The End Of Annual Performance Reviews: Are The Alternatives Any Better? by Knowledge@Wharton
When it comes to workplace events that produce resentment and anxiety, few score higher than the big annual performance review. Calls to end this time-consuming and often unproductive practice have gone unheeded — until now. Recently, Adobe, Kelly Services, GE, Deloitte and PwC have ended them, and the rippling out to smaller firms and other sectors appears to be underway. To which many say: good riddance.
“It’s a big change, the extent to which it seems to be happening, and it’s happening broadly,” says Wharton management professor Peter Cappelli, who has researched the usefulness and accuracy of performance reviews. What’s happening now is nothing less than a revolution in performance management systems, he notes, and for companies that take it seriously, “it’s a fundamental change in the way to manage your employees and the relationship with them.”
Annual Performance Reviews
Decades of unhappiness finally gave way in 2014 and 2015 to a quick dive in the annual performance appraisal, says Anna A. Tavis, a clinical associate professor in leadership and human capital management at New York University who has tracked its passing. The traditional annual review with its ranking system essentially sent the message that “here’s your grade for the year, and you can’t do anything about it, and, by the way, there are compensation consequences — that’s where the culture of fear came about, Peter is better than Paul,” says Tavis. “Then you factor in bias or that a manager might not have visibility, or doesn’t remember what 35 or 40 people have done, and there were lots of faults built into the old system.”
To be sure, new systems are coming on line. A survey by leadership advisory firm CEB found that in 2011, only 1% of Fortune 1000 firms were eliminating the annual review. By 2015 that number jumped to 12%. But are better systems and results coming in behind the old? While the traditional annual performance review is surely dying, Cappelli, who is also director of Wharton’s Center for Human Resources, has a wait-and-see attitude about whether employers will really create a different kind of relationship with employees, or end up doing less performance appraisal and replacing it with nothing instead.
“For a lot of companies that are thinking about this change, they are just copying what other companies are doing,” he says. “We will see a lot of false starts on this thing, and then they will discover their relationship with employees is worse off. The thing I would watch is to what extent this is an ideological battle. Is it all about the money, all about rewarding people — that [this is] how things get done, we have to punish the bad employee and fire them? Is it all about the economic incentive? Or is it much more about relationships and developing people and encouraging them to perform better? It’s an ideological divide that has to do with human nature. And to some extent that’s at the heart of this whole issue.”
“It’s a fundamental change in the way to manage your employees and the relationship with them.”–Peter Cappelli
More Job Coach, Less Task Master
Indeed, CEB’s research shows that newer is not necessarily better — at least, not yet. At firms where reviews had been eliminated, measures of employee engagement and performance dropped by 10%, according to CEB’s survey of nearly 10,000 employees in 18 countries. Managers actually spent less time on conversations, and the quality of those conversations declined. Without a scoring system to motivate and give structure, performance management withered. As one manager told CEB: “When I gave someone a low score in the past, I felt responsible for helping them out, now I just don’t feel that I have to spend time doing that anymore.”
There are useful aspects of the annual review well worth saving, according to Wharton management professor Adam Cobb. “One of the trends we’ve seen in the past several decades is the attempt to link pay to performance and less to tenure or seniority or more political factors. There is reasonable evidence that women and non-whites don’t necessarily get the same kind of performance review for the same work,” he notes. “Should we go back to the same system in which pay is based on non-objective things? That’s where we were 40 years ago, and we’ve moved beyond that.”
Some firms are successfully replacing the annual review with something better, says Tavis. Companies like GE and Cisco, for example, prepared carefully for change, and clearly communicated their objectives. The best companies have shifted to conversations with workers that occur much more frequently than once a year, are less focused on the past and more on the future, and involve continuous adjusting of goals. These firms also are giving managers the skills to be coaches, “rather than task masters,” she says. “Getting feedback once a year is totally not serving a purpose,” says Tavis. “It comes as a verdict, a judgment, whereas the intention here is to be course-correcting, to have coaching throughout the year, so at the minimum companies are recommending or requiring managers to hold quarterly conversations and [to develop] more trust and better relationships overall, which obviously becomes a much more collaborative culture in the long run.”
Apps and that Big Brother Feeling
There is one other aspect of the performance management revolution that has become de rigueur, and quite useful. “Now it’s expected that when a performance system goes in, you are going to launch your own app,” says Tavis. And even firms that aren’t developing their own are using apps being developed by others, she says — tools that allow managers to provide real-time feedback to employees, give workers quick access on how to navigate certain situations, and create a record that is more reliable than memory months after the fact.
“Getting feedback once a year is totally not serving a purpose. It comes as a verdict, a judgment, whereas the intention here is to be course-correcting, to have coaching throughout the year.”–Anna A. Tavis
“First of all, it’s a fast and efficient way of communicating between managers and employees, where a manager can enter a couple of points on the app, and if there are touch points it’s all getting documented there,” Tavis notes. “It’s … user-friendly and efficient, people carry their devices with them everywhere, they don’t have to go into the database. There is great tracking capability, and some apps almost have coaching on demand, more real time learning built into them.” If a manager has a question about how to handle, for instance, a difficult conversation with an employee, “that is searchable, that gives you skills on demand, in the moment,” Tavis adds. “Over time, a picture of the employee emerges. They build up to a consistent pattern.”
There are a lot of these apps coming into use, notes Cappelli. “I think in principle it’s a good idea. The devil’s always in the details,” he says. “The GE one allows the option of not just your boss weighing in, but others as well. You could game it — say to a friend ‘give me positive feedback and I’ll give you positive feedback.’ The idea that these apps are alternatives to managers is false.”
By the same token, managers who say that without a ratings system they can’t get a handle on how employees stack up are actually getting a lot more data than they used to, says Tavis. “The performance footprint through all this time that employees are on the app and watched, it’s a lot more data than was available before,” she notes. And now managers at least have the ability to guard against bias — for instance, data supporting the case of women or others who might previously have been getting biased reviews. “So the question will be, if now we have that objective footprint and all sorts of big data talking about this person, is it less biased? Are we more accurate in capturing performance?”
Clearly, the lack of privacy posed by such apps will be a concern, continues Tavis, “and I don’t think we have resolved as a society how we are going to react to it. But it’s here and we have to deal with it as a reality. There is nothing we can do about it. Everything we do is visible.”
The looking-over-the-shoulder feeling is something that should concern firms, according to Cobb. “When you have sort of this constant presence, and when you put the layer of tech on it, it does feel a little bit more like monitoring than coaching, and there is evidence that when people feel monitored, over a period of time it can have some impact on their job satisfaction — it can take a toll on people,” he says. “One of the things we know about job satisfaction is it is linked to a sense of autonomy. Constant access to a supervisor through an app might make some workers check in more often than necessary — ‘so, here it is for the record, I am working hard.’”
“Updating people more frequently might mean more frequent small one-time bonuses.”–Adam Cobb
Like many contemporary incursions on privacy, concern may be assuaged by money. “Updating people more frequently might mean more frequent small one-time bonuses,” says Cobb. “I’m working for you, you notice I’ve done a bang-up job on a project, and you could give me a one-time bonus based on that last four weeks.”
Success hinges more upon implementation than the system. “It is interesting to see, but it’s hard to know whether these changes are going to be a net negative or a net positive,” says Cobb. “You can imagine two firms implementing the same system, and one in which employees feel it’s overbearing and one where they feel empowered. It will all come down to implementation, and what the goals are the firm is trying for. How are managers using it? Is it an opportunity to say ‘you’re doing a great job,’ or ‘here’s this idea that might simplify things?’ Or is to check off a box — ‘Oh, two weeks are up and I have to give someone feedback?’”
But the potential development of new performance management systems aided by apps and people analytics combined is enormous, says Tavis. It could mean the ability to measure, for the first time, how employees are performing, why, and where they are adding to — or weighing down — the productivity and spirit of everyone around them.
“What’s really interesting is that we’re beginning to get at that intangible level of contribution,” Tavis says. “For example, collaboration. In a sales organization, it’s very clear who is bringing in the money, but then we don’t measure what damage that person might be creating to everyone else. But now with social network analytics, it becomes much more sophisticated. If we are wearing devises and start measuring those things we are going to get to that data. We’ve moving from the mechanical age in HR to a much more sophisticated way. We’re in a different age of tech development, and tech is going to help us understand what matters.”
Right now, for example, Tavis says we’ve made assumptions about the value of bonuses on employees and motivation. “But that’s arithmetic. The question is: Can we get to the quantum physics of what really matters.