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Focusing on performance, not ratings, is a more effective way to evalute and reward employees
As more employers abandon annual scale-based employee ratings, new research suggests that other types of employee appraisals can be more effective for evaluating—and rewarding—employees.
The Center for Effective Organizations at the University of Southern California, in partnership with total rewards association WorldatWork, studied 244 U.S. companies that have adopted one or more of three “cutting-edge” performance-management practices:
The findings were shared during WorldatWork’s 2016 Total Rewards Conference, held earlier this month in San Diego.
“Most companies still do performance management the way they did in the 1950s, with a supervisor-driven process built around annual reviews and rating scales,” said Gerry Ledford, senior research scientist at the Center for Effective Organizations.
Ratingless reviews, in contrast, do not assign a numerical or letter grade to employee performance, or use descriptive ratings such as “excellent” or “meets expectations.”
The center’s survey found that 52 percent of the studied companies had adopted ratingless reviews, alone or in combination with other practices. (Among U.S. companies generally, about 16 percent have eliminated the use of a ratings scale, according to
a separate survey by consulting firm Brandon Hall Group, the
Washington Post recently reported.)
Ratingless appraisals “help employers to focus on performance and consequences, not ratings, and removes an irritant that’s perceived as taking time without adding value,” Ledford said.
Ratingless Reviews and Pay
The study found a number of common pay practices at companies that use ratingless reviews.
Ratingless Reviews and Pay Practices
Companies with ratingless reviews reported the following practices were used.
Type of Practice
Percent That Use It
Managers make decisions on their own within budget constraints about how to allocate rewards.
Reward allocation is determined in
calibration sessions involving a large pool of employees.
Rewards are allocated according to a specific distribution.
Managers use “shadow” performance ratings for allocating rewards; these ratings are not communicated to employees.
Management ranks employees from first to last (stacked ranking); it varies whether this ranking is communicated to employees.
Source: Center for Effective Leadership at the University of Southern California and WorldatWork
“The percentages indicate that many companies use multiple approaches,” Ledford pointed out. While there are concerns that ratingless reviews give managers too much discretion, the compensation budget acts as a constraint and “keeps things from getting out of control.”
Another common concern is that adopting ratingless reviews may hamper pay for performance. To the contrary, the study revealed that companies do not abandon pay for performance when they adopt ratingless reviews, as indicated below.
Ratingless Reviews and Pay Decisions
Among companies that have adopted ratingless reviews, respondents reported that the following effects had occurred either “moderately” or “to a great degree.”
Type of Impact
“Moderately” or “To a Greater Degree”
The level of employee development has increased.
Top performers receive more rewards than before.
Changes in pay are more differentiated based on performance.
Managers have more discretion in delivering pay increases and/or bonuses.
Pay decisions are more transparent to employees.
Changes in pay are less differentiated across the organization.
Employees are less clear about how well they are performing.
recent article Ledford co-authored further discussed the study’s findings regarding how companies make pay decisions in a ratingless system.
Almost all of the cutting-edge companies that use ratingless rewards also provide employees with ongoing performance feedback, as opposed to quarterly or annual reviews, Ledford said.
A key reason for the reported improvement in rewards system effectiveness may be that “ongoing feedback can guide behavior and aid performance,” he added. Ongoing feedback “may help create a clear connection for employees between their behavior and their rewards. The elimination of the scoring feature of performance reviews also may remove an irritating distraction that often makes it difficult for employees to hear performance feedback and rewards messages.”
In addition, 27 percent of the companies in the study use crowd-sourced feedback, “which takes peer perspectives into account, especially in team-based settings,” Ledford explained.
Crowd-sourced feedback typically uses an intranet platform or similar internal social network, and allows peers to share their perspectives in real time—unlike 360-degree reviews, which are usually part of an annual review procedure.
“The views shared through crowd-sourced feedback are not anonymous, which helps to keep them more real and constructive” rather than snarky or personal, Ledford said. “Employees are asked to aim their comments at how others can improve, and not to just sound off.”
Crowd-sourced feedback “may generate a type of feedback that employees are especially receptive to hearing,” he noted.
“Overall, the results suggest that cutting-edge practices have a favorable impact on performance and rewards,” Ledford said. “The companies in the survey report that these practices lead to compensation that is more motivating and more transparent, while increasing the levels of employee development and performance. The results suggest that those who manage rewards should welcome cutting-edge changes in the performance management system.”
Reduced Litigation Risk
“In-house lawyers love no ratings,” said Julie Holbein, director of global talent management at Cardinal Health in Columbus, Ohio, one of the companies in the center’s study.
The reason has to do with lawsuits over terminations. “If an employee is let go after years of receiving a numerical rating of 3 out of 5, even if written comments along with the rating took note of performance issues, the 3—as an above-average rating—is what’s going to get the attention,” making it harder to defend against charges that the termination was discriminatory, she said.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Follow me on Twitter.
Related SHRM Articles:
Instead of Rating Performance with Numbers, How About Adjectives?,
SHRM Online Employee Relations, July 2016
Companies Rethink the Annual Pay Raise,
SHRM Online Employee Relations, June 2016
Employers Seek Better Approaches to Pay for Performance,
SHRM Online Compensation, February 2016
Improving Performance Evaluations Using Calibration,
SHRM Online Compensation, May 2014
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