and tell their bosses what’s actually going on because they don’t want to screw things up for themselves.”

Studies have shown that employees’ scores often aren’t accurate reflections of their performance. Only one-third of the employees who get the highest score in their performance review are considered organizations’ top contributors.

Furthermore, about 66 percent of employees say the performance review process interferes with their productivity, and 65 percent say it isn’t even relevant to their jobs, according to a CEB survey of 13,000 employees worldwide.

It’s not just employees who are unhappy. About 95 percent of managers say they aren’t satisfied with their organizations’ performance management processes either, and 90 percent of HR professionals don’t believe their companies’ performance reviews provide accurate information, CEB researchers found.

If there’s so much dissatisfaction, why aren’t more companies ditching the traditional appraisal process?

Dick Grote, founder of Grote Consulting Group in Frisco, Texas, says there’s a good reason: The documentation that traditional appraisals produce is a business necessity.

The data collected in the performance appraisal process allows the organization to make important decisions in a whole host of business areas, Grote says.

“It provides a mechanism for giving people feedback. It provides a mechanism for deciding who is ready for promotion. It provides a mechanism for supporting when a termination has to occur,” he says.

Plus, Grote notes, every employee deep down wants to know “What do you expect of me? How am I doing at meeting your expectations?”

“As organizational leaders, we have an ethical obligation to answer those two questions fully and frankly for every single person on the team,” he says.

The question, of course, is whether there’s a better way for employers to meet that obligation.

Checking In

Morris believes there is. Four years after Adobe’s simplified process was introduced, she says employees are getting the feedback they seek in informal discussions with managers held at least every other month.

In the appropriately named “Check-in” process, managers are encouraged to discuss how well employees are performing against objectives and what resources employees need to succeed. Instead of dwelling on past mistakes, managers focus on what to change in the future.

Gone are the lengthy bureaucratic forms. Managers aren’t even required to submit forms to HR to prove that the discussions have taken place.

“We’ve gotten out of the policing business altogether,” Morris says of HR’s role. “We’re more focused now on capability-building and consulting.”

Still, HR runs a pulse survey at least annually to make sure employees have had regular check-ins and feel supported. In 2014, 80 percent of employees said their managers were open to feedback, up from 76 percent in 2012.

Rankings = High Anxiety

Stomachaches. Sleepless nights. Paralyzing fear. These are some of the symptoms employees might have before a performance review. And they might spend weeks or months feeling just as anxious afterward. Recent brain research helps explain why.

Labeling people triggers a “fight or flight” response similar to what happens when one’s life is being threatened, says David Rock, director of the NeuroLeadership Institute and author of Your Brain at Work (HarperBusiness, 2009).

“It activates the pain center in the brain, so people react very intensely to the feeling of being attacked,” Rock says.

He has identified five factors that can have a significant negative effect on human emotion:

Status. Am I considered better or worse than others?

Certainty. Am I certain my hard work will get me a higher rating?

Autonomy. Do I have any control over what will happen?

Relatedness. How do I make myself look better than others?

Fairness. Am I being treated fairly?

Most performance ranking systems prompt a strong negative reaction in at least four of the areas, he says. “We put these systems in to hopefully motivate everyone, but it turns out a very large number of people are significantly demotivated,” in part because humans are social beings who crave the approval of others.

Other research shows that rankings encourage a “fixed mindset,” which inhibits learning, as opposed to a “growth mindset,” which refers to the belief that people continue to learn and grow throughout their lives.

Ranking people encourages them to focus on “trying to look good instead of trying to get better,” Rock says. In other words, it discourages risk-taking because employees are reluctant to set stretch goals they may not be able to reach.

Managers can minimize employees’ anxiety by learning how to make people feel comfortable enough to open up and by helping employees develop their own insights.

“How do you help smart people grow faster? You don’t just tell them what to do. You help them make their own connections,” he says.

Adobe managers now have wide discretion in allocating pay increases for their teams, although HR gives them a sense of how the market is moving.

“The ultimate guideline is the budget, the ability for the company to pay based on the country and the market in that country,” Morris says. “We’re trying to build accountability and responsibility across the organization.

“It means that we need to invest in our managers to really make sure they understand not only compensation, but also that they are able to distinguish performance between team members.”

HR provides managers and employees with tools and resources through its Employee Resource Center. To ensure that there are no unintentional patterns of discrimination, HR does a high-level review before salary increases are finalized, she says.

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Morris estimates that Check-in saves Adobe managers 80,000 hours a year—the equivalent of 40 full-time positions—that were once spent laboring over employee evaluation forms.

Voluntary attrition has decreased by 25 percent from 2012 to 2014, which she sees as an indication that employees feel valued. There has also been a “notable increase” in involuntary departures, which she views positively because it shows that managers no longer wait for annual review time to discuss performance problems.

When such issues do occur, Adobe managers are required to put the employee on a corrective action plan and to document the problems.

“What I’m most proud of is that, even at the executive staff level, Check-in has become a part of how we run the business,” Morris says.

Giving Employees a Say

Mark Simpson, vice president of legendary people at Texas Roadhouse, began questioning the value of the traditional performance review process in 2011 as he struggled to calibrate the rankings of the 500 employees at the restaurant chain’s corporate headquarters in Louisville, Ky.

The employees had been rated on a 5-point scale. For every manager who thought 3 meant an employee was doing a good job, there were many more who believed the middle score carried the negative connotation of “average.”

“We couldn’t get people to calibrate,” he says.

He was considering moving to a 4-point scale when he read Culbert’s book, Get Rid of the Performance Review! It struck a chord. He formed a committee of employees and managers from various departments who researched the idea and collected feedback from others.

The result? The company eliminated its ranking system for corporate employees in 2011 and replaced it with a new process called GPS, which stands for growth, plan and support.

Managers are encouraged to have frequent one-on-one conversations with their employees to provide feedback on performance. A month before their hiring anniversaries, employees are reminded by e-mail to schedule GPS meetings with their managers to discuss their career goals and what resources they need to be successful. HR has provided a discussion guide to stimulate the conversations.

The goal is to help employees take ownership of their development, Simpson says.

“I think a lot of times companies and HR folks focus on the bottom 10 percent and lose focus on the other 90 percent,” he says. “Our goal was to focus on the 90 percent of folks who are doing their jobs every day and want to grow and want to develop. And we’ll help the other 10 percent get better, hopefully by having more-regular one-on-one meetings to help them improve.”

The company also eliminated complex compensation formulas in favor of annual cost-of-living adjustments with additional merit increases for employees who take on additional responsibilities. The old “pay-for-performance” method wasn’t living up to its name. The difference between the pay increases awarded to top performers and those given to poor performers wasn’t significant enough to truly be a reward for performance.

“Was that a merit increase? Or was that just a number that was budgeted?” Simpson asks.

While the new GPS process eliminates the headaches caused by the old ranking system, it also requires work.

“There is definitely a time commitment to sit down with people and really listen to what they are passionate about, where they want to grow, what they need to work on and what do we as supervisors need to work on as well,” Simpson says.

“But we really want our people to love their jobs,” he adds. “If they love their jobs and love the culture and love the company, we feel like they’re going to be happier and more productive.”

Just Window Dressing?

Critics argue that the new appraisal processes touted by some companies may not, in reality, be so new. Companies are simply taking apart their old appraisal systems and putting the pieces back together in a different way.

“It’s just old wine in a new bottle,” says Grote, the Texas management consultant.

The CEB’s Kropp says some companies do away with numbers-based rankings but replace them with labels or descriptions that can be just as harmful to an employee’s psyche. Still others develop a hidden ranking system to allocate pay raises; it’s unclear how those systems affect employee trust.

A Forward View

CEB research shows that companies that have eliminated numerical rankings or the entire performance appraisal process fare better in employee surveys measuring effectiveness than those companies that still use traditional reviews.

What matters most is the quality of the conversations between managers and employees, Kropp says. Employees say the most effective performance reviews include a balance of positive and negative feedback and are forward-looking.

“The reality is the past is past, and you can’t change the past,” Kropp says. “What you need to do is take that past information and use it to do something differently going forward.”

A more forward-looking process made sense for EverFi Inc., a small tech startup in Washington, D.C. Inspired by Adobe, the company this year is replacing biannual reviews for its 170 employees with quarterly conversations between employees and their managers. The company never used numerical rankings.

The process should be a good fit because EverFi is growing quickly and 70 percent of its workforce is made up of Millennials, says Dominique Taylor, vice president of talent management. “We know they are much more eager for feedback,” she says.

She hopes the quarterly conversations will help foster a more regular pattern of feedback, eliminating surprises on either side, and remove some of the angst about reviews.

“We considered ourselves progressive because we were already doing biannual reviews,” Taylor says. However, she has learned that “You can always improve, even if you think you are doing something well.”

Morris is confident that Adobe’s bold move was worthwhile.

“I firmly believe we’re a much better organization now than we were then, not only in terms of company performance, which is paramount,” she says, “but I like to believe our employees are having more-rewarding experiences than they have in the past.”

Dori Meinert is a senior writer for HR Magazine.

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