Harvard Business Review Performance Management – Summary. Hated by bosses and subordinates alike, traditional performance appraisals have been abandoned by more than a third of US workers. The biggest limitation of the annual review, the authors argue, is its emphasis on holding employees accountable for what they did last year, at the expense of improving performance now and in the future. That’s why many organizations are moving to more frequent, development-focused conversations between managers and employees. The authors explain how performance management has evolved over the decades and why current thinking has shifted: (1) Today’s tight labor market creates pressure to keep employees happy and groom them for development. (2) The rapidly changing business environment requires agility, which argues for regular check-ins with employees. (3) Prioritizing improvement over accountability promotes teamwork. Some companies worry that being numberless could make it harder to align individual and organizational goals, award merit raises, identify poor performers and counter claims of discrimination—though traditional appraisals haven’t solved those problems. Other firms are trying hybrid approaches – for example, giving employees performance ratings on multiple dimensions, coupled with regular developmental feedback.
By emphasizing individual accountability for past results, traditional appraisals provide shorthand for improving current performance and developing talent for the future. This can affect long-term competitiveness.
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To better support employee development, many organizations are dropping or radically changing their annual appraisal systems in favor of giving people less formal, more frequent feedback that follows the natural cycle of work.
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The shift is not just a fad – real business needs to drive it. Support at the top is critical, though. Some firms that have struggled to go completely without ratings, try a “third way”: assigning multiple ratings several times a year to encourage the growth of employees.
When Brian Jensen told his audience of HR executives that ColorCon was no longer bothering with annual reviews, they were horrified. This was in 2002, during his tenure as the head of global human resources of the drug. In his presentation at the Wharton School, Jensen explained that Colorcon had found a more effective way to reinforce desired behaviors and management performance: supervisors giving people instant feedback, tying it to individuals’ goals, and handing out small weekly bonuses to employees they saw Do good things.
At that time, the idea of abandoning the traditional evaluation process – and everything related to it – seemed heretical. But now, according to some estimates, more than 1/3 of US it. Companies do just that. From Silicon Valley to New York, and in offices around the world, firms are replacing annual reviews with frequent, informal check-ins between managers and employees.
As you might expect, technology companies such as Adobe, Juniper Systems, Dell, Microsoft and IBM have led the way. Yet they have been joined by a number of professional services firms (Deloitte, Accenture, PwC), early adopters in other industries (Gap, Lear, OppenheimerFunds), and even General Electric, the longtime role model for traditional appraisal.
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Without question, rethinking performance management is at the top of many executive teams’ agendas, but what drove the change in this direction? Many reasons. In a recent article for People + Strategy, a Deloitte manager referred to the review process as “an investment of 1.8 million hours across the company that didn’t fit our business needs anymore.” One Washington Post business writer called it a “rite of corporate kabuki” that stifles creativity, generates mountains of paperwork and serves no real purpose. Others have described annual reviews as a turn-of-the-century practice and blame them for a lack of collaboration and innovation. Employers are also finally recognizing that both supervisors and subordinates despise the appraisal process—a perennial problem that feels more urgent now that the labor market is picking up and concerns about retention have returned.
But the biggest limitation of annual reviews—and, we’ve noticed, the main reason more and more companies are abandoning them—is this: with their heavy emphasis on financial rewards and punishments and their end-of-year structure, they hold people accountable. for past behavior at the expense of improving current performance and grooming talent for the future, both of which are critical to organizations’ long-term survival. In contrast, regular conversations about performance and development shift the focus to building the workforce your organization needs to be competitive both today and years from now. Business researcher Josh Bersin estimates that about 70% of multinational companies are moving to this model, even if they haven’t arrived quite yet.
The tension between the traditional and newer approaches stems from a long-running dispute about managing people: Do you “get what you get” when you hire your employees? Should you focus mainly on motivating the strong with money and getting rid of the weak ones? Or are employees malleable? Can you change the way they perform through effective coaching and management and intrinsic rewards such as personal growth and a sense of progress at work?
With traditional appraisals, the pendulum has swung too far toward the former, more transactional view of performance, which has become difficult to support in an era of low inflation and tiny merit-paying budgets. Those who still hold this view rail against the recent emphasis on improvement and growth over accountability. But this new perspective is unlikely to be a flash in the pan because, as we’ll discuss, it’s driven by business needs, not imposed by HR.
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Historical and economic context has played a large role in the evolution of performance management over the decades. When human capital was abundant, the focus was on which people to let go, who to keep and who to reward—and for those purposes, traditional appraisals (with their emphasis on individual accountability) worked pretty well. But when talent was in shorter supply, as it is now, developing people became a greater concern – and organizations had to find new ways to meet this need.
Appraisals can be traced back to the US. After World War II, about 60% of US Although seniority rules determined pay increases and promotions for unionized workers, strong merit scores meant good promotion prospects for managers. at least initially
And then a severe lack of managerial talent caused a shift in organizational priorities: companies began using appraisals to develop employees into supervisors, and especially managers into executives. In a famous 1957 article, social psychologist Douglas McGregor argued that subordinates should, with feedback from the boss, help set their performance goals and assess themselves – a process that would build on their strengths and potential. The “Theory I” approach to management – he coined the term later on – assumed that employees want to perform well and would do so if they were properly supported. (“Theory X” assumed that you had to motivate people with material rewards and punishments.) McGregor noted one drawback of the approach he advocated: Doing it right would take managers several days per subordinate each year.
By the early 1960s, organizations had become so focused on developing future talent that many observers thought that tracking past performance had fallen by the wayside. Part of the problem was that supervisors were reluctant to distinguish good performers from bad ones. One study, for example, found that 98% of federal government employees received “satisfactory” ratings, while only 2% received one of the other two results: “unsatisfactory” or “outstanding.” After conducting a well-publicized experiment in 1964, General Electric found that it was best to split the review process into separate discussions about accountability and development, because of the conflict between them. Other companies followed suit.
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In the 1970s, however, a shift began. Inflation rates shot up, and merit-based payment took center stage in the review process. At this time, the annual wage increases really important. Supervisors often have discretion to give raises of 20% or more to strong performers, to distinguish them from the sea of employees who receive basic cost-of-living raises, and receiving any increase represents a substantial pay cut. With the stakes so high—and with antidiscrimination laws so recently on the books—the pressure was on to award pay more objectively. As a result, accountability became a higher priority than development for many organizations.
First, Jack Welch became CEO of General Electric in 1981. To deal with the long-standing concern that supervisors failed to establish real differences in performance, Welch championed the forced-ranking system – another military creation. Although the US Equating performance with individuals’ inherent capabilities (and largely ignoring their potential to grow), Welch divides his workforce into “A” players, who must be rewarded; “B” players, who should be accommodated; and “C” players, who should be dismissed. In this system, development was reserved for the “A” players – the high-potentials chosen to advance in senior positions.
Second, 1993 legislation limited the tax deductibility of executive salaries to $1 million but exempted performance-based pay. This led to a rise in outcome-based bonuses for corporate leaders—a change that trickled down to frontline managers and even hourly employees—and organizations relied even more on the appraisal process to assess merit.
Third, McKinsey’s war for
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