Even before the landmark publication of In Search of Excellence in 1982, bosses realized that operational excellence gets accomplished through dedicated employees. Yet, to this day, many organizations stifle high performance through the annual performance evaluation process for each employee. This problem is two-fold, and the solution is in every organization's grasp, but it requires a changed approach to engaging employees.
The two-fold problem, as I see it, is
- the annual performance review concept and process, and
- the pay-for-performance compensation system.
In recent years, this topic has been addressed in various forms by publications such as The Wall Street Journal, Harvard Business Review, and The Huffington Post that run the gamut from financial/business to academic and popular news. I will address the two-fold problem in this column by explaining what creates the challenges, providing supporting data, and then concluding with the solution that an increasing number of organizations are adopting. First, permit me to share a bit of my personal history and early appreciation of the basis for the two-fold problem.
Around 1998, we made the decision to restructure the Baldrige Program staff into self-managed teams. We stumbled in our early attempts, created too many matrixed teams, and quickly became a learning organization. However, right from the start, we recognized a significant barrier to the development of high-performance teams. It was our annual process for employee performance reviews. Everything about it was wrong. With self-managed teams, there were only two bosses, the program director and the program deputy director; while the two of us were responsible for performance, we supervised the employees only on paper, as they were self-managed. We could not oversee individual performance without interfering with empowered teams. Furthermore, our parent organization's pay-for-performance system, based on a rank-order list of all employees, forced us to pit one employee against another on our teams. This encouraged competition rather than cooperation.
At the outset, we tried to reorient the pay-for-performance system to meet our needs by suggesting that we put all our pay increases at risk, based on the accomplishment of specified goals, with the potential for exceeding our allotted pay pool if we reached stretch goals. However, since our parent organization's system was embedded in Federal Register-mandated processes, we could not adapt the system to meet our needs. Although we realized then that rating and ranking employees on an annual basis was counterproductive to mission accomplishment, I did not realize how significant this barrier was until I learned more about the problems, had the opportunity to study the data that supported our early thoughts, and, more recently, observed the solution that a growing number of organizations are adopting.
Annual Performance Review
In 2008, Samuel Culbert, a professor of management at UCLA, wrote an article in The Wall Street Journal entitled "Get Rid of the Performance Review!" In it he outlined numerous problems associated with the annual employee performance review, including the following:
- It is a "one-side-accountable, boss-administered review." It sets up an unintended environment of confrontation and intimidation rather than cooperation, preserving the boss' authority and power advantage.
- The review generally involves assessment against a generic checklist or performance agreement. Competent employees in different positions have different responsibilities, and they do not fit the same generic checklist. Indeed, recently, Scott McIntyre of PricewaterhouseCoopers talked about two major classes of contributors in his consulting environment, performers and producers. The performers are the people "who bring in money every day," and the producers are the "people who produce big ideas ... who are true visionaries," explained McIntyre. Both types of people are critical to business success, yet performance evaluations are frequently skewed toward the responsibilities and accomplishments of performers, who generate daily revenue and customer engagement.
- Frequently, performance reviews are political, and they are definitely subjective, thus creating a further boss-employee schism.
- Employees are hesitant to share their development needs and desires with their boss. This is so because sharing needs for improvement could come back to haunt the employee by being recorded as a weakness at performance review time. As a result, an opportunity is lost for the employee to learn and for the organization to benefit.
- Instead of creating an employee-boss partnership for the benefit of all stakeholders, the review sets up a confrontational situation. While personal improvement is each employee's responsibility, a trusting relationship allows for mutual commitment to the improvement.
There are other problems with the annual performance review. In addition to the review process setting up the boss as judge and jury, research from the CEB (formerly known as the Corporate Executive Board) shows that individual performance ratings have zero correlation with actual business results. The CEB reports that recent neuroscience research shows that the dynamic of the review puts employees so much on the defensive that the process results in worse performance, even for high performers. Because of organizational requirements or fear of grievances, the review may involve a scripted conversation in which the majority of employees are told they "met expectations." (This despite a year of extremely dedicated work and project success!)
Often, setting goals once a year, maybe with a mid-year check-in, results in agreements that are out of sync with the organization's business cycle. Furthermore, commitment to the agreement can discourage the employee from setting even bigger or revised goals based on changes or new opportunities discovered during the year.
Finally, due to the very nature of performance plans, setting them at the beginning of the year focuses employee commitments on activities rather than outcomes. Yet outcomes are what matter for organizational and personal accomplishment. This is well illustrated by the 2009 Dilbert cartoon where Dilbert's boss tells him at his annual appraisal that he needs to get better at anticipating problems (an activity), and he responds, "If I could anticipate problems, I wouldn't have agreed to work for you."
A pay-for-performance system is widely used to "equitably" distribute the assigned allotment for pay increases and bonuses. As I described above, its focus on individual performance encourages competition rather than collaboration. For one employee to get more than the average, another employee has to get less than the average. No employee wants to be the person getting less than the average.
The system is further exacerbated by the forced distribution curves that many organizations use. This forced distribution generally results in more than 40 percent of employees being relegated to a middle group of performers—no matter how significant their accomplishments. General Electric (GE) was known for many years for its "rank and yank" system. Managers were given a rigid scale for evaluating employees, and the bottom ten percent of employees got fired. While GE has abandoned this system, according to BloombergBusiness, many companies still use some type of regimented system to determine pay, promotion, and firings. Is this a road to improving overall company performance or to instilling internal suboptimization through competition?
Perhaps the most damaging criticism of pay for performance is that in the end it frequently isn't true. Budget shortfalls, lack of profitability, or growth below targets limits the amount of pay raise and bonus money an organization has available. With a rigid rating system, all employees are rated lower than they deserve in order to match funds availability. Admitting this during an employee review could lead to grievances and, in any case, almost certainly serves as a disincentive to improve performance in the next cycle.
According to Dan Heckle, former vice president of human resources for The Gap , the company's managers put 130,000 hours into annual reviews at a cost of $3 million in 2014. In a recent survey by CEB, managers said they spend an average of 210 hours a year on performance management and that employees each spend 40 hours a year. In addition, a CEB representative stated that 77 percent of human resources executives believe performance reviews don't accurately reflect employees' contributions. The same study found nine out of ten managers dissatisfied with how their companies conduct annual reviews, with almost nine out of ten saying the process does not yield accurate information. In a 2014 survey conducted by the Society for Human Resource Management, almost 75 percent of respondents gave their own companies grades between a "C" and a "B" on their handling of annual reviews.
The good news is that the CEB reports that 12 percent of Fortune 1000 companies have gotten rid of annual rankings, and many are doing away with annual performance reviews completely because they are not appropriate to today's workplace. According to Fast Company, half of the Fortune 1000 companies are expected to eliminate rankings and numeric ratings in the next three years.
The obvious answer is that we need to build a partnership between bosses/managers and employees. We also need to encourage collaboration and focus on common goals in organizations—goals that benefit the organization and engage employees for the long term through a sense of accomplishment and personal growth.
High-performing organizations are eliminating annual performance reviews and numeric ratings. In their place are more frequent coaching sessions and check-ins. According to BetterWorks, employees who check in regularly on their progress toward goals are up to 24 times more likely to achieve them.
Check-ins should include a focus on strengths and growth opportunities for the employee and the organization to reach the next level of performance. Constructive feedback should focus on things the employee is likely to change. The feedback should avoid discussions of personality traits.
Check-ins are designed to be frequent communications that are conversational, not authoritarian. There are no forms. They build partnerships. They allow both the boss and employee to grow through open dialog and mutual commitment.
According to Culbert, the boss becomes a "guide, coach, tutor" who provides oversight and assistance so that the boss and employee can reach jointly accountable goals.
What about compensation and bonuses? I would recommend that they be based on achieving and exceeding organization-wide and business or work-unit goals. In the evaluation, a part of achieving unit goals would be how well the unit contributes to the success of its internal customers and suppliers and how well it collaborates with them. When appropriate, individual bonuses would also be given for unique personal accomplishments.
How Is the Solution Embedded in the Baldrige Framework?
The solution is totally compatible with the Baldrige Excellence Framework (including the Criteria for Performance Excellence) for managing organizational performance. Here are some of the touch points:
- The definition of performance excellence, which we learned early on from Baldrige Award recipients, has to include personal and organizational learning.
- The Baldrige core concepts/values of systems perspective and valuing people address cooperation and inclusion.
- The Criteria items 5.2 and 7.3 address performance management and workforce development, in a process that encourages workforce engagement.
- The Baldrige Criteria scoring guidelines are always aimed at achieving the next-higher level of performance.
- The Baldrige Criteria scoring guidelines are always aimed at achieving the next-higher level of performance.
Of course, a key premise for this whole model of workforce performance excellence is smart hiring at the outset. But that is the subject for another column!
Baldrige Excellence Framework
Baldrige Excellence Builder
If You Want to Build Trust, Collect Trash (February/March 2015)
People, Process, and Plentiful Passion (April/May 2015)
It Is 2015. Is Your CEO Thinking about Current Issues? (June/July 2015)
Leadership Behaviors That Count (and Can Benefit All Organizations) (August/September)
Effective Communication Requires Caring, Explaining, Listening, and Living the Role (October/November)
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