Performance Reviews: In Detail
A performance review is a tool used by employers to formally document and evaluate an employee’s work performance over a particular time frame.
Many organisations continue to understand “performance review” in terms of a traditional “annual review”. That is, a once a year meeting between a manager and employee that seeks to summarise the past 12 months of work into a rank or grade that determines pay and promotions. However, the inadequacies of traditional performance review processes are increasingly being recognised, with the most innovative multinationals such as Microsoft, General Electric, Deloitte and IBM replacing annual review processes with simpler, continuous processes that are focused on improving an organisation’s future performance.
CCER has prepared this brief to help Catholic employers better understand performance reviews and how they can be reinvented to improve effectiveness.
Part 1 of this paper provides an overview of why they are used and common methods of reviewing employee performance, while Part 2 considers some problems with these traditional approaches. Part 3 considers emerging trends in contemporary performance review while Part 4 looks at some detailed case studies on how these emerging trends have been applied by leading multinationals.
Part 1: Performance reviews: What are they and why are they used?
Employers use performance reviews to document and evaluate an employee’s work performance over a particular time-frame, normally 12 months.
In traditional management theory, performance review is the final stage in a three part performance management cycle, which begins with performance planning, followed by with performance monitoring and a formal review at the end of the cycle.
Employers have generally used performance reviews for both accountability and development purposes.
- They can help to identify strong and weak performers and provide a framework to help managers “manage”
- They provide a rationale for making decisions about pay, promotion and termination
- They produce a ‘paper trail’ to document and defend HR decisions, including defences of unfair dismissal and adverse action
- They provide employees with structured feedback on their performance and information on strengths and weaknesses
- They can identify learning and development gaps and future organisational training and recruitment needs
- They help align organisational and employee goals, and the career development of employees.
Methods of performance review
Performance reviews traditionally involve the formal evaluation of an employee’s work by a manager.
There are a number of methods that can be used to review an employee’s performance. Popular approaches include:
Employees are evaluated by their supervisor based on quantitative indexes of individual or team performance, for example, production rates, profitability, turnover and absenteeism. This approach of performance review has increased in popularity over the past decade, with improvements in data monitoring and analysis, and tools like performance dashboards enabling more efficient use of objective data and monitoring of KPIs.
Rating based appraisal
An employee’s work performance is graded using a rank, rating or score, typically determined via one of the following methods:
Forced choice– A supervisor is provided with a pair of statements and must pick which statement best describes the employee, even from statements that appear equally inapplicable or unfavourable. The statements are scored independently in advance and a final score tallied.
Graphic rating scale– A supervisor is provided with a range of statements about an employee’s work performance and asked to rate the employee using a continuum scale with weighted anchor points (e.g 1 being unsatisfactory and 10 being outstanding). The points are then tallied to provide a final score.
Forced distribution/stack ranking– A supervisor is required to compare the performance of all their employees, and rank them according to a pre-determined distribution (e.g top 20 percent, middle 70 percent, bottom 10 per cent). This method was pioneered by Jack Welsh, CEO of General Electric during the 1980s and became a standard appraisal approach across many organisations for the next 20 years.
Management by Objectives
Employees are evaluated based on how they have progressed in achieving goals that were mutually developed and agreed by management and the employee at the beginning of the appraisal cycle. This approach is based on the writings of management guru Peter Drucker and gained traction in the 80s and 90s.
Essay appraisal/ narrative
A supervisor prepares an individualised, written analysis of the employee’s performance, including their strengths, weaknesses and future potential.
Critical incident method/ work sampling
During the appraisal cycle, a supervisor collects and prepares a log of critical incidents (which may include work samples) that describes both effective and ineffective performance which then forms the basis of the performance review.
An employee’s personality, work skills and potential are comprehensively evaluated used a range of techniques such as interviews, exams, group scenarios, simulated role plays and psychometric testing. This approach is based on practices used in German army in the 1930s, and is often used to identify employees suitable for promotion into specialised or senior management position.
360 degree appraisal
An employee’s performance is assessed by a range of stakeholders in order to obtain a more complete assessment of their contributions and areas for improvement. Feedback is usually provided by the employee, his/her manager, peers, superiors, subordinates and clients.
The employee reflects on their own performance over the appraisal cycle, including their achievements, critical incidents, and areas for further support and development.
Traditionally, these methods of performance review are used as part of an annual appraisal cycle, with the outcome of the evaluation being delivered within the context of a formal one-to-one meeting between a manager and an employee.
Part 2: What are the problems with performance reviews?
Over the past 15 years, cracks have appeared in traditional approaches to performance review. A number of important limitations with performance reviews have been recognised by HR practitioners and documented in management research.
Time-consuming and resource intensive
Performance reviews are often complex and elaborate processes, however managers and employees are increasingly seeing them as a low value compliance exercises that generate extra work for limited return.
With most organisations scheduling performance reviews only once every 12 months, performance reviews can only deal with past performance, and not offer the ongoing real-time feedback and coaching needed to improve current and future performance.
Performance reviews are usually based on a manager or supervisor’s perceptions of an employee’s performance which is subjective and open to error. Rater errors have been widely documented in research and over to 60% of variance in rater scores has found to be determined by the person doing the rating. This is known as the “idiosyncratic rater effect”. Some common problems with ratings include:
- “inflated ratings”- an employer provides an employee with a more favourable review than is warranted to avoid conflict and maintain a positive working relationship
- “halo or horn effect”- one positive or negative performance feature is generalised to all aspects of an employee’s performance.
- “central tendency error”- all employees are rated about the same, which is average
- “recency effect”- where an employee is rated based on recent performance success
- or failure, rather than looking at performance during the entire review period
- “contrast error”- where an employee rating is biased depending on the performance of another employee who has just been rated
- “sampling errors”- where an employee’s overall performance is rated according to a small sample of work done
- “similar to me errors”- where a rater provides a better rating of an employee with whom the rater has something in common, e.g to employees who went to the same school or university.
Out of touch
Millennial workers- born into an era of Twitter, Facebook, crowdsourcing and open source have strong expectations of instant feedback, social recognition, team work and collaboration at work. They are also strongly motivated by work that provides them with autonomy, creativity and personally fulfilment, with this being even more important than financial rewards.
Traditional performance review methods are not aligned with the expectations of the millennial workforce, as they focus heavily on individual performance (rather than collaboration), are typically tied to financial rewards (rather than social recognition), and scheduled too infrequently to provide meaningful feedback (usually just annually).
Damaging to morale
Traditional performance review processes focus heavily on the evaluation of individual contributions, which can create destructive internal competition between employees, and inhibit knowledge sharing and collaboration.
Latest neuroscience research has found that performance review practices that involve “constructive criticism”, or ranking or rating an employee can generate a “fight or flight” stress response in employees. This can lead employees to feel disengaged with the review process, inhibiting meaningful learning arising from the review.
Finally, review processes can also reinforce a “fixed mindset” view of human learning, rather than a “growth mindset”. The fear of being given a less than glowing review can act as a disincentive for employees to take risks, pursue innovation or set ambitious “stretch” goals.
Part 3: Latest trends in Performance reviews
Faced with the many problems of performance reviews, and with a desire to meet the needs of modern organisations and employees, a growing number of organisations are electing to significantly reinvent their performance review processes.
- Adobe, Accenture, Gap, IBM, Microsoft, General Electric and Deloitte are a sample of many leading multinationals that have made significant changes to performance review processes in the last 5 years.
- In Australia, a 2015 survey of 27 ASX150 companies by PricewaterhouseCooper found that 67% of companies saw performance reviews as just a compliance process, and 96% had begun to change their performance management systems or were planning significant changes in the coming year.
So what are the key changes?
Annual reviews replaced with frequent ‘check ins’
Recognising that high performance is an ongoing activity, formal annual reviews (including annual planning and goal setting meetings) have been replaced with less formal and more frequent performance “check-ins”.
Check-ins are essentially conversations between employees and management to set and revise goals, clarify expectations, and identify areas and strategies for future growth and development. Check-ins are usually scheduled at least quarterly, but they can also be scheduled more frequently (e.g fortnightly or monthly), including at the request of an employee.
Better use of technology
Many leading organisations are embracing new technology to make performance monitoring and feedback processes faster and more efficient. To complement face to face ‘check-ins’, some organisations have developed specialised mobile apps which enable employers and managers to set, revise and share goals, document their progress and provide feedback. These mobile apps do not just provide ‘top-down’ communication, but also enable employees to ask for and give recognition and feedback to their peers as well as higher levels of management.
Another trend is in the growth of performance dashboards, which enable improved real-time monitoring of key organisational data and progress towards KPIs. The sharing of dashboard data across an organisation helps to align individual employees with organisational goals and promote team work. The use of real-time progress tools can also “gamify” the performance management process, enabling better engagement with goals and priorities and providing powerful motivation to employees.
Abolishing ranks and ratings and separating reviews from pay decisions
With research demonstrating that ranks and ratings are often inaccurate and destructive to morale, many organisations have elected to stop using them. Employers are also hosting separate discussions about pay increases and career development.
Emphasis on professional development and coaching
Finally, the focus of performance reviews is shifting away from reviewing and evaluating past performance, to coaching and developing for future performance. The role of managers is being redefined to include explicit coaching requirements, including active listening, questioning, feedback and goal setting.
Organisations are also emphasising the importance of building high-performance teams and promoting collaboration and agility through strategies such as participative leadership, shared vision and values, open and clear communication and valued diversity.
Part 4: Reinventing Performance Reviews- In-depth Case studies
A Spotlight on:
General Electric (GE)
- In 2014, General Electric began a pilot to replace its annual review process with ongoing employee feedback facilitated by a mobile app: Professional Development@General Electric (“PD@GE”).
- The PD@GE app enables employees to give and receive feedback faster and more frequently, allowing for better responsiveness and continuous improvement. In June 2016, General Electric announced it would adopt the app across all 180,000 salaried employees.
- PD@GE replaces a time-consuming annual review process, involving self-evaluations, formal write-ups, and ratings, which could sometimes take up to five months to finalise. The use of continuous feedback, enabled by mobile technology reduces lag-time in adopting improvements, and aligns with GE’s shift in company direction to become leaner, more agile and innovation driven.
- The PD@GE app comprises a menu bar with four options, i) priorities, ii) touch points, iii) summary and iv) insights.
- Under “priorities”, employees can record and update their own work goals.
- Under “touch-points”, direct managers can provide employees with feedback/ coaching on achieving their priorities. The feedback can be 500 characters or less and is tagged as either actions to “continue” (e.g positive feedback) or feedback to “consider” (e.g constructive criticism).
- Under “insights”, employees can use the app to request feedback from other co-workers and also to provide feedback to other co-workers (feedback can be provided to anyone in the organisation- including the CEO!)
- Under “summary”, electronic records of “priorities”, “touch points” and “insights” can be quickly viewed. In addition, summaries of other “in-person” discussions can be stored, e.g via notes, photographs (e.g of handwritten notes) or voice recordings.
- Managers are expected to continue to have formal ‘face to face’ quarterly reviews with their employees, although this process is a lighter process as managers and employees are in more frequent contact during the year.
- GE has also announced that from July 2016, it will no longer require managers to grade employees into one of five categories (ranging from “role model” to “unsatisfactory”), as these grades are too simplistic and can be counterproductive in creating a culture of continuous learning and improvement.
- GE also found that managers did not need to use a simplified rating process in order to differentiate between employees and make decisions about salary increases and bonuses.
- In 2014, Microsoft announced that it would no longer use “stack ranking” (bell curve distribution) in its performance review process.
- Microsoft abandoned stack ranking because it realised it was inhibiting genuine team work and collaboration and encouraged its employees to view each other as a competitor. It also cultivated a culture of internal sabotage and disengagement.
- Microsoft’s new performance review process is designed to promote teamwork, collaboration, employee growth and development.
The annual review has been replaced with more regular feedback and discussions using a cloud based HR tool called “Connect”. Managers and employees are expected to meet three to four times each year and evaluate the areas that are working well as well as areas for improvement. This is recorded in the integrated HR information system.
- When evaluating an employee’s performance, managers are now required to consider not just the employee’s individual output, but also their contribution to organisational goals of teamwork and collaboration. Specifically, managers must consider:
- How did the employee leverage input and ideas from others?
- What did the employee do to contribute to others’ success?, and
- How did this add up to greater business impact?
- Finally, there is no longer stack ranking and managers have the flexibility to allocate rewards in the manner that best reflects the performance of their teams and individuals, as long as they stay within their compensation budget.
- In June 2015, Deloitte Australia announced that it would be making significant changes to its performance review processes to further align with agile business philosophy.
- Agile is a philosophy that originated in IT software development and enables new software to be delivered to the market more quickly, by breaking a project into several stages and involving constant collaboration with stakeholders and continuous improvement and iteration at every stage. Deloitte is now recognised as a leading agile expert and adviser.
- The ‘agile manifesto’ was developed by 17 software developers in 2001 and has 12 basic principles; customer satisfaction, welcoming changing requirements, frequent delivery, business and delivery working together, motivated individuals, sustainable development, output is the measure of progress, face-to-face conversations, technical excellence, simplicity, self-organising teams and regular reflection and adaptation.
- Agile philosophy is increasingly being popularised in sectors as it enables better responsiveness in a digital age.
- As part of Deloitte’s HR changes, employees are no longer required to undergo annual performance reviews or 360 degree reviews, because they are too time consuming, have too long lag-times and do not effectively support and improve future performance. (Deloitte US calculated that approximately 2 million hours each year were allocated to activities relating to these reviews).
- The annual review process has been replaced with a simpler performance review process which comprises of three parts:
- Frequent feedback and coaching: Employees will meet with their team leader every week or fortnight for 10 minutes for feedback and coaching.
- Quarterly management survey: employees will complete a 10 question survey every quarter to enable management to gauge the cohesiveness of the team and how the team is progressing towards it goals
- Regular “performance snapshot” provided by the team leader: At the end of each project (or at least each quarter), an employee’s team leader is to provide a “performance snapshot” on the employee by completing the following future- focussed statements:
- Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus.
- Given what I know of this person’s performance, I would always want him or her on my team.
- This person is at risk for low performance.
- This person is ready for promotion today.
(N.B- Deloitte undertook considerable research to develop these four questions which it says is a simple way to objectively highlight differences between employees and reliably measure performance.)
- In July 2015, IBM crowdsourced ideas from 380,000 staff across 170 countries for new performance review processes.
- With the benefit of staff feedback, IBM launched a new app-based performance review system called “Checkpoint” which was launched in February 2016.
- Under Checkpoint, employees can set and adjust goals, as well as ask for feedback and provide it to managers and co-workers. Employees are also required to meet with their manager every quarter to discuss their performance.
- At the end of each year, employees are not given a single rating based on individual performance, but instead rated on five generic criteria impacting the organisation as a whole; i.e: business results, impact on client, innovation, personal responsibility to team mates, and skills.