What really happens when companies nix performance ratings

By David Rock and Beth Jones, NeuroLeadership Institute

The move away from conventional, ratings-based performance management continues to gain momentum. By November 2015, at least 52 large companies had shifted from the practice of once-yearly performance appraisals; estimates are that hundreds of other companies are considering following suit. A wide range of industries are represented, from technology (39% of the 52) to business services (19%).

At the NeuroLeadership Institute, we’ve conducted in-depth research with 33 of these 52 companies to find out what really happens when companies remove performance ratings. Here are some of our high-level findings:

1. The frequency of manager-employee conversations increases dramatically.
All of the companies increased the recommended number of manager interactions with their teams. Of the 33 U.S.-based companies we studied, 76% had previously recommended an annual performance conversation. After moving away from ratings, 68% moved to a recommendation of, at minimum, quarterly conversations.

The focus has clearly shifted to conversations happening throughout the year. Managers are being urged to use their judgment about a conversation frequency that best supports employee performance. Some companies are also asking direct reports to play a more proactive role in owning the responsibility for scheduling and preparing for performance conversations.

2. Companies are significantly reducing administrative burden.
Almost two-thirds of the 33 organizations formally reduced managers’ documentation requirements in performance conversations with their direct reports. Another 30% eliminated documentation requirements altogether. HBR has previously reported the two million hours annually that Deloitte needs to review its 65,000+ employees across the globe, as well as Adobe’s estimate that its yearly reviews require a time equivalence of 40 full-time jobs. Those levels of investment can’t be justified when conventional performance management is failing to improve performance. They’re even less defensible when traditional methods are actually driving good people away, as many companies have reported happening, especially due to the upsetting nature of conversations that treat people as a number.

3. Conversations focus on goals, growth, and development.
In the revamped performance management systems, conversations have evolved from assessing past performance to setting goals, planning growth, and taking action. One organization summarized its new performance management approach as ‘providing feedback in ways that empower individuals, drive performance, support development, and create a sense of purpose.’ Conversations about goals have taken on new importance, since they are an important cornerstone of setting clear expectations in a process without ratings. There’s an implicit recognition that performance and engagement are strongest when employees feel supported by a manager’s guidance and coaching and when they have more ownership of the process. Companies told us that the new focus on quality conversations has been well received by employees and managers alike.

4. There is no single best practice.
Companies making the shift away from ratings definitely look to the experiences of others that have already made the change. But there is no ‘one size fits all’ in post-ratings performance management. The organizations we talked to were clear that a revamped performance management process was an opportunity to revitalize their frameworks for supporting engagement and performance. But the ways each company achieved this differed according to its particular goals and culture. As one organization described, it wasn’t just a new process, it was ‘the best new process for us.’

5. No one is getting rid of pay-for-performance or pay differentiation.
It might be easy to assume that companies are moving away from ratings in order to drop pay-for-performance. Often the first fear we hear from a CEO or CHRO when broaching the no-ratings idea is ‘How would we pay people now?’ It turns out that in a no-ratings world, pay-for-performance is alive and well. Despite having no simple rating for employee performance, companies are working out how to identify low performers, often using specific language to describe someone who isn’t up to standards. High performers are benefiting via the same or even more differentiated pay as a result of compensation going back to more of a ‘manager discretion’ strategy. In short, companies are encouraging managers to get to know their people better through having better-quality conversations about performance, then to differentiate compensation based on their own judgment. At one multinational retailer, this new strategy resulted in a dramatic drop in the number of complaints during compensation season.

6. Well-designed change management is essential.
The few organizations that rolled out their new performance management platforms too quickly, in a period of a couple of months and without a lot of planning, reported to us that they regretted rushing. Most companies recognized that taking the time to execute a strong change-management strategy was essential to their new performance management approach. One company said that its 91% continued-participation rate was a direct result of its having invested in a months-long change-management process. Educating line executives about the business case for the change was a critical step, as those execs then took ownership of the initiative and were naturally inclined to advocate for both the significance and the urgency of the proposed performance management change.

It’s telling that the idea to remove ratings was in some cases secondary to the realization that a current performance management system just wasn’t working and the decision to do something about it. The primary intention was to identify and implement the performance management system that made the most sense, whatever that turned out to be. As an ever-growing number of companies continue to discover, de-emphasizing ratings in favour of ongoing quality conversations that support employee development is showing itself to be a viable option.

This article first appeared at HBR


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