Firing the annual performance review

Over the past few years, a number of companies, including Microsoft and Adobe, have dropped their annual employee rating systems


Whether performance reviews really can separate the wheat from the chaff is being widely debated these days. Photo: iStockphoto
Whether performance reviews really can separate the wheat from the chaff is being widely debated these days. Photo: iStockphoto

Employees, managers, even many consultants and business school professors have expressed serious doubts about the value of annual employee assessment. Yet, for over half a century, they have remained a constant feature of corporate life.

Until now. Over the past few years, a number of companies, including Microsoft and Adobe, have dropped their annual employee rating systems. This year, Accenture and Deloitte added their names to the list, citing high costs and minimal results. Even General Electric (GE), the company most closely associated with ruthless annual assessments, has announced plans to phase out the annual review.

“Companies have just figured out that it’s not working. They’re not finding it to be effective,” explains Cliff Stevenson, senior human capital researcher at the Institute for Corporate Productivity (i4cp), a Seattle-based HR research firm.

The performance review grew out of US military practices. Initially, it focused on personal qualities that helped employees fit in, but by the late 1950s the emphasis turned towards meeting clear business objectives.

At its most extreme, the idea morphed into a system GE adopted in the 1980s that critics refer to as “rank and yank”: rate everyone’s performance, reward high scorers, cull the bottom 10%.

But some have questioned whether performance reviews really can separate the wheat from the chaff.

As far back as 1969, W. Edwards Deming, the father of Total Quality Management, argued that 94% of variation in performance in any process had to do with the structure of the job rather than the capacity of the individual.

He deemed assessments counterproductive. “It annihilates long-term planning, it annihilates teamwork,” Deming said. “People live in fear.”

Microsoft’s experience seems to confirm this. A 2012 Vanity Fair article found that “stack ranking” had crippled the company’s ability to innovate. One engineer was cited as saying, “People responsible for features will openly sabotage other people’s efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn’t get ahead of me on the rankings.”

Over the past decade, a consensus has begun to grow against the practice. In 2006, i4cp reported that 71% of executives surveyed said employees found their performance management process fair. By 2010, that had slid to 38%; and by 2013, to 29%.

In one 2014 study, Deloitte found that only 8% of executives polled said that performance management drives significant value.

One reason the outcry has grown may be that management has less time to do the job well. “Today, managers have multiple roles, are increasingly working longer hours and have more direct reports,” says Cary Cooper, a professor of organizational psychology and health at the Manchester Business School. “Keeping in touch with an individual is more difficult, particularly if you do the performance appraisal once a year and can’t remember specific behaviours to feedback to the individual employee to help him/her understand the behaviour you would like changed.”

Peter Cappelli, a professor of management at the Wharton School of the University of Pennsylvania, says that one reason performance reviews are becoming less popular is that most companies don’t take them seriously except as a way to differentiate pay.

The millennials, the 20-30-something generation that has grown up in a world of constant feedback, may be having an impact as well. GE’s senior vice-president for HR, Susan P. Peters, recently told Quartz: “It’s the way millennials are used to working and getting feedback, which is more frequent, faster, mobile-enabled, so there were multiple drivers that said it’s time to make this big change.”

The new assessment systems that companies are now experimenting with rely on more frequent, forward-looking updates. This makes sense, says Cooper: “If you’re trying to give people feedback, you don’t do it once a year…an effective, good manager should do it in real time all the time.”

Read the unabridged version on www.foundingfuel.com, printed in an exclusive partnership with CKGSB Knowledge.

More From Livemint