How effective are organizations at driving superior performance from their employees? If we are to believe human resources professionals, then the answer is that our performance management systems are failing to make the grade. This is the sobering conclusion from Sibson Consulting's worldwide survey.
In mid-2010, Sibson Consulting, in concert with the WorldatWork association, surveyed the association's members on the status and effectiveness of their organizations' performance management systems. Some 750 members responded in a variety of countries and industries and covered organizations of less than 100 employees to those employing more than 500,000.
Performance management systems, as set up and administered by HR functions, typically serve to rate the performance of individual employees and shape their behavior towards superior performance for the next rating period. Those employees not so fortunate may be moved out of the organization. Such systems are very pervasive in today's organizations, with 91% of respondents reporting that their organization has a formal performance management system in place. The results of this survey, therefore, have very wide application.
How do HR professionals rate their own performance management system? After over four decades of fine tuning the system, less than half of them saw their system as helping the organization achieve its strategic objectives. Let's tease out this disturbing result.
For a start, what are HR professionals hoping to achieve with their appraisal systems? Two thirds (66%) of survey respondents identified the distribution of rewards based on individual performance as a key objective. A little over one half (54%) selected greater individual accountability. Only 46% selected talent development as a key goal.
And what kinds of rewards are being distributed? Four in five respondents (80%) report that their organization is using performance evaluations to grant merit increases. One half of organizations (51%) link performance to short-term incentives, whilst only one-third (30%) link performance to long-term incentives. The upshot is that in 65% of organizations, low performers suffer with their pay packets and in 42% of organizations, high performers are rewarded with bigger pay checks.
What is surprising is the popularity of grading employees with the hope of increasing their motivation, given that differential monetary rewards have been found to work in but a limited number of scenarios. Daniel Pink, Jeffrey Pfeffer and Robert Sutton, for example, continue to highlight the poor research base behind the idea that paying for performance is generally effective in lifting employee productivity. Pay and bonus incentives, they demonstrate, do not work when the task is complex, requires judgment and relies on collaboration with others. And these are the types of jobs that predominate in organization's today. Perhaps this is a primary reason why performance management systems are failing to live up to the expectations of human resources staffs.
Many organizations are finding out the hard way how financial disparities based on perceived performance differences bring with it significant risks. For a start, employees are set in competition with each other when co-operation and teamwork are needed. In addition, overly simplistic performance criteria can drive dysfunctional behaviors. Salaries can also blow out and put enormous financial strain on the organization, especially during times of low economic activity and recession.
How are organizations implementing their employee appraisal systems? Only half of the respondents reported their organization using any kind of goal setting in their performance management process. And only half of those again use quantitative measures in their performance evaluation. With the low incidence of setting measurable goals at the start of the appraisal cycle, it is not surprising then that employees by and large rate the appraisal process subjective and capricious. Only one third of all employees, the survey respondents felt, had trust in the appraisal process.
In those cases in which employee goals are set, the alignment of the goals to the organization's objectives rapidly loosen as we slide down the organization's hierarchy. For senior managers, goals are completely or largely aligned in 70% of cases, sliding to 45% at middle manager level and bottoming at 17% for frontline employees. With such poor line of sight between individual goals and company strategy, it is not difficult to see how for the majority of workers the appraisal system is an irrelevant nuisance.
On the question of employee participation in the appraisal process, only 61% of professionals surveyed said their organization allows employees to have input into shaping their goals. In 28% of organizations, goals cascade down from the top of the hierarchy. Interestingly, 72% of respondents said that in their organization, employees are asked to complete a self-assessment. So, notions of employee empowerment remain quite weak for many organizations in the study. Many such organizations are content to simply listen to their employees' self-appraisals on their performance. In many cases, this only serves to set the scene for confrontation, especially considering that most people regard themselves as performing above average. With only one quarter of organizations using any kind of quantitative measures, the battle of the "opinions" is set.
Such a confrontational atmosphere is often further inflamed by the nature of the appraisal. More that half of respondents reported that their organization uses a five-point scale for rating employees. For many organizations, ratings are scrutinized to positively encourage differentiation amongst employees. This is done in a variety of ways. For 37% of organizations, ratings are audited by the HR department, 30% specify a ratings distribution, 29% require managers to calibrate ratings and 12% use forced rankings. Nearly half of all organizations in the study (46%) compile and disseminate ratings distribution reports to their managers. For 35% of organizations (mainly smaller), ratings are not formally validated in any way. The battle lines are drawn for each employee to fight for that all important "number" that will win them greater status and money.
What of the link between individual performance ratings and overall organizational performance? Only 20% of survey respondents reported employee ratings going down when organizational performance is poor. This may suggest that managers predominantly give high performance ratings irrespective of changes in employee performance. However, the story is not so simple. Poorer employee performance may not be reflected in actual business results until the following year. In some cases, there may be a lag effect as loyal employees and customers hang on, existing stocks diminish and cash reserves fill the gap. Secondly, poor organization performance is not always caused by poor performing employees. Economic downturns and the entrance of aggressive new competitors are outside the influence of employees, but can send any organization into a tail spin.
How are organizations supporting workers and managers in the performance management process? Little more than half of organizations (56%) conduct training sessions on using the performance management system. It is perhaps not surprising then that only 55% of respondents said that their managers complete the performance evaluations on time. Over one quarter of respondents (28%) felt that their managers saw performance management as a form filling exercise instead of having quality conversations with employees.
It seems that tying the appraisal cycle to employee anniversary dates is well out of favor. No survey respondents reported this way of timing the appraisal process. Two thirds (68%) reported that their appraisal cycle was tied to the annual budget and goal-setting process. As laudable as this timing may be, lumping all of the appraisals to one time in the year only serves to burden managers who already feel overworked.
The administrative workload has been lessened thanks to technological improvements over the last several years. One third of organizations (34%), the survey found, have transferred their performance management process completely online. For another 40% of organizations, the process is a combination of online and offline. Not surprisingly, paper-based forms are favored more by smaller organizations.
In spite of this ease of administration in the majority of performance management system implementations, how effective is the process? Less than half of HR professionals (47%) surveyed see their system as helping the organization achieve its strategic objectives. HR professionals are also at the frontline in gauging employee confidence in the system. Alarmingly, less than one third (30%) reported their employees as having trust in the system. Another one third felt that their employees lack a sense of trust in the appraisal process. Overall, only 43% of respondents rated their performance management system as effective.
The survey uncovered significant challenges ahead for HR professionals in moving forward with their appraisal systems. The top three roadblocks to enjoying an effective system, as seen by the human resources staffs themselves, are:
- managers lack the courage to have difficult performance conversations with employees (63%)
- performance management is viewed as a HR process instead of as a business-critical process (47%)
- poor goal setting at the start of the employee appraisal cycle (36%)
Only a little over one third of HR professionals thought that managers complete thorough performance assessments. Another one third of respondents openly disagreed. Not even half (46%) thought the system worthwhile considering the amount time expended in conducting and reporting the evaluations.
The real challenge ahead for all of us now is to confront the underlying causes for these maladies. In this article, I have touched briefly on some of those causes for our dysfunctional performance management systems. We can keep tinkering with the system, hoping that we will discover the right combination of processes, forms and skills that will make all of the problems disappear. Or we can learn the lessons from this study and begin with a clean slate. We can start on the task of creating a new type of performance management system; one that is based on evidence and true collaboration between all of the stakeholders. The challenge is ours.
- Allan, Leslie, (2010) "Top Leadership Perspectives on Performance Management", Business Performance Pty Ltd
- Pink, Daniel H., (2009) Drive: The Surprising Truth About What Motivates Us, Riverhead Hardcover
- Pfeffer, Jeffrey, (2007) What Were They Thinking Unconventional Wisdom About Management, Ch. 11, Harvard Business School Press
- Pfeffer, Jeffrey and Sutton, Robert I., (2006) Hard Facts, Dangerous Half-Truths and Total Nonsense: Profiting from Evidence-Based Management, Ch. 5, Harvard Business School Press
- The Segal Group, (2010) Study on The State of Performance Management
- The Segal Group, (2010) Information About the Respondents to the WorldatWork/Sibson 2010 Study on The State of Performance Management
Leslie Allan is Managing Director of Business Performance Pty Ltd; a management consulting firm specializing in people and process capability. He has been assisting organizations for over 20 years, contributing in various roles as project manager, process consultant and trainer for organizations large and small.
He is also the author of five books on training and change management and is the creator of various training tools and templates. Leslie is a member of the Australian Institute of Management and the Quality Society of Australasia. He is also a member of the Divisional Council of the Victorian Division of the Australian Institute of Training and Development (AITD). Leslie may be contacted by email at firstname.lastname@example.org
Find out more about keeping employees engaged through times of change. Check out Leslie's resource kit, Managing Change in the Workplace. This comprehensive guide is intended for everyone expected to lead, manage and implement change. Visit the Managing Change in the Workplace information portal to find out how to download the free Introductory Chapter and start using this practical change management guide and workbook today.