I have not been a big fan of the standard annual employee performance review for quite a long time. The thought of those long, uncomfortable meetings (for both the manager and their direct report) to hear the manager’s assessments of your strengths and weaknesses, to justify the assignment of a final rating score, is still bothersome. Some leaders would simply circumvent the entire process of joint information exchange and simply hand the evaluation form to the employee, tell them to read it, sign it and send it back to them. Oh, by the way, if the direct report had any questions, needed clarification or for goodness sake, had the temerity to disagree with the evaluation… they were free to schedule another meeting with the boss; who didn’t want to talk to them about their rating score in the first place. Why would an employee take that chance?  

My HR teams used many alternative strategies to achieve an increase in communication and development opportunities that would benefit the employee and the company. We tried to have the employee complete a self-evaluation first and then take their thoughts, now in writing, to the boss for an up or down vote on each of the evaluation areas.  We removed the timing and evaluation score from a direct correlation to your pay raise. 

We created trickle-down goal creation, so that top corporate goals were assigned to the executive team and then as you moved down the ranks, each level of employee was assigned a goal that would assist their supervisor achieve their goals. This is still a concept with much merit, but done in an annual discussion period, was not productive for anyone, and created more of those sweaty palms, deer in the headlights, mostly silent annual meetings.

Finally, we moved to a non-numeric, goal oriented system, with documented quarterly updates (conversations) between the manager and the employee to talk about goal achievement and development opportunities and/or needs. This is the recommended approach for our consulting clients today.

Company’s New Approach

The above anecdotal story is to introduce the latest research and actions taken in progressively larger numbers by many companies large and small. As presented In the latest issue of The Harvard Business Review by David Rock, cofounder of the NeuroLeadership Institute, and author of Your Brain at Work and Beth Jones a senior consultant with NeuroLeadership Institute, they also noticed a few years ago, that some courageous companies began experiments to remove ratings from their performance management systems. Companies stopped giving people a one-to-five rating or evaluating employees on a “performance curve,” also known as the “forced ranking” approach. The forced ranking approach, I believe may be the most unrealistic and unfair, in addition to statistically inaccurate, approach to performance evaluations. The forced ranking philosophy mandates that all employee performance be ranked in a “normal distribution” with all of their performance falling within a normal distribution +/- 3 standard deviations from the mean score (the “average” employee).   

This is the bell shaped curve, we see in many diagrams. The practical application of this would cause a manager to score an equal number of their employees as “unacceptable” and “needs improvement “as they scored “outstanding” and “excellent” (on a 5-point scale). Without diving into the details of this approach, consider one observation. If that distribution represented the actual performance level of her staff, the manager would need to be fired for allowing that many grossly under-performing employees to remain still-employed at the time of evaluation!

What actually happens in employee performance, is what’s called a “Power Law” distribution; also known as a “long tail.” It indicates that people are not “normally distributed.” In this statistical model, there are a small number of people who are “hyper high performers,” a broad swath of people who are “good performers” and a smaller number of people who are “low performers.” It essentially accounts for a much wider variation in performance among the sample.

Talent Management Update

By early 2015, around 30 large companies, representing over 1.5 million employees, were following a similar path. No longer defining performance by a single number, these companies were emphasizing ongoing, quality conversations between managers and their teams.

Of interest is the research on motivation and the brain conducted by the NeuroLeadership Institute. The findings were now explaining why standard performance reviews were failing. In short, social threats and rewards, like one’s sense of status or fairness, activate intense reaction networks in the brain. This explained the intense reactions people had to being assessed on a ratings scale, and it pointed to ways of designing better systems.

The idea of removing ratings drives many HR executives, but more CEOs, a little crazy because companies love to quantify and analyze almost everything. The thought of getting rid of a metric is almost heretical. Executives who contacted the NeuroLeadership Institute after reading their research often assumed that removing ratings was an anomaly, perhaps driven by companies who did not realize how important pay-for-performance is.

Yet in mid-2015, the trend started to accelerate. Consulting firms Deloitte and Accenture, global health services client Cigna, and even GE — the company who popularized the idea of forcing people into a performance curve — all announced changes to their performance management systems. By September 2015, 51 large firms were moving to a no-ratings system. According to the research firm Bersin by Deloitte, around 70 percent of companies are now reconsidering their performance management strategy.

This November, a full set of findings are scheduled to be published from closely studying the 30 companies that first made this change.  However, it is obvious to some, that we have already experienced four, clear reasons the trend is finally gaining momentum:

The changing nature of work

Numerical performance management systems do not take into account how work is done today. Who sets 12-month goals anymore? Some workers need goal cycles of one month, or one quarter. Work is also happening in teams more than ever, and many people are involved in multiple teams that often are spread everywhere or work different shifts than their manager. Few managers accurately know their team members’ performance when that employee is involved in many other teams, often doing work the manager doesn’t see or even understand. In short, standard performance reviews, delivered once a year, are just not relevant to the ways we currently work.

The need for better collaboration

Studying companies that have made the change, a clear trend is becoming evident:  conventional ratings systems inhibit collaboration, conversation, consideration, and creativity. Top ratings lead to high status, promotions, and raises — yet it is not like at school, where everyone can get an “A” if they work hard enough. Even worse, with a forced curve, a manager with a hardworking team of 10 people may only be allowed to give one or two of them the top rating. As a result, people directly compete with each other for rewards, thus hurting teamwork, morale, productivity and each other’s feelings.

Remember our past columns on positive leadership and emotional intelligence? Science and good leaders have known for quite a while, that treating employees and each other in a non-cooperative manner produces very bad results. It seems difficult to believe, but one of the smartest, most analytical and insightful companies in the world, previously run by one of the richest men in the world finally realized that, when they, Microsoft, recently removed its forced curve ratings, employee collaboration skyrocketed.

The need to attract and keep talent

Companies are also removing all ratings to get managers to talk to employees about their development more than once or twice a year. Millennials in particular crave learning and career growth. Of the 30 companies studied, one preliminary finding that jumped out according to the NeuroLeadership Institute was that after a company removed ratings, managers talked to their teams significantly more often about performance (three or four times a year instead of only once).  More frequent communication helps with employee engagement, development, and fairer pay, as managers better understand how their people are doing.

The need to develop people faster

By removing ratings, early indications of their research are that companies appear to be developing people faster across the board. It’s happening because of more frequent dialogues, which also tend to be more honest and open when neither party has to worry about justifying a rating at the end of the year.

When Deloitte analyzed their process, they found employees and managers spent around two million hours a year on performance reviews. The problem was that much of this time was spent talking about the ratings themselves. Companies that remove ratings are seeing the conversations shift from justifying past performance to thinking about growth and development. The result is better employee development, a win for everyone.

Conclusion

Companies who have replaced ratings tend to be anxious about it beforehand and enthusiastic about it afterward. Their employees are happier, which encourages more engagement and better performance. It should be no surprise that treating an employee like a human being and not a number is a better approach. Yet it has seemingly taken a few bold companies to lead the way and show us that life is better on the other side.

William Kreider is the founder and CEO of HR Future Group, a firm that offers a full service suite of human capital management services for all sizes & types of businesses. From Transformational HR, Talent Management, Outsourcing, Compensation, Executive and Organizational Coaching, Talent Acquisition and other HCM consulting services to Cloud-based Payroll, HRIS, Time & Attendance, and Benefit Administration, HR Future can assist your business. Mr. Kreider has significant executive experience in all areas within the HR profession in a variety of industries. For more information, please email him at bill@hrfuturegroup.com or call 610.584.2467.