Annual performance reviews have been as much a part of corporate ritual as the coffee machine and the holiday party.
But during recent years, they’ve been in decline. First, most firms abandoned the “forced rankings” that had been popular since the 1980s. And now, some companies are scrapping the performance review altogether.
Should your organization consider ditching annual performance reviews, and what could replace them?
The Demise of Forced Rankings
If your company is still using forced rankings, you’re in a dwindling minority. The forced ranking system, in which employees are sorted by performance according to fixed percentages – say, 20% as “top performers”, 10% as “underperforming”, and the rest “satisfactory” – was popularized by GE in the 1980s, but has been under fire of late.
The percentage of companies using forced rankings plummeted from 49% in 2009 to just 14% in 2012. One recent high-profile company to jump ship is Microsoft, which abandoned its ranking system late last year.
The main argument against forced ranking systems is that they pit employees against each other. If people know that only 20% of the people in their group can be classified as top performers, they may be unwilling to cooperate with colleagues who they see as competitors for that top ranking. Essentially, you’re more likely to get a good ranking if your colleagues fail.
It’s also unfair sometimes. If your group is performing well overall, then you’re less likely to be within that group’s top 20%. Someone undeserving from a weaker group may end up being rewarded more than you. Few groups correspond exactly to the percentages prescribed by the ranking system.
Performance Reviews to Follow?
But while forced rankings are on the way out, 90% of companies still use some form of rating system to measure performance. However, that system is also coming under fire.
Some companies have jettisoned formal reviews and ratings altogether. Adobe, Juniper and New York Life are a few examples, and they’ve all reported increases in engagement and performance as a result.
A recent Deloitte University Press survey found that 70% of companies had either recently reviewed and updated their performance management system or were currently evaluating it.
UCLA management professor Samuel A. Culbert laid out many of the arguments for abandoning the traditional performance review in a 2008 Wall Street Journal article. Among his main points:
- It puts boss and employee at cross-purposes. The boss wants to critique performance in order to spotlight areas to improve, while the employee tries to depict performance in the best possible light.
- It raises unrealistic expectations. The employee believes that pay will be determined by performance, when more often it’s a function of the marketplace or the department budget.
- It feigns objectivity. When people switch bosses, they often receive very different evaluations. No review between people can be objective, and they’re influenced by third party perspectives.
- It impedes personal development. Employees are less likely to turn to the boss for help, fearing that admitting to a weakness or need for help will come back to bite them in the performance review.
- It disrupts teamwork. The dynamic is so asymmetrical that it can undermine manager-team relationships by rewarding bad acts like deception.
The Alternative to Performance Reviews
So if performance reviews are so bad, how to replace them? Companies need some way of monitoring performance, after all, and of distributing compensation fairly.
The main component of the new approach is to have much more frequent conversations. A year is a long time in business these days, and some companies are replacing the annual review with much more frequent conversations.
The frequency can strengthen relationships by removing the specter of only acknowledging sensitive topics on very rare occasions. It’s also less about judging the past, and more about planning for the future.
And, instead of excessively honing in on individual achievement, managers can maintain perspective and emphasis on overall accomplishments by the broader team.
Let’s look at an example of how it’s actually working right now, at Adobe.
In 2012, Adobe moved from yearly performance rankings to frequent “check-ins.” These conversations have no prescribed format or frequency, and there are no forms to fill in. The idea is simply to convey what’s expected, exchange feedback, and coach and advise employees to help them achieve their plans.
Managers still adjust employee compensation once a year, but have much more discretion than before over how to allocate their budget. Adobe wants its managers to feel as if they’re running their own businesses, and take full responsibility, rather than fitting in with a pre-defined system.
One clear advantage of the new system is that it’s simpler – the traditional performance review annually ate up an astonishing 80,000 hours, which is 40 work-years.
The main benefit, however, is that employees are happier, feel their managers listen to them more, and are less likely to leave. Voluntary attrition is down 30% since the new system was put in place.
But what about weeding out the poor performers? If people aren’t ranked, how do you ensure that people meet expectations?
The new system of closer contact and more frequent check-ins actually makes that process more efficient, Adobe says. Since the new system was introduced, involuntary departures have increased by 50%. Rather than putting off tough conversations until the next year’s performance review, managers have regular opportunities to share what’s really on their minds, and issues are highlighted more quickly.