The future of performance management: A critical review of current practices and innovations

Performance management systems can foster positive change but also brings pitfalls.

In a recent article, Deloitte describe how they changed their performance management system to an innovative design that was more agile and lean than their previous system (Buckingham & Goodall, 2015). The old system involved a 360-degree performance appraisal system whereby evaluations were garnered from management and peers to derive a year-end rating for each employee. The old procedure involved lengthy meetings and several personnel. Deloitte found that the performance appraisal system was taking close two million hours per year! Moreover, they found that the ratings were not accurate in that rater bias crept into the ratings (Buckingham & Goodall, 2015).

Deloitte realigned their system based on scientific evidence on performance ratings (Mount, Scullen, & Goff, 2000). In the study by Mount and colleagues, 4,492 managers received ratings on a several performance dimensions. The managers were evaluated by two managers, two peers, and two subordinates. The study found that a large amount of the variance in ratings (62%) were due to rater bias and difference in perception of performance. In fact, actual performance accounted for only 21% of the variance in ratings. This research shows how performance ratings are not reliable sources of performance and are mainly due to rater idiosyncrasies. The research showed that performance ratings reflected more about the rater than they did about the ‘ratee’.

Innovation in performance management systems encompasses teams and leaders.

Deloitte, in recognizing the limitations of previous systems and rater bias, implemented a new solution with the aim of generating more accurate ratings of each employee. Deloitte built their new system based on research conducted by Gallup on characteristics of high performing teams. Gallup asked teams a series of questions and found that the differences between high and low-performing teams was based on a small group of items. The most important one was, “At work, I have the opportunity to do what I do best every day.” Those teams whose members chose ‘strongly agree’ were more likely to earn high customer ratings, low turnover and to be more productive (Buckingham & Goodall, 2015).

Deloitte conducted a similar survey and found one item that differentiated high performing teams from low – “I have the chance to use my strengths every day.” In dealing with rater idiosyncrasy, Deloitte decided to focus on ratings from one person – the supervisor -  and rather than ask them to rate the subordinate they asked them what they would do with each of subordinate. To quote Buckingham and Goodall (2015), “we ask leaders what they’d do with their team members, not what they think of them.” Deloitte have now moved from an emphasis on ratings to an emphasis on providing rich descriptions of each team member (Buckingham & Goodall, 2015). Deloitte changed from issuing performance ratings to focusing on performance improvement by implementing weekly check-ins, quarterly or end-of-project feedback, and annual compensation decisions. The annual meeting merely formalizes what has been discussed all year, and hence can be completed much more quickly. Team leaders “set expectations for the upcoming week, review priorities, comment on recent work, and provide course correction, coaching, or important new information.”

Other companies have also eschewed the traditional annual performance evaluation. Organizations like Microsoft, Goldman Sachs and Accenture have changed or discarded their annual review in favor of ongoing feedback (Buckingham & Goodall, 2015).

Do these new innovations work? Scientific opinions differ.

Although organizations are streamlining their performance management procedures, the major issue is in deciding whether they are effective in assessment of employees. It seems that discussing plans with each subordinate is more effective than writing a detailed performance appraisal so it is understandable that organizations are jumping on the band wagon of these new innovations. Researchers in Industrial/Organizational Psychology have criticized these new fads in performance management and have called for better scientific principles in understanding what works in appraisal (Rotolo et al., 2018).

There has been a debate concerning whether eliminating performance ratings is beneficial or deleterious to organizations (Adler et al., 2015). Problems with rater bias, failure to develop effective benchmarks for evaluation, and the weak relationship between ratee performance and ratings suggest it is time to eliminate ratings. However, critics of this proposal believe ratings still have many merits for improving organizations and scholars and practitioners need to focus on improving performance management systems rather than eliminating them. Proponents for performance appraisal believe that it is too easy to give up the progress that has been made (Adler et al., 215). 

The issue can be solved through structure, relationships, and insights from psychology.

A recent review of the literature by the Center for Evidence-Based management focused on the pros and cons of performance management (CEBMA, 2016). Their review revealed several key findings.

First, when appraising employees, it is not the feedback that affects performance but employees’ reactions to feedback. These psychology reactions determine the extent to which employees use the information to improve their performance (Murphy & Cleveland, 1995). When an employee reacts negatively to feedback, they are less likely to improve and will feel disgruntled. One way in which to deal with this is for managers to actively engage in conversations with employees following a performance discussion. This is similar to the system initiated by Deloitte. However, rather than abandon the annual performance evaluation, there is an ongoing discussion with employees that helps strengthen relationships between management and employees (CEBMA, 2016).

Second, based on their review, CEBMA also recommend organizations use external reviewers to assess performance because this tends to motivate employees to do well rather than the use of self-ratings. This suggestion is based on a meta-analysis that showed self-set goals are less effective than assigned goals (Harkins & Lowe, 2000). People have a need to know how they are perceived by their employer.

Third, there is also a need for employees to have a voice and so conversations between managers and subordinates must be two-way when developing targets (Colquitt et al., 2001). The relationship between the manager and subordinate do matter so having frequent conversations is appropriate rather than just having an annual review.

Finally, the issue of ratings is also important and research shows that forced distributions tend to be ineffective in reviewing performance. Based on scientific evidence, the CEBMA propose the use of rating scales with more categories (e.g., five rather than three).

Conclusion

Although organizations are jumping on the bandwagon of new and innovative methods of performance management, it is still prudent to focus on the research findings and to utilize scientific principles in developing a performance management system that is effective for the organization.