The Real Impact of Eliminating Performance Ratings

 

In recent years, there has been a steady re-look being by many larger organizations about how employees are rated. Mind you, this is not wholly unexpected. After all, we’ve seen many education systems moving away from a system of forced ratings to a more gelatinous version of soft-grades that focused on projects instead of examinations. The theory, from the education perspective at least, was that if you evaluated students on something that was actually tangible and useful in the world, there was a higher likelihood that they would understand concepts instead of relying on rote memory and would emerge as better citizens and workers when they got older.

There’s some truth to this and as a result, many companies, particularly in the consulting and technology fields started to adapt to this millennial mindset and move toward a system of frequent check-ins and discussions that effectively took the place of appraisals. They also issued compensatory rewards on a more frequent basis in line with hitting certain development or project goals at interim points of the year.

And yet, a 2017 study by CEB found a 10% decrease in employee engagement and performance in companies that had removed annual appraisals and ratings. This sent shockwaves through many a managerial consultant. Was this proof that this “enlightened” approach was perhaps wrong?

We All Know Why People Hate Performance Appraisals

There is not a single person out there who doesn’t have a complaint about the annual PA. In many companies, the PA itself is guided by KPIs that are poorly set out, not adjusted during the year or are overly vague. In other instances, we can see ratings are highly weighed down by either recency bias or even personal bias. In yet other instances, candid conversations about performance are kicked down the road by managers until the PA. Even then, many managers still fail to go through the unpleasant process of actually being honest to their teams.

So, we can say that even in companies that have well set-out procedures and good performance management systems and software, the PA and rating system invariably goes awry in one way or another. Managers hate having to take a week or two out of their year to have these highly stressful conversations.  Employees hate having to go through 30 minutes or an hour of equally stressful conversations that invariably end up leading them to get a lower pay raise than they deserve, yadda, yadda, yadda.

So, we can all agree that the current system of performance appraisals should be burnt to the ground, so that it can never rear its ugly head again…. right?

Umm…Not So Fast

The CEB study quickly put the brakes on that thinking in the sense of demonstrating that eliminating ratings and the PA wasn’t a uniformly good idea. It mentioned that managers often became less systematic in having discussions with their teams, still assigned overly vague KPI’s assigned to performance, and created a whole new set of problems in figuring out how to transparently reward employees.

Ultimately, it’s fair to say that old ways do give people some level of comfort. After all, without the sophisticated compensation management software and tools that we have today, the old system of rating employees was always going to be less than optimal.

Yet even in that sub-optimal scenario, ratings did give team members something to hold onto. The fact that a number was there to pass final judgement on an employee gave both the team member and their manager a justification to work toward their issues. And for what it’s worth, distilling performance down to a numeric scale does create transparency when it comes to pay increases.

Finding a Middle Ground

Ultimately, the theory behind eliminating appraisals and ratings probably needed to include some kind of balance. There are age-old truths that still exist. In fact, it’s interesting to note that many business schools have long used a range-based scale (e.g.: Group 1 is the top 10%, Group 2 is the middle 65% and Group 3 is the bottom 25%). Many of the most progressive grade schools still use a 1-3 or 1-5 rating based on exceeding competencies, meeting competencies or achievement below minimum competency.

Similarly, eliminating the PA and ratings should never have been used to excuse managers from having difficult conversations with employees. This is even before we remember that fast-growing companies often fail to maintain discipline in undertaking regular check-ins when everyone is busily chasing targets.

Ultimately, removing the PA and ratings can work, but it depends on the organization not simply moving from “Animal Farm” to “Lord of the Flies”. There has to be a happy medium. Here are some suggestions on how to achieve that:

1)         Quarterly check-ins or reports can be used as replacements for PA’s. But these should be more simplified at how they approach things and should be a genuine opportunity to do quality coaching

2)         Organizations need to be smart in teaching their managers how to do continuous coaching. Often times, managers move up the ranks not because of their leadership skills but rather their functional skills. As a result, training on how to coach needs to be a continuous focus of the talent team in any organization

3)         A simple 1-3 rating system can work fine in terms of at least giving employees the grounding that there is some kind of quantitative rating system there.

4)         Compensation systems need to become more transparent than ever. This is where the problems really come in considering compensation standards have always been a point of pain for both employee and company. Equally, as labour has become scarcer, importing new employees from another company often throws internal compensation standards out of whack. As such, a compensation management system that enables the company to quantify skill development and great interim performance is something that every company should look at extra carefully.

Ultimately, we have to recognize that while the “old ways” of running our business do need to be revamped, there are many good lessons from those same systems that can be immensely useful. Hopefully, by doing so, talent professionals can find ways to cater to a feedback-hungry talent base while taking the best of the PA system that has been prevalent for so long.

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