Performance Management After the Annual Appraisal

Wednesday 21 September 2016
Three examples of next-gen performance management and whether there are better ways to get the most out of your people
target and arrows

Performance management is meant to improve your organisation’s output, but, more often than not, an ill-conceived and ill-suited process is put in place that does little more than waste time and demotivate your staff.

For years, managers across the globe have sat down with their staff once a year to review their performance and give them a rating based on a set of often arbitrary measures. Big Four accounting firm Deloitte found that its annual review process was taking two million hours to complete every year, including filling in forms, holding the actual reviews and creating ratings.

Most shockingly, the vast majority of these hours were not about the staff that were supposed to be assessed, but were wasted in management discussions held behind closed doors.

In fact, a 2014 Deloitte survey found that 58% of executives felt their performance-management system was not an effective use of time, and only 8% felt the process drove high levels of value.

Deloitte decided enough was enough, and set about updating the process for the modern world.

The aim, Deloitte said, was to move from “talking to ourselves about ratings to talking to our people about their performance and careers – from a focus on the past to a focus on the future”.

Make It Natural

Jules Goddard CCMI, a Companion of the CMI and London Business School lecturer who’s spent the past 30 years studying performance-management systems, calls for a fundamental shift in thinking about the annual appraisal.

Such conversations, he says, must take place with staff on the frontline, and become part of everyday life for employees.

“It is the measure of a high-performance team that individuals within it know that the quality of the output comes from the individual,” he says. “We need to be open about where we feel we did well, and not so well, otherwise we won’t learn. Feedback should be part of open, natural conversation as humans; unless appraisal is received when the relevant action is fresh in one’s mind, it is often not regarded as just or interesting.”

American food company Morning Star has taken this notion of detailed feedback between team members to the next level, creating a ‘colleague letter of understanding’ that details the work each individual must carry out for their respective colleagues. This then becomes a basis for future performance appraisals and discussions.

Not only does this system remove the bureaucracy of involving managers in the goalsetting and appraisal process, it also allows individuals to set their own criteria of success, and focus on what matters to their specific job role.

When giving feedback, it must be constructed in the right way, otherwise appraisals just demotivate staff and drag down overall business performance.

“Most performance appraisals harm the firm as a whole because they standardise and erode the confidence of the players,” says Goddard. “For every negative, there should be three or four positives. Performance appraisal is the art of bringing out the great individual competencies or achievements of the past year.

“Only then are you entitled to say: there is one area we need to discuss further because things didn’t go as well as they could’ve done.”

Risk Averse

But even if appraisals take place at the right time with the right people, the wrong type of rating and assessment process will still hinder, rather than promote, better performance.

One of the big problems with appraisals is that they incentivise the safe approach to tackling a problem or project – nobody wants to take a risk (even if it’s calculated), and then be punished in their appraisal when it goes wrong.

Goddard argues that such systems “encourage people to play safe and be very careful with their reputation”. They also limit the creativity and innovation flowing through an organisation.

“The vast majority of performance appraisal systems encourage people to only talk when very sure of the answer, and stay overly in control,” Goddard adds. “And nothing useful happens in business when people are in control; all the exciting things in business are happening at the edge.”

So, now you know what not to do with your performance-management system. Read on to discover three examples of businesses’ innovative performance-management practice that are helping them thrive on an international stage.

Deloitte: the Scientific Approach

Deloitte’s process of simplifying and updating its performance management system was built on three simple research steps: counting up the hours currently taken up by performance management; conducting a review of existing research on the science behind rating systems; and carrying out a controlled study of the organisation as a whole.

After establishing that it was wasting two million hours on appraisals, Deloitte’s research review also discovered that assessing someone’s skills is an inconsistent process, and therefore yields inconsistent data.

The review found that as much as 62% of the variance in a ratings system is due to the difference in perception of the appraisers; actual performance differences only accounted for 21%.

In the third stage of the process, Deloitte analysed how its own internal teams were performing, and examined the reasons for their success.

Three factors featured highly in the firm’s top-performing teams: ‘my co-workers are committed to doing quality work’; ‘the mission of our company inspires me’; and ‘I have the chance to use my strengths every day’.

Writing in the Harvard Business Review , then Deloitte director of leader development Ashley Goodall, and Marcus Buckingham, author of StandOut 2.0: Assess Your Strengths, Find Your Edge, Win At Work , said: “All this evidence helped bring into focus the problem we were trying to solve with our new design. We wanted to spend more time helping our people use their strengths – in teams characterised by great clarity of purpose and expectations – and we wanted a quick way to collect reliable and differentiated performance data.”

Implementing the Redesign

Deloitte created three objectives for its new and improved performance-management system:

1. The system must recognise performance through variable compensation.

2. The system must clearly see performance.

3. The system must fuel performance and drive people to improve.

Numbers two and three were the most difficult to deliver.

To give a proper view of an individual’s performance, the new process had to avoid the impact of difference of perception highlighted at the research stage, and reduce the number of hours eaten up by the process.

So, Deloitte moved away from the traditional annual review process and abandoned the 360° and upward feedback surveys common at many other global firms.

Instead, it focused on four key questions for an individual’s direct team leader to ask about the employee’s future actions. These avoid the unconscious bias that inevitably comes with appraising someone’s skills.

These four questions are:

1. Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus (measures overall performance and unique value to the organisation on a five-point scale from ‘strongly agree’ to ‘strongly disagree’).

2. Given what I know of this person’s performance, I would always want him or her on my team (measures ability to work well with others on the same five-point scale).

3. This person is at risk for low performance (identifies problems that might harm the customer or the team on a yes-or-no basis).

4. This person is ready for promotion today (measures potential on a yes-or-no basis).

Instead of reserving these questions for the end of the year, Deloitte also decided to ask the question at the end of each completed project or, for longer-term projects, every quarter.

All of this accumulated data then feeds into succession planning, promotion decisions and development-path discussions at the end of the year.

Fuelling the Fir

That just left Deloitte with the problem of the third and final objective: fuelling performance improvements.

To ensure that employees are constantly focused on their objectives and always looking to improve themselves, team leaders are required to ‘check in’ with every employee once a month, ensuring that objectives are always at the fore of every employee’s mind, and that any problems can be dealt with quickly and effectively.

And that is something Deloitte thinks will give it an edge on its competitors.

Goodall and Buckingham wrote: “If you want people to talk about how to do their best work in the near future, they need to talk often. And so far we have found in our testing a direct and measurable correlation between the frequency of these conversations and engagement.

“Very frequent check-ins (we might say radically frequent check-ins) are a team leader’s killer app.”

Morning Star: the Self-Managed Company

Morning Star is not your typical food-processing company.

Founded in 1970 by Chris Rufer, Morning Star was initially a one-man trucking company that has since grown into the world’s largest processor of tomatoes.

When Rufer started taking on staff he was determined to do things differently, and, after consulting with his then small workforce, decided the company would be entirely self-managed with no hierarchical structure.

This means no job descriptions and no traditional management, and at its heart even today is the idea of the ‘colleague letter of understanding’ (CLOU).

This is a type of employee-to-employee contract that stipulates the various pieces of work each individual was committed to completing for another colleague.

Rethinking the Clou

The CLOU is created independently from managerial input and its contents decided upon entirely by employees using five key elements:

Personal commercial mission: This represents the ‘fundamental purpose’ the employee has at the company, and acts as a guide for all commercial activities.

Activities: This details the key activities required to complete their mission.

Stepping stones: These are the key performance indicators used to assess progress towards completion of the mission.

Time commitment: The amount of time allocated to completing the mission.

CLOU colleagues: The colleagues to whom the commitments are made, who also need to accept and sign off the CLOU.

At first, each CLOU was written down on a piece of paper and reviewed annually. But, as Morning Star grew, so did the mounting piles of paperwork, and a rethink was needed.

The rethink was not revolutionary, but did have a big impact on the way the company operates.

The process was moved from an entirely offline process to one completed entirely through an online portal, digitising the CLOU and ensuring frequent and continuous access to the commitments each individual had made to their colleagues.

Subtle but Dynamic

Writing for Management Innovation eXchange, Morning Star head of development Paul Green Jr wrote: “The impact of the software was subtle, but important. First, it’s dynamic; it has the ability to reflect the real changes in content or context of an individual’s responsibilities within the enterprise. In fact, a CLOU can now be changed daily, if necessary.

“Further, it allows colleagues to immediately view their colleagues’ CLOUs – giving a much more ready view into who is responsible for what – even if a colleague isn’t directly related to you.

“It essentially makes the world that is Morning Star a lot smaller,” he added.

WL Gore: the Democratiser

Gore-Tex maker WL Gore often features among the best companies to work for, and this is partly down to the way its performance-management system handles employees.

The company has never had a typical management structure. Leaders are not promoted by the company, but by the people who follow them. Even chief executive Terri Kelly was appointed as a result of peer selection.

Speaking to The Wall Street Journal , she said that, while this can, at times, create a chaotic workplace, staff are kept in line and on task by a performance-management process that sees them ranked by their colleagues day in, day out.

“Every associate is constantly thinking ‘I want to be viewed as making a big contribution’, so they’re constantly looking for opportunities that will leverage their strengths, and that they’re passionate about,” she said. “So there’s a natural, built-in pressure: every associate wants to work on something impactful.

“Every associate knows that they won’t be judged by one boss or superior, but by all their peers, by individuals who know what they’ve done and how they interact with others on a daily basis.”

This peer-review process means that every employee has to rank 20 to 30 employees in order of how they are contributing to the team and, in turn, everyone is ranked by their peers themselves.

Kelly explained that this creates a clear picture of who is performing well and who is lagging behind.

“What we find is that there’s typically a lot of consistency in who people view as the top contributors, and who they view as the bottom of the list,” she said. “We don’t tell our associates what criteria to use, we simply ask them to base their ranking on who’s making the greatest contribution. You don’t evaluate people solely on the basis of what they’re doing in the team, but in terms of their broader impact.

“And then, beyond their contributions, are they behaving in ways that are collaborative? Are they living the values? Sometimes, someone will get great results, but at great expense to the organisation. These are the issues associates consider in their rankings.”

Not only do these rankings transparently show who is performing and who isn’t, they are also directly linked to remuneration, and the final aggregated ranking of employees determines how much each individual gets paid in relation to their colleagues.

“The process is a bit brutal, but it ensures that real talent gets recognised,” Kelly said. “This system avoids the problem of paying someone more because of seniority or title. New associates joining the organisation, the scientists who don’t want to be people leaders – we want these people to feel highly valued, because the next invention may come from them.

“No system is perfect, but ours levels the playing field and allows real talent to emerge and get compensated accordingly.”