Over the past few years, cutting-edge employers have eliminated performance ratings for employees—a development some managers and more than a few employees have greeted with skepticism. However, the willingness of these organizations to experiment with so drastic a change indicates how severely deficient many of them view conventional performance management practices to be.
A 2017 performance management study by Mercer, an HR consultancy, found that 89 percent of employers have employee performance ratings that are linked to employee pay (and that 57 percent use a traditional 5-point rating scale). It also found that:
- 95 percent of managers are dissatisfied with their organization's performance management system.
- 90 percent of heads of HR believe that their performance management system does not yield accurate information.
- 48 percent of employers believe their performance management system needs further work to be effective.
- Just 3 percent of employers believe that their performance management system delivers "exceptional value."
The study also found that 10 percent to 15 percent of companies say they are eliminating performance ratings, although companies that have done so still assess performance in other ways—such as with written descriptions or checklists of strengths and weakness—and then use these performance factors to make pay decisions.
A 2016 Mercer report on performance management trends noted that "in a no-rating environment, an organization can promote fruitful discussions about goals, performance and development" and then "make performance-based pay decisions, relying on manager discretion, calibration committees, various business metrics or a combination of methods to deliver base salary and/or incentive pay."
But many HR executives remain skeptical about this development, and some companies that have explored eliminating performance ratings have ultimately decided to maintain them, the report noted. One such company, a global professional services firm, found that its consultants valued their overall rating and that high ratings were a critical factor in retaining top talent.
However, discussions about eliminating performance ratings "are a recognition that performance management is not helping organizations to achieve their goals," said Lori Holsinger, a principal in Mercer's Atlanta office. That in itself is "an opportunity to refocus on performance management and its purpose," she noted.
When performance management practices aren't helping businesses to improve employee performance, then "something has to change—either shore up existing systems or throw them out," said Asumi Ishibashi, a senior consultant with Willis Towers Watson in Toronto.
Improving the Process
A frequent criticism of these systems is that they focus on an annual employee performance review, looking back at goals that were met or missed. For a proactive approach, increase the frequency and effectiveness of performance feedback, management experts advise.
"After the establishment of performance goals, the organization must provide feedback, set expectations, and constantly loop back through an ongoing dialogue about performance with monthly or quarterly check-ins," said Holsinger.
"Performance management has long been an annual event," said Ishibashi. "It can shift toward being continual" with the manager leading the way. Even if this shift is made, this is not to say that the annual review is not important; it still can be an opportunity to share critical information, he noted.
Line managers also must play a key role in performance management. This includes engaging employees in discussions about ways to make performance management conversations more effective and relevant.
[SHRM members-only toolkit: Managing Employee Performance]
Goal-setting is a crucial part of performance management, as employers struggle to coordinate high-level goals tied to organizational strategies with individual objectives aimed at outcomes that employees can directly achieve.
To help find the right balance, consider a "bottom-up approach," Ishibashi advised. With organizational goals in mind, allow employees to take ownership in setting performance priorities that play a role in achieving those larger, strategic objectives.
For example, if an employer's strategic plan focuses heavily on digital innovation, that overarching goal needs to be broken down into workable objectives that show managers and employees how their work can help meet that goal. In some cases, these objectives might focus on customer service or on research and development.
"Specific goals for an employee in research and development might focus on how employees build on what others have done and contribute to a team developing prototypes," said Ishibashi. Goals for those in customer service might focus on managing specific touchpoints where employees interact with customers.
Among other things managers should consider when defining the performance they need from employees are:
- Should goals be team-oriented or based on individual performance?
- For employee skills development, what training opportunities should be provided?
- Should performance management discussions seek to reinforce performance levels employees can sustain or constantly push for greater improvement (as with "stretch" goals)?
- Asking and answering these types of questions allows employers to identify the type of performance that matters," said Ishibashi.
Making a Change
Developing a new performance management system is a process. Starting with a prototype system and testing it in a pilot project gives the organization a chance to identify what is working well and what needs to be adjusted before rolling it out to the whole organization.
From there, managers must be trained on using the new system.
In addition, "organizations need to determine what [performance outcomes] they want to reward," said Ishibashi. This could include basing pay decisions on:
- The goals an employee achieved.
- The employee's potential as a performer.
- The employee's skills development.
- Some mix of all three.
From there, the employer must determine how these results will influence decisions about merit increases to base pay as well as variable bonus payouts.
Joanne Sammer is a New Jersey-based business and financial writer.
Related SHRM Article:
Ratingless Reviews and Pay Practices, SHRM Online Compensation, June 2016
Instead of Rating Performance with Numbers, How About Adjectives?, SHRM Online Employee Relations, July 2016
Improving Performance Evaluations Using Calibration, SHRM Online Compensation, May 2014
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