Getting rid of Performance Appraisals?

About a year ago, the consultancy company Deloitte was all over the headlines. How come? They had announced that they would be getting rid of their conventional, ratings-based performance appraisal process. And within a few months, high-profile companies like Accenture and GE followed suit. Since then the media may have lost interest a little, but the number of companies reconsidering how they rate their employees appears to be growing steadily.

Ratings-based performance management is attractive. It is simple to stick a number or a category label on a person according to some or other criterion, and it suggests an objective robustness. Often it also incorporates forced ranking. Comparing employees with their peers and placing them in bands is handy if you want to identify your top-20% people so you can nurture and fast-track them, and the bottom-10% so you can get trim the so-called dead wood (something in which GE is a past master).

However, we have known for some time that such systems are ineffective and unreliable. So, what is surprising is not so much that more and more prominent businesses are stopping the practice, but that it has taken so long for them to do so. How come? Last September, an article in the HBR looked into the matter.

The increased importance of collaboration at work is one such reason. Most people are members of teams, often multiple teams at the same time. An appraisal system that focuses on individual performance is counterproductive when it’s team performance that really counts.

Another challenge is that business goals of project teams, departments and people no longer neatly fit into an annual calendar. Monthly, or even weekly horizons (and performance appraisals) are often more appropriate than a rigid 12-month review cycle. Furthermore, if you want to attract and keep talent, you need to engage more often than once a year with employees who are keen on opportunities to develop new skills and to gain new experience. The same applies for the company itself. It makes no sense to restrict promotions to just one short period in the year, and a more continuous evaluation process would be a lot better.

So companies like GE and Adobe have implemented more frequent check-ins, and more short-term goals. However, even these new approaches still focus largely on outcomes: what remains central is the answer to the question whether an employee has met his or her goals.

And this is a problem. Of course it is appealing for a manager to use outcome as a proxy for ability and skill – the intrinsic capabilities of an employee. It is easy to determine with little ambiguity whether a goal was reached or an expectation was fulfilled. And it is tempting to think that, just because an employee achieved her goals, she must have performed well (and similarly, that whoever failed to meet their goals obviously is not competent or simply didn’t work hard enough).

Hindsight and Chance

But in doing so, managers are prone to hindsight bias. There are almost always multiple ways in which success or failure arises. When you only look at outcomes you don’t see the behaviour of the employee in question, nor the process by which they achieved their goals. Perhaps they were successful, oblivious of the harmful effect their actions had on others elsewhere in the organization. Maybe they were even fully aware that their success came at the expense of somebody else.

Worse still, you are also overlooking the role of chance in success or failure. A fund manager outperforming 94% of a countries investment funds has to be a really clever person, right? Except when it is a chimpanzee picking companies at random, who is simply lucky…

How to combat hindsight bias? In his book Misbehaving, Richard Thaler puts it like this: “Good leaders must create environments in which employees feel that making evidence-based decisions will always be rewarded, no matter what outcome occurs.” This is a clear plea for looking at how people make decisions, rather than just to what the result of those decisions is.

Another behavioural economist, Dan Ariely, thinks along the same lines. In an answer to a reader’s question whether it is wise to fire people who fail, he writes:

Organizations reward and punish people based on the outcome of decisions, not on the quality of decisions. In general, you’d hope that good decisions would lead to good outcomes, but that causal link rests on probabilities, not certainties—so reward and punishment are often misapplied.

The Way of Working

We’d be better off evaluating people on the basis of their ways of working. Look at how employees make decisions, but also at how they coöperate with their colleagues, how they provide leadership to their team members, and so on.

Of course, it is not because someone shows great diligence, observes, consults and collects data before making a decision that they are guaranteed to deliver the best outcome, or even a good outcome. But wouldn’t it be crazy to reward people who ‘failed’ and to punish those who were ‘successful’? Well, no.

Just think what kind of employee would, in the long run, add more value to your organization. Would it be someone who, like the investment chimpanzee, takes decisions without any intelligence or skill, and who ends up just being lucky? Or someone who makes choices after systematically evaluating risks and benefits, and weighing off the pros and cons – and who may be unlucky?

More changes needed to solve the Problem of Performance Appraisals

Talent management should not rely on luck and on hindsight bias. That means that more changes are needed in performance management. What Deloitte, GE, Adobe and others have done is at best only half of the solution.

As Dan Ariely says:

We should reward and retain people who know how to make good decisions, but most of the time, we just reward good outcomes. As long as organizations behave this way, we will be stuck with conservative, risk-avoiding behaviour, and we will keep firing some of the wrong people.

Koen Smets

Koen Smets

Koen Smets is an accidental behavioural economist, who works as an organization development specialist. He uses elements from both orthodox microeconomics and behavioural economics to bring about behavioural change. He is on Twitter as @koenfucius.

The Performance Appraisals Problem is half-solved

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