Is It Time To Move On From The Annual Performance Review?

Yes. Why, with rapidly changing contexts, we need to change how we do performance management

A succession of large businesses (including Accenture, Deloitte, Microsoft and Adobe) have now moved away from the annual review as a standard mechanic for performance management. When GE announced a while back that they too were experimenting with replacing the annual formal review with more frequent conversations, they talked about how the increased pace of change meant that goals set annually quickly became out of date, and feedback on things that happened a year ago made no sense.

Speaking about why her company made their transition, Adobe HR head Donna Morris said:

“It’s a process that looks in the rear view mirror, that’s focused on what you’ve done a year ago. That just isn’t current with how I think we’re working and how many of the employees that we’re looking to attract or grow have been raised.”

When Accenture announced their move, their CEO talked about how an annual assessment made little sense in the modern business environment, how performance was about what happened every day meaning that it was now more about instant management feedback, and how they were not convinced that the legacy review process was actually driving better performance. The idea of ranking staff along a distribution curve was, he said, increasingly irrelevant.

Many of these companies noted the drain on management time and resources that the review process represented and whilst acknowledging the time intensive nature of feedback and performance management, the opportunity in shifting to a more frequent and incremental evaluation process is seen to be in achieving a greater return on that investment of time.

There are some not insignificant question marks around how fit-for-purpose traditional performance review systems are in achieving key aims. A public survey conducted by Deloitte found that 58% of the executives that they questioned believed that the current review process did not support either high performance or employee engagement.

Work by Dr David Rock which combines principles from neuroscience with the practice of leadership has set out some key ways in which reviews (even positive ones) can negatively impact motivation and engagement. His neuroscience-based framework incorporates five key factors (the SCARF model: Status, Certainty, Autonomy, Relatedness and Fairness) that can have a disproportionately high affect on human reactions, and which performance rankings can often negatively impact. This can leave staff feeling under-recognised, under-appreciated, disengaged, less open to setting stretching goals.

A well known study (PDF) into performance ratings by Michael Mount, Steven Scullen, and Maynard Goff (Journal of Psychology, 2000) based on a sample of almost 4,500 managers who were rated by bosses, peers and subordinates, found that ‘idiosyncratic rater effects’ (or the individual quirks or peculiarities of rater’s perceptions) accounted for 62% of the rating variance, whereas actual performance accounted for only 21% of the variance. Ratings, they concluded, ‘reveal more about the the rater than they do the ratee’.

Deloitte went as far as counting the time spent on performance management and found that each year it consumed almost two million hours of management time, much of it taken up with leaders discussing the outputs of the process rather than talking to the employees themselves. The whole thing over-emphasised the past at the expense of looking to the future.

And yet rating systems are not entirely bad. Research by management insight and technology business CEB has found that numeric or qualitative performance rating systems can still be useful in driving performance, helping with staff and management decision-making accountability, the tangible linking of performance to reward, employee engagement and the perceived quality of manager feedback (particularly with high performing staff). But there are however, some tangible ways they found to improve performance management:

• An increased frequency of informal review — more timely, regular, ongoing feedback allows for earlier adaptation and better adjustment of expectations
• Forwards, not backwards looking review — discussing future requirements better aligns individual strengths with business needs
• Peer, as well as manager, review — particularly useful given the greater contemporary need for cross-functional collaboration

Deloitte’s experience is instructive. A study that they conducted comparing 60 high-performing teams with a control group showed that a few key factors that related to coworker commitment to quality work, the presence of an inspiring company mission, and the opportunity to use individual strengths on a daily basis, most highly correlated to high performance.

Their efforts to improve their review process focused on tackling the idiosyncratic rater effect whilst reducing process complexity. Instead of asking team leaders to rate the skills of team members (which leads to idiosyncratic rating), they ask them about their own future actions related to that person (which has far greater consistency). At the end of projects (or quarterly if that’s not frequent enough), team leaders are asked to respond to four future-focused statements about each team member, each of which have been tested and tweaked over time to more reliably measure performance. The four questions are (quoting from this article by Ashley Goodall, Deloitte’s Director of Leader Development):

1. 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 (answers based on a five point scale from ‘strongly agree’ to ‘strongly disagree’ measures performance and unique value)

2. Given what I know of this person’s performance, I would always want him or her on my team (answers based on the same five point scale, measures the ability to work well with others)

3. This person is at risk for low performance (simple yes or no, identifies problems)

4. This person is ready for promotion today (simple yes or no again, measures potential)

This focus on both seeing and recognising performance clearly was combined with techniques to fuel performance, most notably through more regular and informal check-ins that can frequently set expectations, give feedback and support and review priorities (‘For us, these check-ins are not in addition to the work of a team leader; they are the work of a team leader’). Regular, brief conversations that can bring clarity of direction, avoid misalignment and enable each team member to do their best possible work. All attributes that align with the expectations, purpose and strengths that characterise their highest performing teams. Deloitte have identified a measurable correlation between the frequency of these conversations and employee engagement, and so combine weekly check-ins with quarterly performance snapshots and annual compensation discussions.

In the book, we discuss the rhythms that organisations and teams work to, and how tempo can be a key driver for change. An essential part of this is the frequency and type of performance feedback and review. Agile, iterative working creates a natural rhythm and appropriate environment for more frequent, informal feedback that can support continuous performance improvement. More than ever, businesses are confronted with rapidly changing contexts: competitive, consumer and company. Performance management needs to change.

Structured but nimble, timely, and more regular feedback.

Individual.

Focused on the future, not the past.

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Originally published at Building The Agile Business.