The End of the Performance Review

Evidence is mounting that performance management (PM) systems are broken. The appraisal process is one in which employees and their managers set goals for the year; managers interview others who have worked with them and write up an appraisal; employees are rated and ranked numerically; and salary, bonus, and promotion opportunities are awarded accordingly. A 2013 survey by the Society for Human Resource Management asked HR professionals about the quality of their own PM systems; only 23% said their company was above average in the way it conducted them. Other studies uncovered even more disdain. According to CEB Inc., a management research group, 95% of managers are dissatisfied with their PM systems and 90% of HR heads believe they do not yield accurate information. The performance management systems in many companies are misleading, cumbersome and complex, requiring some HR departments to put aside an entire quarter to manage them. More importantly, they can be counterproductive. In the context of neuroscience research, most PM practices turn out to damage the performance they are intended to improve. That’s because they are based on a fundamental misunderstanding of human responses, as revealed in recurring patterns of mental activity. How your brain responds to performance rankings There are at least two basic problems with performance management: First, labelling people with any form of numerical rating or ranking generates an overwhelming fight- or- flight response that impairs good judgment. This neural response hijacks the brain, much as when there is an imminent physical threat like a confrontation with a wild animal. It primes people for rapid reaction and aggressive movement. But it is ill suited for the kind of thoughtful, reflective conversation that allows people to learn from a performance review. For example, a supervisor might say, with the best of intentions, “You were ranked number 2 this year, and here are some development actions for the future.” In this company, which scores its appraisals on a 1–3 scale, a 2 ranking is supposed to represent high praise. But a typical employee immediately disengages. Knowing that others were ranked still higher is enough to provoke a brain hijack. The employee may not say anything overtly, but he or she feels disregarded and undermined — and thus intensely inclined to ignore feedback, push back against stretch goals, and reject the example of positive role models. The second problem with PM is that it fosters an incorrect but prevalent view of human growth and learning. Dr. Carol Dweck, Professor of Psychology at Stanford University, discovered that most people hold one of two implicit theories about human growth and learning. The fixed mindset, as she calls it, holds that intelligence and talent are basically established at birth and remain static throughout life. People are born smart or not, and there’s not much anyone can do about it. The growth mindset, by contrast, holds that people learn, grow and improve all their lives. This is accurate; most people do learn throughout their years. But they could learn far more effectively, and bring more of a high-performance attitude to everything they did, if they weren’t held back by the mental paralysis associated with the fixed mindset. Few people are thoroughly inclined toward either the fixed or the growth mindset. Some people, for instance, might go to work with a fixed mindset about their ability to be creative, believing that they can never become any better at innovating new products than they are today. But they might have a growth mindset when playing classical piano, associating the rigors of daily practice with their ability to improve. Unfortunately, the fixed mindset is prevalent in many organizations — and reinforced by PM systems. This induces many employees to avoid the kind of effort that leads to learning and professional growth. Think back to your days in school. Chances are, no one liked to appear as if he or she had to work really hard to get good grades. They feared others might think they were not naturally talented. Similarly, in a work environment where the fixed mindset holds sway, people will typically strive to avoid difficult challenges. Any stretch goal or strategic imperative, no matter how worthy, will be seen as an invitation to fail. Unsurprisingly, this mindset also makes people more likely to cheat. In one study, people primed just before a test with fixed mindset suggestions (for example, statements that they could not change or grow) were 300% more likely to cheat than their growth mindset counterparts. The effects on organizations are devastating. Conventional performance management has been linked to high levels of attrition, low productivity, and significant problems with collaboration. PricewaterhouseCoopers (PwC’s) 17th Annual Global CEO Survey, conducted in 2013, found that 93% of the CEOs surveyed recognized the need to change their talent practices — something their companies were doing wasn’t working. If you want a high-performance organization, you have to reverse the destructive effects of conventional performance management. You need to find ways to evaluate people that recognizes the unique role each person has played in moving the organization forward. These evaluations must be based on a growth mindset: They must recognize that with the right context and conditions, anyone’s abilities can be improved, especially given the expansive, flexible nature of the human brain. The discontent of ranking A standardized, objectives-based PM system should be a straightforward exercise: Set goals, provide feedback about progress, agree at the end of the cycle on whether these goals were achieved, and link an individual’s compensation to the results. It is also easier to manage this approach with a common rating system for all employees. Typically, people are ranked on a 1–3 or 1–5 scale. The lowest number denoted an outstanding performer, and anyone with the highest number was a problem employee. Soon, many companies discovered that managers tended to rate everyone in the middle. As one executive from a large food manufacturer (with a 1–5 rating system) explained, “Anything other than a 3 requires extra work for a manager. You have to justify it if you give an employee a 1 or 2, and you have to put the employee in a performance improvement plan if you rank them 4 or 5.” Starting with General Electric in the late 1980s, under Jack Welch’s direction, companies tried to solve this problem by requiring managers to differentiate their people and spread out the ratings on a curve. In this system, known as “forced ranking” (or “rank and yank”), a specific percentage of people had to be ranked at the top and bottom ranges, with their promotions and bonuses affected accordingly. Yet both managers and employees find these systems dispiriting and exhausting. Satoris Culbertson, Kansas State University management professor who studied responses to more than 200 performance reviews, argues that the mere act of receiving a numerical rating can be perceived as negative feedback, and even people with a growth mindset don’t react well to negative feedback. “You would think that having so many smart people try thousands of variations of a scale over decades, someone would have found the right way to do this,” says Culbertson. Codifying the fight-or-flight response I developed a neuroscience-based framework called the SCARF model, which posits that five organizational factors have an immense, but often unnoticed, effect on negative human reactions. These factors are: STATUS: the perception of being considered better or worse than others CERTAINTY: the predictability of future events AUTONOMY: the level of control people feel over their lives RELATEDNESS: the experience of sharing goals with others FAIRNESS: the sense of being respected and treated equitably, especially compared with others When an organization’s perceived level of any of the SCARF factors is low, people feel threatened and perturbed. Even if they don’t express it, the feeling is there, and it often impairs their productivity and willingness to show commitment. Performance rankings trigger that perturbed feeling in all five ways: STATUS: People in lower-status positions have been labelled with numbers throughout history, as a way of dehumanizing and demoralizing them. In performance rankings in most organizations today, any number except 1 automatically signifies a lower-status position, with pay levels and promotion prospects to match. People carry that number, and the insult implicit in it, mentally around with them for a year, until their next performance review. CERTAINTY: The process of determining how people are rated is usually set in the Human Resources department and is often opaque to everyone else. People may work as hard and as cleverly as they can, but they still don’t know if this will get them a higher rating. That’s because the rankings reflect not just their individual performance, but their perceived contribution compared to a cohort of their peers. AUTONOMY: When a student gets a poor grade at school, there is generally a clear path to improvement — a path that may involve studying harder or seeking extra help. Whatever it is, the individual has some control. In an organization, a clear path is not always evident. Improvement may depend on factors (such as customer response to a product or the willingness of others to collaborate) that employees feel they cannot control or even influence. Though workers may actually have more influence than they think, the ratings trigger a sense of lack of autonomy. They reinforce the perception that the employee is neither trusted nor empowered. RELATEDNESS: If only one person can be given the top rating and get the best bonus, suddenly employees have good reason to undermine one another’s ratings, rather than collaborate. “We spend performance season getting battle ready,” explains one manager. “Two weeks before my review, I begin to prepare my attack. It leads to employees focusing on competing with each other rather than competing with other companies.” A similar unintended consequence occurs up the hierarchy. If employees feel that their bosses are comparing them against their peers, they will not openly share information that might compromise their ranking. FAIRNESS: A study by CEB, a best practice and technology company, showed that at least two-thirds of the people paid as top performers are not actually seen by their peers as contributing the most to the enterprise. Unfairness is perhaps the biggest problem with forced ranking, because the system is set up in a way that makes the decisions seem more arbitrary every year. In most companies, after several years of a forced ranking system, poor performers have already left. Everyone who remains performs above expectations, almost by definition. But managers are still forced to rank their subordinates on a 20/70/10 scale, and the bottom 10% are required to leave. Thus, every year, at least one highly motivated, highly capable employee is ranked as a bottom performer. This ends with the employee exiting the company, and the manager deeply frustrated. Of course, all these factors reinforce one another in ways that worsen the effect. For example, when people feel that others were ranked more highly without merit, and have no recourse to complain, the combined lack of fairness and autonomy can generate a much stronger emotional reaction than either would alone. The result of all of this? People feel unappreciated. They become more conservative. They set their goals low to ensure they are seen as succeeding. They retreat from candid conversations about development, because the whole issue of progress and feedback is so emotionally charged. The experience becomes one of ticking a box. There is little of the type of conversation that actually promotes personal growth. The rating system is particularly harsh on those who conduct the appraisals. Supervisors feel pressure to continue to show improvement, raising some people’s rating over time. They also feel pressure to differentiate, leading them to scapegoat some of their subordinates as poor performers. Rethinking evaluation An increasing number of organizations have been listening to their employees’ complaints and taking a more sophisticated approach to performance management. They are replacing year-end appraisals and ratings with in-depth conversations, often drawing on the myriad data points now available about employee and company performance, such as sales information, organizational climate survey results, and employee engagement data. One noteworthy example is Microsoft, which revamped its entire approach in 2013. It now focuses evaluation on results that people deliver together, leveraging and contributing to one another, emphasizing continual learning and growth. The company completely retired traditional PM tactics, including ratings, distributions and annual reviews. Only one person feels neurologically rewarded by the PM exercise: the senior executive who oversees it. How do these organizations transform their destructive performance ranking practices into a system that can develop talent consistently and pay people fairly? They do it by not throwing out the old approach entirely. In the CEB study, goal setting was shown to increase performance by 36%. Even feedback, which is often destructive to learning, can be designed in a productive way. The structure of bonuses and the calculation of salary can also be improved. As firms make the courageous transition to a no-rating system, they tend to choose one of two options. The first is highly structured types of conversations regarding employee performance. The HR department might lay out five or six topics to discuss in an annual review, such as career growth, contribution, collaboration or innovation. The companies also provide guidance on how to talk about each topic. The second option is a guided conversation that focuses on the goals people set for themselves and how they are progressing toward those goals, along with their contribution, past and present, to the company. In either a structured or a guided conversation, one key element is to prime people — both the employee and the boss — to induce a growth mindset. This improves how people listen to feedback, encourages them to set stretch goals, makes it easier for them to put in extra effort toward a worthy project, and helps them learn from positive role models. You can hear the difference between the fixed mindset and the growth mindset in the subtle nuances of conversation, and managers can make a difference in a company by deliberately choosing one kind of phrasing over another. For example, in giving feedback to employees, the phrase “You did well; you must be talented,” activates a fixed mindset. Talent is perceived to be innate and changeless. If the manager says instead, “You did well; you must have worked hard on this,” or, “I see you put everything you had into this”, a growth mindset is activated in the employee. The effort and creativity that people bring to bear makes a difference. The employee can also prime the boss. For example, saying “I want to be the top performer” primes the fixed mindset. It implies there can be only one. By contrast, saying “I want to take on challenges where I can learn new things” primes the growth mindset. How some companies are changing their PM systems Some firms that got rid of numerical ratings left one type of rating in place: the determination of whether someone is essentially “in or out” as a fit with the company’s culture. At Juniper, this is defined as being a “J-Player” or a “Non-J Player.” A J-Player is someone who generally behaves according to Juniper’s values and delivers reasonably good performance. Juniper clearly and consistently explains which types of behaviour result in Non-J Player status and helps those employees fit in if they choose to stay. More than 80% of the people rated as Non-J Players have opted to leave the company; they understood why they would never succeed there. There is also an effort, at many companies, to reframe the entire PM process as something else. At Gap, managers conduct monthly conversations in a new performance management process called “Grow, Perform, Succeed”. (Its abbreviation, GPS, is also the company’s stock symbol.) By redesigning its PM system and giving it a new name, the company repositioned the process as less of a threat. That in itself is an important step to better conversations. Sharon Arad, a Cargill executive, describes how the company made their shift: “We found the system failed to generate quality conversations, leaving employees with a that many viewed as a deficiency statement. In the end, the ratings given were not a trustworthy indicator of the actual status of performance or engagement.” Cargill leaders set up a no-rating pilot of several thousand employees for three years. Every year Arad’s team compared the pilot group’s feedback to that of a random sample of rated employees. “Overall, 90% of the no-rating pilot participants reported, year after year, that their experience was positive,” Arad says. This was in stark contrast to the feedback that people normally gave about their performance management experience. After the pilot, Cargill adopted the no-rating approach for its entire organization. The results of no-rating systems are dramatically better than their rating and ranking counterparts — in satisfaction, retention, and engagement scores, which have been shown to correlate to organizational performance. It would be nice to believe that eventually the ideal of labelling people numerically will be seen as a blip in the history of HR. Giving people a rating might be a useful tool in a company with a lot of “fat,” where it makes sense to shake people up and create competition, but in many of today’s lean businesses that demand a great deal from their employees, we need a better model. We need to improve the quality of the conversations we hold with workers. It’s time to kill your performance ratings.

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