Much has been made recently of the movement away from performance review systems. Last year The New York Times expressed in wonder that "Mc" In July, consulting giant Deloitte "banned" performance reviews, and just recently fellow heavyweight Accenture made the headlines by announcing that they are In July, consulting giant Deloitte doing away with their performance review system . What a wonderful time for those looking to fly under the radar in corporate America! Time to go to work and go through the motions: nobody looking over your shoulder anymore, no more consequences for taking it easy at work, nothing but easy living. For once it's easy to feel sorry for the hardworking overachiever instead of the underdog. Imagine wanting to improve your performance through a formal system, but nope, no feedback for them either.
Thankfully this isn't really the case, as I'll explain below, but it is no wonder that these headlines are so catchy when you look into how people feel about performance reviews. Research has shown that 95% of managers surveyed are dissatisfied with their performance review systems. There is the same feeling amongst employees; 59% feel reviews are not worth the time invested and 56% said they do not receive feedback on how to improve. In addition, almost 90% of human resources heads report that their performance review systems do not yield accurate information (1). Not to mention the stress they engender. According to The Onion even the Pope gets nervous when it comes time for his annual review.
What these companies are actually doing is not eliminating, but revamping and repackaging their approach to employee reviews. Of particular note is that each of these companies is transitioning away from an annual review based on forced ranking, or stack ranking, of employees. Former General Electric CEO Jack Welch was the leading advocate of these types of systems where employees are forced into a distribution that turns performance feedback into a relative standard where you are judged in comparison to your fellow employees as opposed to evaluated against an absolute standard. Think of it as being graded on a curve except that instead of your test grade being on the line it was your livelihood. Literally. Welch's position was that the bottom 10% of performers in the rankings should be fired. This is why these systems are often derisively referred to as "Rank and Yank".
Forced rank systems became popular because it can help make the investors happy. It signals that you are taking a hard line on performance. Your employees should be motivated to keep their jobs so they work harder to make sure they aren't in that bottom tier. It can create a direct impact on the bottom line if you replace 10% if your workforce with cheaper labor. This type of myopic view of performance is great for Wall Street where your value as an organization is often decided by your next quarterly earnings statement, but what about the impact on your employees? What happens to your morale when you see one in ten of your coworkers disappear year after year? Does this engender commitment to the company when they have clearly demonstrated their commitment to employees?
One of the big impacts is that employees quickly figure out how to game the system. Forced ranking systems often end up looking like a workplace setting of the old joke about the two hikers who encounter an enraged bear in the woods. Both hikers freeze for a moment, but then the first hiker takes off his backpack and pulls out a pair of running shoes. The second hiker looks at him incredulously and says "What are you doing? You can't out run a bear!" To which the first hiker replies "I know, but I don't have to outrun the bear, I only need to outrun you!" Since performance is relative it encourages employees to not necessarily be more productive, but rather to just make sure they look better than their coworkers. In an environment like Microsoft's that relies on innovation and creativity this can be particularly damaging. Employees need to be focused on how can we be better than the competition, not on how can I look better than my coworkers. Also, it can discourage top performers from wanting to work together. What happens if you assemble a team of 10 superstars? Someone still has to be in that bottom 10 percent.
Moving away from forced rankings is a great first step for Microsoft, Deloitte, and Accenture. From the information available it doesn't look like they are making the radical shift in their processes that the headlines would have you believe. For example, Deloitte is refocusing their system to localize the feedback as much as possible through increased frequency, focusing each part of the evaluation on a single construct, and ensuring that those evaluating performance are the ones in best position to observe the behavior. In my next post I will discuss why these are good ideas, as well as what other elements should be considered to create an effective and useful evaluation system.