Source: The Economist
Employers are modifying, not abolishing them
IN RECENT months the business press has reverberated with cheers for the end of performance reviews. “Performance reviews are getting sacked,” crows the BBC. They “will soon be over for all of us”, rejoices the Financial Times. Such celebration is hardly surprising. Kevin Murphy, a performance-review guru at Colorado State University, sums up the general feeling about them: an “expensive and complex way of making people unhappy”. The problem is, they are not in fact being scrapped.
A survey in 2013 by Mercer, a consulting firm, of 1,000 employers in more than 50 countries reported that 94% of them undertook formal reviews of workers’ performance each year and 95% set individual goals for employees; 89% calculated an overall score for each worker and linked pay to these ratings. It is true that a number of big companies have announced that they are abandoning annual performance reviews; this month IBM did so, joining Accenture, Adobe, Deloitte, GE, Microsoft and Netflix. In reality, though, they are no more getting rid of performance reviews than a person who shifts from drinking whisky to wine is becoming teetotal. Employee reviews are being modified, not abolished, and not necessarily for the better.
Four changes are proving particularly popular. First, companies are getting rid of “ranking and yanking”, in which those with the lowest scores each year are sacked. GE, which practised this system with particular enthusiasm under its previous boss, Jack Welch, has now dropped it. Second, annual reviews are being replaced with more frequent ones—quarterly, or even weekly. Third, pay reviews and performance reviews are being separated. And fourth, some performance reviews are turning into performance “previews”, focusing more on discovering and developing employees’ potential than on rating their past work.
Is this new system of employee reviews any better than the old? There are good arguments for getting rid of ranking and yanking: the ritualistic decimation of the workforce on the basis of a single number routinely paralysed businesses in the run-up to each year’s reviews, killing creativity and setting workers against each other. Thereafter the picture is murkier.
Some of the arguments being advanced for the new-style reviews are hoopla. Deloitte says its new system is about “speed, agility, one-size-fits-one and constant learning”. The consulting firm’s employees sit down once a week with their “team leaders”. But good managers should give their charges constant feedback anyway. Adding another regular meeting to everyone’s calendar sounds like a formula for time-wasting. “One-size-fits-one” assessment is meaningless: a vital part of assessing people is measuring them against their peers—particularly when you have to think about who to promote or how to divvy out bonuses. It sounds nice to focus on people’s potential rather than their past performance. But how do you assess the former without considering the latter? And if decisions about pay are not based on performance, what will they be based on?
Some of the arguments are not just hoopla, but dangerous hoopla. Social scientists have repeatedly demonstrated that performance reviews are distorted by two things: office politics and grade inflation. Managers are susceptible to lobbying. They also have an incentive to put a positive spin on things, often against their own better judgment, because in assessing their subordinates’ performance they are, to a large extent, evaluating their own ability to manage. Deliver a series of damning verdicts on your team and you inevitably raise a red flag about your own leadership. But the more subjective the reviewing process becomes, the more powerful these distortions are likely to be: “instant” feedback sessions can easily become orgies of mutual praise that do not teach anybody anything.
For purists, such as Samuel Culbert of UCLA’s Anderson School of Management, this is proof that performance reviews are unsalvageable: better to get rid of them entirely than to replace one imperfect system with another. In fact there are good reasons why almost all organisations this side of Utopia use employee reviews of one type or another.
Insurance against lawsuits
Companies are always having to make difficult decisions, whether allocating limited resources (such as promotions and bonuses) or sacking people if they hold the organisation back or if the market turns down. It is preferable to make such decisions on the back of robust criteria rather than on the basis of managerial whim. Increasingly, firms also have to defend those decisions in the courts against people who feel hard done by. Firms that embrace more touchy-feely assessment systems, let alone get rid of them entirely, may be setting themselves up for legal nightmares.
Annual performance reviews can certainly be improved. Companies need to put more effort into guarding the guards—training them in how to conduct reviews and holding them accountable if they are overgenerous or otherwise sloppy. Google wisely encourages its managers to review each other’s assessments. Bosses also need to be more rigorous about acting on what they discover: there is no point in amassing information about weak performers if you only act on it in a crisis.
However, provided they are carried out consistently, rationally and fairly, and supplemented with more frequent feedback, annual performance reviews have many virtues. They provide a way of measuring an employee’s development over time (it is odd that some of those who criticise annual feedback for being too slow also criticise companies for being too short-term). They also provide a way of measuring all a company’s employees against each other rather than just their immediate colleagues. Bill Clinton once said that the best approach to affirmative action was “mend it, don’t end it”. The same is true of annual performance reviews.