Are performance reviews dead?

Leading-edge companies such as Eli Lilly, General Electric and Deloitte are rebranding their performance management systems and swapping frequent informal supervisor/employee meetings for the more customary annual or semi-annual evaluations with formal ratings.

Given the wide-spread antipathy among both employees and managers to more traditional systems, it’s not surprising that an increasing number of organizations are re-thinking their performance management programs.

A recent survey of employees age 18-34 by HR solutions provider TriNet reveals that 69% of millennials see their company’s review process as flawed and nearly 90% would feel more confident if they could have more frequent performance conversations with their manager. Twenty-two percent have called in sick because they were anxious about their upcoming review.

Also see: “6 steps to implementing effective performance management.”

Rob Hernandez, product manager forTriNet Perform, the company’s performance management software, says the company wanted to survey millennials because this technologically savvy cohort now makes up about one-third of the workforce. Nevertheless he says, “I think if we asked other age groups the same questions they would agree they are apprehensive about traditional performance reviews and they’d like to see something better.”

UCLA Management Professor Samuel Culbert and author of Get Rid of the Performance Review believes that everything about traditional performance reviews is ‘bogus.’ “Managers pretend to be objective, which they are not. The best way to change your review is to change bosses,” he says. “What companies really need are two people discussing what’s actually going on, and not what the other person wants to hear.”

Culbert prefers what he calls “performance previews,” where supervisors and staff talk candidly about what they can and can’t do so the other person can pitch in and help out.

Also see: “What really matters to employees?”

One company leader who has had more experience with new models of performance management than most is Mark Shahriary, CEO of Lucix Corporation in California. Prior to joining Lucix, a world leader in space communications payload electronics in 2002, he headed up a group of about 600 employees at Hughes Corporation (subsequently purchased by Boeing).

Like in most companies, employees at Hughes had to fill out a form describing their accomplishments over the last year and where they thought they needed improvement. Then supervisors added their views of each individual’s performance to the form and employees were ranked from one to 10.

“I noticed the biggest turnover of people happened after performance reviews at Hughes. That’s because people thought they have done a good job and expected a certain raise. When it didn’t happen, it was a terrible shock,” says Shahriary.

Also see: “Employer achieves health accountability with performance reviews.”

This awareness was the catalyst for him to begin experimenting with having managers on his own team give employees continuous feedback, instead of annual performance reviews. He was so impressed with the improved morale and drop in employee turnover, that when he moved to Lucix, he decided to adopt the same strategy for the company’s 150 employees.

“Basically, I worked with supervisors to explain the system and encourage them to do informal, continuous reviews. There is no documentation required whatsoever,” he says. At the end of the year, each supervisor informally rates his direct reports and decides what their raises should be. Then Shahriary brings them all together and the list is combined to see if one or more supervisors has imposed higher or lower standards.

“We adjust the ratings to equalize them and we issue raises,” he says. “A typical conversation with an individual employee might go something like this, ‘The average raise this year was 6% but you are getting 4% because your salary was already higher than the norm for your job, and we really think you need improvement in these specific areas.’”

Also see: “Conducting performance appraisals in hard times.”

How does Shahriary know his unorthodox approach to performance management is working? “There is almost no measurement better than whether or not your employees are happy. Very few people ever leave Lucix,” he says.

Eli Lilly re-engineers performance management

Dr. David Rock is a co-author of the 2015 study “Reengineering Performance Management.” He believes an increasing number of companies are rethinking their performance management systems because current systems don’t provide accurate information and people hate them.

“The vast majority of companies will do significantly better in an environment without ratings. People will be happier, more engaged, more agile and more collaborative,” he says.

Rock, the director of the NeuroLeadership Institute in New York, recently led a team that conducted in-depth interviews with leaders of 33 large U.S. organizations that have eliminated appraisal scores as their primary performance management tool.

Also see: “5 questions to coach your team through a midyear review.”

The interviews revealed that 90% of companies are rebranding their programs after abandoning ratings using such catchy phrases like “GPS (Grow Perform Success)” at Gap Inc., “P2P (Passport to Performance)” at Expedia and “Check-in” at Adobe. But Rock says, “You can’t just do a re-branding. There would be a danger changing the brand and nothing else. It has to be a complete change of process.”

Mark Ferrera, the VP of talent management at pharmaceutical company Eli Lilly recently partnered with Rock to present a web seminar sharing his company’s performance management journey. Ferrera says that by mid-2012 there were signs that the existing performance management program for the company’s 40,000 employees headquartered in Indianapolis just wasn’t working well.

“We found that we were spending hundreds of thousands of dollars on bonuses and raises, yet for 85% of our population there was a drop in engagement level for about three months after reviews. Our five-point rating system had become an unnecessary distraction,” Ferrara says. “We asked our CEO for 20 months to research and deliver the prototype for a new program. He asked us to deliver in eight months. We just jumped right in without a pilot project.”

Also see: “Engagement tools target wrong audience.”

The team spearheading change recommended that ratings be eliminated and the CEO was immediately onboard. “We found that by taking ratings out of the equation, all of a sudden the pressure is off and the conversation is different. If people need improvement, there is simply a checkbox,” Ferrara says.

Considerable resources were devoted to supervisor training and the method of compensation was modified to encourage collaboration. “We now focus on team work. If a team meets its objectives the whole team gets the same percentage bonus. We have also moved away from differentiating percentage pay raises, except in limited circumstances where we are dealing with a small number of very top performers or very poor performers,” he says.

“Millennials today find it almost laughable that they would get feedback in a structured way just twice a year,” he says. “We believe we have addressed fairness and our supervisors are now better coaches. They can close out performance discussions at the end of the year by focusing on highlights and key learnings collected over the last 12 months.”

One-size does not fit all

Another important takeaway revealed in the NeuroLeadership interviews is that there is no template or single right approach to revamping performance management. The organizations interviewed stressed that new performance management infrastructures reflect their specific identity, culture and business aims.

A full 93.3% of the performance management change leaders reported that they expressly reduced the administrative load by lightening performance management documentation requirements; 63.3% stipulated they now require less documentation and 30% eliminated documentation altogether.

Also see: “Engagement levels tied to benefits understanding.”

General Electric’s culture leader Janice Semper says the company – with 300,000 employees worldwide – is at a pivotal time in its history. “We are implementing an integrated culture change to create a flexible environment that promotes experimentation, customer focus and new ways of collaborating,” she says. “The company has conducted focus groups with 1,000 employees and plans to have its new performance development system available to 170,000 professional employees by the end of 2016.”

To keep track of ongoing manager/employee conversations in real time, the company has developed PD@GE, an app that is available on desktops and mobile devices.  “The tool enables a new way of working and can help managers and employees set priorities [and] goals, record touch points  [and] ongoing discussions, share insights [and] feedback and create a draft summary at the end of the year,” Semper says.

The frequency with which managers and employees meet varies based on the needs of the business unit, placing stronger ownership on employees to initiate conversations with their managers. While Semper says a few divisions are piloting “no ratings” in 2015, there are still many unanswered questions about whether ratings will be completely eliminated and how the company will continue to “pay for performance” in the new, less structured environment.

Also see: “Publix attributes proactive communication to engagement, retention success.”

In 2012, accounting and consulting firm Deloitte started on its performance management re-engineering journey. “We found that the process of goal setting, having meetings, creating ratings and time behind closed doors added up to two million hours year,” says Heidi Soltis-Berner, Deloitte’s talent director, evolving workforce. “We want to shift that time and actually turn it into an investment where we focus more on the present and future than looking backwards.”

Soltis-Berner also notes that with millennials forming almost half of Deloitte’s population of professionals and Generation Z coming up behind, the company realized it needed to focus on continuous learning opportunities and real-time feedback.

For 40,000 of the company’s 70,000 employees, a new performance management system will be rolled out this year that will not include formal ratings. The three components of the new system are check-ins (weekly or less frequently), performance snapshots (annually based primarily on four questions answered by managers about each employee) and coaching.

Also see: “Stalled career management programs damaging retention.”

Performance snapshot information is plotted on a “scatter chart” and shared with practice leadership but not with employees. However Soltis-Berner says how compensation increases are determined and how compensation will be linked to performance still has to be worked out. “We’re also looking at the testing we have done to determine the best way to evaluate and compensate top performers,” she says.

Rock agrees that re-engineering performance management is not necessarily about getting rid of ratings, documentation or pay for performance.

“It’s about improving all of these so we no longer have to try and simplify a year of someone’s blood, sweat and tears into a single number,” he says. “Since 2010, close to 50 large companies have ‘crossed the line of courage,’ but some companies will always keep ratings, particularly in manufacturing where goals are more tangible.”

But Culbert believes that in order for changes to the performance management process to bring about real change it’s not enough for companies to get rid of the annual discussion if the boss is still making decisions about pay, performance and advancement.

Also see: “Benefits ‘ticket to the game’ of attraction and retention.”

“Companies have to actually get rid of performance reviews, not just hide them. What you want is for the work unit to get results,” he concludes. “The best and most productive work environments are where compensation and benefits are de-linked from individual performance [and] are based on team and company performance so politics are minimized in the evaluation process.”

Sheryl Smolkin is a lawyer and freelance writer based in Toronto.