Designing Performance Management

In the recent past, we have seen a lot of buzz on performance management – many companies did away with appraisals and bell curves. They announced they were bringing in regular reviews, real time feedback conversations, investments in coaching et al. But was this stance really unprecedented? Was it the first time ever that organisations were talking about development?

Seems not.

Before I deep dive into the evolution, let us do a quick recap of why do we need to manage performance. There are three key motives that I have inferred –

  1. Fixing Accountability for performance (identifying promotes, rewarding exceptional performers and managing poor performers)
  2. Development workforce capabilities (augmenting skills, reinforcing desired behaviours, driving a growth mindset)
  3. And through both of the above, Engagement of the talent (enabling a sense of purpose, helping people find value in their work and fostering team work)

Since the origin of Performance Management during WW I, we have seen five waves already. Organisations have shifted from accountability to development to accountability and back. 

Wave 1 – Accountability. Merit ratings were introduced in WWI by the US military to identify and dismiss poor performers. In WW II, forced rankings were introduced to identify soldiers with potential to become officers. By the 1940s, about 60% of US companies were using appraisals to formally document performance and allocate rewards.

Wave 2 – Development. The shift came in 1950s. There was a shortage of managerial talent, and it was important to develop employees to take on supervisory and manager roles. Theory Y was advocated, the need for involving the employees in goal setting and assessment. In the 60s, GE decided to have two separate appraisal discussions for accountability and development, and others followed suit.

Wave 3 – Accountability. Wave 2 came in the 70s. inflation was increasing, real value of money declined and differentiation in rewards became important to retain high performers. In 80s, GE introduced the bell curve or forced distribution – develop high performers, accommodate the middle, and dismiss the bottom. It was believed that capabilities were inherent or innate, and people with high capabilities needed to be identified and rewarded. Organisations were also getting flatter and it was not feasible for supervisors to invest time in development of all individuals.

Wave 4 : Development. In 2012, Kelly Services became first professional services firm to perform to drop performance ratings. Adobe followed soon after dropping annual appraisals as agile methodology meant short term priorities and team driven outcomes. A host of other organisations announced similar changes.

Wave 5 : The truth lies in the middle. However, since 2016, we have seen some of the companies go back to ratings. Research indicates that a few organisations saw a drop in performance after they dropped ratings and bell curves, with employees not getting a sense of how they were performing. Supervisors were unable to explain the logic and context of how reward decisions were taken in the absence of ratings. Also, time saved by the supervisors from documenting performance and attending appraisal meetings was not necessarily re-allocated to coaching and development conversations. The initial euphoria faded, and employee engagement dipped.

Organisations are realising the importance of a hybrid approach balancing accountability and development.

  1. Feedback needs to be embedded in daily work and reviews, for it to be ongoing and relevant. And formal periodic reviews of performance are needed as well.
  2. Feedback conversations have to focus on performance as well as future actions needed to grow.
  3. It is necessary to identify the exceptional and poor individual performances, as much as it is important to focus on team outcomes, collaboration and innovation.
  4. We have to reward people from their performance as well as their skills and market relevance.

The biggest lesson to draw is that there is no perfect performance management design or system. 

Each organisation has to develop an approach tuned to its business conditions and organisation structures. Even within an organisation, there is a need for customisation based on various talent pools, nature of work and what are the desired employee behaviours.

To elaborate this further, let us discuss each aspect at length –

Business conditions include the agility and responsiveness required to meet customer needs, scarcity of talent etc. If an organisation has a pool or groups of similarly skilled people and hires en masse, focus is on accountability – it needs performance management as a validation for assessing individual performance and taking relevant actions around promotions, exits and rewards. If an organisation has a pool or groups of experts, focus is on development – it will need to retain its talent and expertise and reward skills as well as desired team outcomes.

Organisation structures include pyramids, spans of control etc. A flatter organisation would imply a higher span of control, focus is on accountability – a supervisor may need to differentiate talent to prioritise investments in development. For agile teams which require greater autonomy and self direction, focus is on development – need for greater investments on the team as a whole.

Nature of work influences the approach as well. If the individuals have discrete tasks and well defined KPIs, focus is on accountability – differentiating performance is important. Agile and design thinking methodologies require focus on development – teams need to continuously ideate, prototype and test solutions; team collaboration and innovation needs to be recognised and rewarded.

Lastly, desired employee behaviours need to be considered. Are we focusing on individual excellence – or – focusing on building expertise and collaboration?

A performance management framework design need to keep the employees and teams at the centre and be designed around what really drives performance.

  • Short term priorities help focus on things which are relevant at the moment and are most impactful, but they need to be in line with the team and organisational expectations.
  • Very frequent conversations are required, not only to discuss performance but also purpose, expectations and strengths.
  • Formal periodic performance reviews are needed for transparency, but they need to be well backed by real time data and crowdsourced feedback from all stakeholders.
  • Ratings and labels have been replaced with forward looking talent decisions that are an objective view of actions that need to be taken by/ for an individual.
  • And while there needs to be greater flexibility for supervisors and leads to determine rewards, they need guardrails as well to ensure consistency across the organisation.

We must understand that this is a massive cultural and behaviour change and cannot be effected overnight through announcements, process or tool changes. It needs behavioural changes at all levels. Organisations on this journey still have a few challenges to solve for –

  1. Coaching at Scale – How do we make coaching pervasive? How do we develop coaching capabilities for all our supervisors?
  2. Feedback as a way of life – Real time feedback conversations do not come naturally to people. How do we reinforce the need and enable these?
  3. Aligned Culture and role models – No change will happen unless it is led from the top. How do we ensure our business leaders practise what they preach?
  4. Real time recognition of poor performance – Rather than relying on annual identification of poor performers, how do we encourage and enable supervisors identify sub par performance real time to mitigate productivity losses and/ or impact on team outcomes.
  5. Insights from the humungous data – How do we design and democratise analytics to enable supervisors with real time insights on individual and team performance?
  6. Redesign of processes strongly linked to ratings – In the absence of ratings, how do we make eligibility criteria for various programmes and opportunities more relevant?
  7. Ability to explain context applied for reward decisions – How do we equip and train our Supervisors to explain reward decisions effectively? How do we ensure people perceive reward decisions as fair and objective?

It is an interesting and challenging journey ahead for all of us! Would be glad to share and discuss any ideas or solutions you may have. 

References

https://hbr.org/2016/10/the-performance-management-revolution

https://www.cebglobal.com/blogs/corporate-hr-removing-performance-ratings-is-unlikely-to-improve-performance/

https://www.mckinsey.com/business-functions/organization/our-insights/ahead-of-the-curve-the-future-of-performance-management

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