The Death of the Performance Appraisal – Redefining Performance Management

Over the last few years as we have studied the market for performance management systems, we have talked with dozens of HR executives and managers about their Performance Managementperformance management process.  In our discussions we find that organizations struggle mightily with the right way to craft the precise process which will best reflect their organization’s goals, culture, and desired management style.  Performance management systems, which support this process, often constrain or rush these decisions, forcing organizations to design a process around the system features and capabilities.

I believe the rapid growth of these systems is creating quite a stress on this market, and in fact we believe a major shift is taking place.  Performance management systems (you know the players) revolve around automating the seven core processes which companies use:  goal development, goal alignment, self-assessment, manager assessment, 360 assessment, competency development, and development planning.  But they don’t really help organizations decide how the process itself will work, which is ultimately the most important issue of all.

 

Consider what performance management is designed to do.  The principle of such a business process has three goals: 

1. Employee evaluation:  First, to create standardized and equitable ratings and rankings to facilitate compensation decisions, promotions, succession planning, and the ability to coach people out of the business.
2. Alignment:  Second, to create consistent goals which align employees with managers and business units and align these goals with the organization’s overall priorities.  These goals also help employees themselves stay focused.
3. Coaching and development:  Third, and perhaps most importantly (which our research supports), this process enables managers and other employees to provide coaching and development in a structured process which can be supported by the L&D organization, leadership development, and other processes in the organization.

Which of these is the most important and how do you design a process that works?  We all know that most performance appraisals do not work – our research shows that onlye 35% of organizations have such an enteprise-wide process and among these fewer than 40% of employees find the process valuable and fewer than 45% of HR managers find the process valuable.  I cannot remember more than one performance appraisal in my entire career (30+ years) which was valuable.

Well one important fact to consider:  our High Impact Talent Management® research found that in fact the business process with the highest overall business impact is coaching.  Consider the following findings from this research (more than 800 large organizations participated):

1. By far the highest-impact process in organizations is coaching.  Coaching generated a 150% greater return than performance assessment, for example, and almost a 200% greater return than “pay-for-performance” processes.  We will explain what this means below. 
2. Developing high-value, unique, and job-aligned competencies which are maintained regularly was the second ranked high-impact process in performance management.  This process of identifying critical competencies and using these competencies to assess and improve performance clearly has very high value.
3. Goal development and goal alignment formed the third highest impact process, supporting the need to gain agreement on work plans and align employees with organizational goals.
4. The fourth highest-impact process in performance management was development planning – creating clear and consistent development plans (this was almost tied with goal development in fact).
5. Performance assessment and linking compensation to performance ratings showed returns as well, but far below the other four above.

Unfortunately, most companies focus on the bottom of these – assessment and linkage to compensation.  Why?  Because this is a compliance-related issue and it is the “common wisdom.”  Well our research (and my opinion) shows that in fact the other four are far more important if you want the process to drive business impact.

Consider the following:  performance management is management.  It is not an annual process, it sets the stage for every management interaction which takes place in your organization.  Whatever process you design will reflect itself in the behaviors and activities of leaders, managers, and employees.

GE, for example, which popularized the concept of the 20/70/10 model, establishes strict rules to “fire the bottom 10%” in every workgroup.  This seems to work for GE, which is an enormous, highly decentralized conglomerate, but does it work for your company in your industry?  I would venture to say no.  What works for GE is likely not to work in your company, unless you are in a very similar business size, structure, and industry as GE.

Rather, our research clearly shows that there is new approach needed – rather than use the “competitive evaluation” model of performance management (where managers and employees are forced to rank and rate people), we find organizations are shifting to what we call the “coaching and development” model of performance management (where leaders and managers are trained to assess people against competencies, identify strengths and weaknesses, and take actions to improve performance).  We have written extensively about the concept of “manager as coach” – and I firmly believe this is by far the best model in nearly every organization I speak with.

How do you do this?  What does it mean?  Well we are developing an in-depth bulletin on this topic, but the main message now is that organizations should design a process which makes evaluation the “last” thing you do, not the “first.”

Fig 1:  The Two Models for Performance Management

 

A final point on this topic.  
 

Do not let the performance management system (whether it be Authoria, SuccessFactors, Halogen, or any other tool) drive your decisions about how you want managers to manage.  These systems are still in their early stages, and most of them were built to automate the forms and data entry part of performance management.  Only some of the newest systems (Taleo’s and Halogen’s show great promise in this regard) are able to facilitate and assist in the coaching and development process.