For many companies, it’s that time of the year again.
It’s hard to decide which is worse: explaining a bonus payout to staff who think they should’ve done better, or listening to your boss giving you reasons why you didn’t qualify for a better payout.
However, as much as everyone loathes doing performance reviews, they are a necessary process. It’s like a report card in school – everyone wants to know how well they’ve done and what they need to improve.
In school, we got a grade for every pop quiz, exam and paper so that we knew exactly where we stood amongst our peers throughout the entire year. In a work environment, you get one or, at most, two cracks at it.
A typical performance review process starts at the beginning of each financial year, with employees setting KPIs, and ends 12 months later with an evaluation of performance for that period.
For many decades, corporations have used the bell-curve for performance evaluation – a system which rewards a small percentage of top performers, encourages a majority (say, 80% of people who do a “good but not great” job) in the middle to improve, and helps discard the underperformers.
But is this system effective? Does it increase the performance of individuals and companies? Many corporate giants, such as GE and Microsoft, believe it isn’t and overhauled their performance review systems in recent years. Other companies, such as Netflix and Accenture, agreed and followed suit.
What is wrong with the traditional performance-review process and how can we change it to make it better?
Flaws in “traditional” performance reviews
The main issue with traditional, forced-ranking performance reviews is not truly in the system itself. The history of this system can be traced back to World War I, when American applied psychologist Walter Dill Scott developed a rating scale for the US Army.
Scott’s original system had three functions: discover what types of abilities were needed in the army, place each enlisted man where he had the opportunity to make best use of his talent and skill, and select and promote officers on the basis of merit and ability.
Fast forward to the 1980s to General Electric’s “rank and yank” (formally known as the “vitality curve”) system, championed by then-CEO Jack Welch. The system summed up employees’ performance to a number, on which they were ranked against their peers.
Under Welch’s version of the forced-ranking system, top performers were rewarded, the middle accommodated and the bottom 10% of underperformers were sacked. And this rigid system was practiced consistently at GE for decades.
However, cracks began to appear in the forced-ranking system in recent years, as a large segment of the workforce began to be made up of millennials. According to U.S. Census Bureau statistics, there are plenty of millennials out there—80 million plus (the largest cohort size in history) in the US alone.
Buy something on Amazon, it’ll appear at your doorstep the very next day. Post on Facebook or Instagram, you’ll get instant feedback. Anyone and everyone is contactable, 24/7, as they were born in the mobile-enabled age where no one involuntarily went radio silent, ever.
They are also an idealistic cohort.
Millennials were raised to say that they could make a difference in this world, a real “impact,” and they want and expect to do just that.
So what is the solution? Do you try to inflict a traditional (and deemed outdated by many) performance review process upon millennials that has been around since World War I? Or do you try to adapt and change to better suit the nature of your core workforce? And what would those changes be?
7 Changes You Need to Make To Your Performance Review Process
1. Get rid of rankings
A vast majority of companies around the world still go through the annual ritual of traditional performance reviews. Managers rank employees based loosely on KPIs drawn out 12 months ago. These KPIs, typically jointly-set by the manager and the employee, are generally linked to broad company goals.
Rankings usually consist of three to five ratings: for example, “does not meet expectations,” “meets expectations,” and “exceeds expectations. In a nutshell, a year’s worth of an employee’s hard work and dedication gets summed up in this rather archaic, simplistic and brute manner.
The ratings are then used to decide employee compensation (based on a typical bell curve, most people are bound to get average pay while overperformers get more and underperformers may face the ax).
For individuals, these yearly reviews are supposed to provide information on past performance and encourage future achievement. Companies, on other hand, regularly use reviews to justify doling out big bonuses to high achievers or dismissing those who don’t meet expectations.
But society has undergone massive changes since the days of W.D. Scott. And, as suitable as it may have been a century ago, the system of ranking employees on an annual basis cannot be effectively adapted from its industrial-era origins to today’s more complicated work and workforce.
Of all the things that can boost emotions, motivation, and perceptions during a workday, the single most important is making progress in meaningful work. The more frequently people experience that sense of progress
– Teresa Amabile
Get rid of the system of rankings and replace them with a real-time feedback platform that measures and encourages the true progress of employees.
2. De-link performance evaluation and layoffs
The performance bell-curve has a purpose. It shows managers exactly who is a top performer, an average employee and an underperformer. The bell-curve, traditionally, had strict percentage distribution and those that rank in the bottom percentiles (in the case of GE, the bottom 10%) were gotten rid of.
This means that the company would shrink by 10% on an annual basis. And by getting rid of the bottom performers, the rigidity of the bell-curve forces managers to downgrade former high performers to “average.” They, in turn, feeling (rightfully) hard done by this artificial demotion, begin to act mediocre.
With high performers now behaving like average employees, managers find it extremely difficult to differentiate staff. And employees, due to the fear of being laid off, start concentrating on visible results, which will begin to take its toll on the performance of the company.
This is not to say that the performance bell-curves need to be chucked out completely. The key is to resist setting strict percentage distribution on the bell-curve and use it as a tool for trimming fat.
To make the best use out of the bell curve, it should be decoupled from any implications of lay-offs so that it be utilised only to provide feedback to employees about where they stand amongst their peers.
3. Divorce performance evaluation from compensation
Hard as it may be to execute in real life, try not to directly link performance reviews to compensation.
It may seem rather counterintuitive but, by linking the two, the very motivational tool that was supposed to help encourage employees to work harder may have the exact opposite effect.
Unless the main purpose of your company’s performance evaluations are to lay-off underperformers and dole out extraordinary rewards only to top performers, it makes no real sense to link performance evaluations to compensation.
Instead, the better and more motivating way to handle compensation is to offer a competitive base salary and peg bonuses (sometimes paid in shares or share options), McKinsey & Co research report says.
By doing so, employees will feel free to focus on doing great work, to develop, and even to make mistakes—without having to worry about the implications of marginal rating differences on their compensation, it says.
4. Constant and real-time feedback
This is one of the glaring signs that times have really changed. With the advancement in technology, there is constant and real-time feedback on virtually every aspect of our lives, if we so desire (and, often, even when we don’t!).
We have become accustomed to receiving instant feedback, especially due to the prevalence of social media in our everyday life.
Millennials will shape the world of work for years to come as they increasingly become a larger part of the global workforce. They are unique from all others before them as they are a tech generation.
One of the strongest millennial traits is that they welcome and expect detailed, regular feedback and praise for a job well done – 51% of those questioned said feedback should be given very frequently or continually on the job, a PWC report says.
The PWC survey also found 41% of millennials prefer to communicate electronically at work than face to face or even over the telephone.
In this age of technology, many global, blue-chip firms such as GE are opting for a less regimented system of more frequent feedback via an app. Survey-based performance measurement apps allow managers to communicate directly with their staff on a regular basis, without taking too much of everyone’s time.
Constant, real-time feedback and communication, when delivered through a millennial-friendly app, helps build a culture of recognition for good work, inspires employee loyalty and a greater desire to produce even better work in the future.
5. Collect good data
Most of the internal and commercially-available performance-evaluation apps tend to be survey-based. It makes sense – what better way to find out what your employees are thinking than ask questions?
A performance-evaluation survey typically gathers all sorts of information to help managers measure performance and gauge job satisfaction. They help identify (real-time) strengths, recognise (and acknowledge) achievements in a timely manner and help instill a sense of purpose and meaning into work life.
Given that we spend so much of our waking lives at work with colleagues, it is imperative that we ask the right questions in a timely manner.
Good data is crucial to the new processes, not least because so many employees think that the current evaluation processes are full of subjectivity, according to McKinsey & Co.
So what are the key traits of good-quality performance data? They are: 1) accuracy 2) validity 3) reliability 4) timeliness and 5) relevance.
The best way to obtain good-quality data for performance evaluation is to utilise technology readily available to us on our smartphones. By simply asking the right questions via survey apps, in one fell swoop, managers are able to nail down four of the of the key traits listed above – accurate, valid, reliable and timely information gets delivered straight into your analysis page on your performance-evaluation app, at the click of a button.
Relevance is obtained by asking the right questions to the right people. Rather than relying on a once-a-year, inexact analysis of individuals, companies can get better information by using systems that crowdsource and collect data on the performance of people and teams, McKinsey & Co says. Continually crowd-sourcing performance data throughout the year yields even better insight, it adds.
Employees can request feedback from a large pool of people who they believe could provide valuable insight to nurture and develop their careers: supervisors, colleagues, and even internal/external customers.
6. Real-time analysis
So we’ve collected some awesome data through survey apps (like, *ahem*, EngageRocket) – what do we with all this information that we’ve gathered? The best thing about technology is a lot of the work is done for you, almost instantaneously.
A clear, concise analysis, based on collected data, is made available to you on a regular basis on the app platform, so that you, as a manager, can bring the best out of each employee.
With good, relevant and real-time analysis about each member of your team, managers will be able to handle any issues before they become a problem. This is important as more and more millennials flood into our companies and demand quick and regular feedback.
Millennials are considered as “loyalty-lite,” with over a quarter now expect to have six employers or more, according to PWC research. Hiring and firing of staff costs companies a great deal of money and time, not to mention the detrimental impact it has on morale.
Detailed, real-time analysis helps managers readjust objectives rapidly throughout the year, so that employees feel challenged, encouraged and gain a sense of ownership and purpose (something that millennials have been widely quoted as desiring most in their professional lives).
Use the technology available to us to develop this new generation of enthusiastic, tech-savvy and confident individuals – this will underpin their growth as well as that of the company.
7. Frequent and focused coaching
Millennials want to receive as much training and coaching as possible as they desire to move up the ladder faster than previous generations. A total of 52% of millennials surveyed by PWC said career progression was the main attraction in an employer, coming ahead of competitive salaries in second place (44%).
Millennials want to climb the corporate ladder based on results, not on tenure. Gone are the times when career advancement was mainly built upon seniority and time of service.
But they aren’t expecting something for nothing – millennials have a strong desire to train and learn so that they can make those giant leaps on the the corporate ladder. And, for high achievers who show true potential, what could be better than young, enthusiastic and eager employees who want, more than anything, to rise up the ranks quickly by bringing real results?
Use the data collected from performance surveys and provide the relevant training that each employee wants and needs – afterall, we all want to know we’re becoming better and achieving some level of mastery.
Author: Catherine Cheong
Catherine is a regular contributor to the EngageRocket blog, and has written for news organisations such as the Washington Post and Reuters. She is a corporate communications expert, having headed the PR and branding efforts of international asset management firms.