What’s wrong with the traditional performance management method? In a nutshell, a lot. People have been complaining about the ineffectiveness of the annual performance review and merit-pay-increase matrix for years. In fact, there are a few things that almost everyone can agree on:
The original goal was simple: to not only track workers’ progress and continual improvement, but to also engage, motivate and reward employees based on their individual efforts. Somewhere along the line, the process jumped the tracks — and the madness to the current method is actually creating disengagement and turnover, exactly the opposite of what organizations hope to achieve.
Sadly, Deloitte studies show that only 8% of companies believe their performance management process is highly effective in driving business value, while 58% say it’s not an effective use of time.
Other statistics confirm high levels of employee dissatisfaction — largely related to lack of career growth, pay or recognition. According to a December 2014 Saba survey conducted by Harris Poll, nearly half of American employees searching for a new job say they are looking for more growth opportunities. And 43% cite unhappiness with their current level of pay. These are the very things that should be addressed as part of the performance process.
Since your organization still needs to measure performance and allocate compensation budgets, you can’t simply toss out the old approach. But you can make it better — and the time is now. Where do you begin? Let’s start by taking a closer look at the problems.
#1: Business moves too quickly for annual goals to remain static.
Many companies rate employee performance based on goals set at the start of each year, yet we know that in today’s world, market dynamics can turn on a dime. Assuming an organization has a defined set of goals likely crafted at the beginning of the year, when a new competitor emerges, technology changes or regulations shift, the original goals may not be the best or most strategic ones to take the company forward.
For example, in a dynamic industry like software, not regularly revising goals means a company can run the risk of missing golden opportunities, spinning their wheels on irrelevant tasks and technologies, and wasting employees’ time on the wrong things. Every year, as the pace of business continues to accelerate, this problem only gets worse.
If an organization’s strategic goals flex, so should the goals of individual employees. Having half your workforce rowing in the wrong direction only to reach personal objectives, but not the right ones for the company, is enough to steer any ship off course.
#2: People wait too long to give performance feedback.
Imagine this scenario: During his annual review, an employee discovers that his supervisor was disappointed in something he did almost nine months earlier. The manager relives his disappointment as he recounts the mishap. The employee feels blind-sided. Nobody wins.
People should know where they stand on a regular basis. If you’re not addressing performance issues as they occur, your poor performers may assume they are fine and not make efforts to improve. Worse still, your great performers may become unsure of their status and disengage.
And let’s not forget Millennials and a huge portion of the modern workforce that demands continuous feedback and wants performance-based, metrics-focused evaluations: Once-a-year or every-six-months feedback is not frequent enough. Period.
#3: Traditional reviews don’t help employees grow and develop.
In the previous example, the employee lost months of opportunities to improve because performance feedback was withheld until the annual review. The manager wasted nearly a year of corrective action, then everyone’s time was wasted dwelling on the past during a performance review that could have focused on future development.
When managers are coached to address performance in the moment, they can inspire and engage your workforce. Waiting until the formal review process doesn’t mean only missed development opportunities, but it could also mean damage to long-term engagement.
Using performance reviews to help employees improve their skills and become better workers is a much better use of everyone’s time. Managers and employees should be having regular conversations around career goals, developing new skillsets and future paths for success. Most of the time, however, these discussions don’t happen at all. Or if they do happen during reviews, they take a backseat to the elephant in the room: the stacked ranking number that ultimately dictates the compensation decision.
#4: Ranking and rating actually reduces engagement and de-motivates employees.
Turns out, the general disdain for performance reviews and the stacked-ranking process isn’t just a matter of personal opinion. It’s actually backed by neuroscience. Using numbers to rate a person’s performance can create an anxiety-inducing feeling that often derails the conversation.
According to a Strategy+Business article, “This neural response is the same type of ‘brain hijack’ that occurs when there’s an imminent physical threat like a confrontation with a wild animal. It primes people for rapid reaction and aggressive movement. But it’s ill-suited for the kind of thoughtful, reflective conversation that allows people to learn from a performance review.”
For example, a typical employee who was ranked with a 2 (on a 1–3 scale) would disengage and close his ears to any real performance feedback knowing that others were ranked still higher. Then, managers are wasting time trying to provide constructive guidance while employees are missing out on tips for personal development.
#5: Traditional reviews and rewards don’t treat people as individuals.
We know that most companies use the widespread ranking- and ratings-based performance review process for one simple reason: to drive compensation decisions. Sadly, most performance management practices are one-size-fits-all strategies that don’t recognize individuals’ unique contributions.
In fact, according to independent industry analyst Bill Kutik, the merit-pay-increase matrix has little to do with merit at all. He describes the matrix as a way for companies to control growth in wages and for HR to fulfill its traditional role of treating everyone equally.
You know how it works: All the increases must total a company-wide standard (typically, a 2 to 3% increase). The idea is to drive everyone’s base salary as close to the midpoint as possible. Practically speaking, that often means giving employees below the midpoint larger increases (often regardless of merit) and those above the midpoint smaller increases (often despite their merit). This “drive to the middle” may make the finance department happy, but it frustrates your top performers who don’t want to be treated as “groups” or “averages.”
While this standardized approach may have benefited companies decades ago, it’s not working in today’s world where we’ve come to expect personalized experiences. If your stars aren’t being rewarded for their stellar performance, they may feel they can get better rewards by leaving. Today’s experts encourage companies to identify top talent, provide top incentives to keep them, and watch them closely so competitors don’t poach these top performers.
Bottom Line: Pick Up the Broken Pieces
If you want to keep your best talent from walking out the door, then one thing is clear: The old ways simply don’t work and it’s time to rethink old processes — and focus on building a convincing business case for a new, more intelligent approach to performance management.
To read more about the problems with traditional performance management, and understand the four steps toward a better performance management paradigm, download our eBook Winning Your Workforce: The Essential Guide to Improving Retention and Employee Performance.