status quo next exit

Performance Management: Sticking With What Doesn't Work

Despite all the angst about performance management, most companies aren't doing much to change the status quo. i4cp's latest research report focuses on the changes--or lack thereof--made to improve performance management (PM) over the last seven years. Specifically, we were looking for evidence that a significant number of organizations were moving to a ratingless PM system. What we found did not support this notion. Of all study participants, only 3% planned to either remove their rating system or their PM systems overall.

Using that information and the data from other responses from within the survey, certain other trends are apparent. These four major points highlighted the findings from the report, and a quick summary of those four major trends follows.

Use of performance ratings remains high, regardless of their perceived shortcomings

A majority of companies, 86% overall, have some form of performance management process. That number remains consistent across industries and company sizes, and the use of formal performance management processes has remained high for the last seven years of i4cp surveys where that question was asked. However, only 55% of survey respondents from high-performance organizations (HPOs) indicated that performance management has a positive business impact on their organizations (among those from lower-performing organizations [LPOs], only 36% reported positive affect on the business).

Possibly even more alarming is that when asked whether their organizations were effective at performance management, only 28% of respondents from high-performing companies reported high or very high effectiveness at PM. To recap, although nearly nine of ten companies are doing performance management, only about three of ten report that they are doing it well. Added to all of those numbers is this one: of the survey respondents, only 29% reported that their employees find their performance management system to be fair.

Performance management effectiveness research

Some of those employees may not find the process fair because they received poor ratings, but that certainly isn't true for all 71% of them. This picture of fairness in PM is one that has been growing increasingly bleak over time; when asked if employees found the PM system to be fair back in 2006, the numbers were flipped--71% said they did find it fair. The 2008 recession and the subsequent lack of allocated money for bonuses and merit pay increases may account for some of the sea change in perceived fairness, but that doesn't make it any less of a problem.

Few companies are planning major changes

With the wide discrepancy between what is being done and what should be done, it is easy to imagine that sweeping changes are being made. Nevertheless, this is not the case. Over the last three years, only 30% of surveyed respondents said their organizations had made changes to their PM system, and of those changes only 6% could be classified as radical transformations (removal of the rating system or removal of PM altogether). The follow-up question, "Is your organization planning to make any of the following changes to its PM process in the next year?" uncovered that only 3% of organizations plan on removing either the ratings aspect or their PM system altogether.

Performance management changes planned 2013

Admittedly, removal of performance ratings is not the only change that can or should be made to performance management, but most of the other ideas were to change from a five-point system to a three-point system (or vice versa), which is hardly a change at all.

Performance management is viewed as flawed, but no viable alternative has been taken up

Part of the problem is a lack of options for a solution. Although some companies have done away with ratings (REI and Adobe are two that are profiled in the research paper), that solution is not feasible for many organizations. Although the time spent on reviews and ratings can be significant, a replacement system of continuous conversations and instant feedback also requires a lot of time from employees. The value of that time should be better in a constant feedback system, but if the only goal is to free up employee time, this may not be the best answer for some companies.

Additionally, there are plenty of organizations that need or even require performance ratings. Companies that work with the public sector, or have highly structured job levels and concrete checklist-driven goals may find real value in ratings. Also, numerical ratings are valuable tools for the datafication of the workforce, allowing organizations to run internal research on correlations between performance ratings and quality standards in a given department, for example.

There are no easy answers when it comes to performance management

Despite a relatively short history, performance management has become so synonymous with compensation that separating the two is anathema to most established organizations. With only a few case studies of companies that have gone ratingless (four are available to i4cp members), most organizations are waiting until the bandwagon is firmly established before jumping aboard.

The good news for those organizations that are thinking of moving to a performance management system without ratings--those organizations that have done so such as Expedia, REI, Adobe, and Juniper Networks--have done so successfully. In fact, all four of those organizations have seen increases in either bottom line revenue or employee engagement, or sometimes both.

The bad news is that performance management is still directly linked to compensation at most companies. Of the surveyed respondents, 73% said their organizations' primary use of PM is to support compensation decisions--virtually unchanged from 2006, when 72% responded with the same answer. As long as compensation management and performance management remain linked, it is very unlikely that we will see fundamental changes in the core concepts of performance management.

A final word: these trends should not be taken as negative indicators. The interest level in performance management is very high among C-level executives, and with the advent of Millennials joining the workforce and continuing globalization, finding ways to monitor and improve and develop performance is a useful and highly sought-after capability. Although changes to PM have been incremental, they have also been thoughtful and forward-looking, and the people who are involved in this field can rest assured that things are getting better. Slowly.