Are you growing into a 'Big Dumb Company'?
Growth is the goal of most successful businesses: to grow revenue, grow profitability, grow geographically. But as your...
Some of the world’s leading companies have ditched the performance review, while even more have stopped rating employee performances. Is this the beginning of the end for the annual performance review?
The performance review has been around for about 100 years, introduced by the US Army during World War I to determine officer ranks. But its days may be numbered. Some of the world’s leading companies are dropping the performance review in favour of more regular low-key ‘catch-ups’. Other large companies aren’t quite willing to go that far, but they are removing the one-to-five ratings.
It’s a quiet trend, but one that has been building over time. And anyone who has worked in a large organisation will be familiar with the deficiencies of the annual performance review. The time lag between ‘performance’ and ‘review’ in an annual review is too great, the manager doing the review isn’t always familiar with the work of the employee, and they’re also wary of the demotivating effect of a low – albeit justified – score. One perverse result of the latter trend is that an organisation can have a workforce where everyone is above average – a statistical impossibility.
While such deficiencies would be familiar to a worker two decades ago, how we do our work has changed so comprehensively in recent years that it’s not surprising some companies feel the old paradigms don’t quite work anymore.
One of the big changes is that the way we work has changed so much. A numerical performance management system undertaken annually just doesn’t bear any real resemblance to how work actually gets done today. Does anyone set 12-month goals anymore? In today’s fast-moving business world some workers may need a goal cycle of one week, while monthly or quarterly goal cycles may be more appropriate for others.
We are also working in teams more than ever, and it’s not unusual for employees to be involved in multiple teams spread around the world. As a result, it’s a rare manager who accurately knows how their team member is performing in those other teams – especially when they’re doing work not visible to the manager.
One of the major findings of those companies who have dropped or made major changes to the performance review system is that conventional ratings systems have an impact on collaboration. Unlike a learning environment where getting a particular grade depends on meeting certain objective criteria, managers may be restricted in the number of top ratings they can give. So a manager may have a high-performing team of 10 people, yet only be able to give out one or two top ratings. This leads to people competing directly with one another for promotions, bonuses and raises, which can make a business less customer-focused and agile.
Every company is faced with the challenge of attracting and retaining its talented employees. By removing ratings, companies force managers to have conversations with employees about their development three to four times a year instead of only once. In particular, this approach is valuable for retaining talented millennials who crave feedback, learning and career growth. Even for older employees – Generations X and Y – more frequent communication often boosts employee engagement, leads to greater skills development and fairer pay. These benefits flow simply from managers having a better understanding of how the people who report to them are actually doing.
Among those companies that retain the performance review but have removed ratings, people tend to develop faster across the board. Not only is there more frequent dialogue, but conversations are more honest and open because there is no need to justify or challenge a rating at the end of the year.
While it may not sound like an important factor, not having to justify a rating makes a huge difference to an organisation. Deloitte, for example, found that when it analysed its process, the company was devoting around 2 million hours a year on performance reviews. Because most of that time was being spent talking about the ratings themselves, removing ratings shifts the conversation from defending past performance, or lack thereof, to talking about growth and development.
Companies that have ditched the yearly event are finding their employees are happier, more engaged and perform better. On one hand, this is not surprising – it’s simply treating an employee like a person instead of a number. Only time will tell whether performance reviews are finished for good.