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Reinventing Performance management

Executive summary

Business leaders increasingly recognize their performance management processes need some fixes. Performance management systems do not serve their business goals anymore: they fail to produce full engagement, appropriately evaluate achievements, help design the right development plans or set fair compensation. Crucial in today’s large corporations, they fail to leverage a wider range of talents.

Yet, objectively and effectively evaluating performance is more needed than ever. As a result, there is currently a major debate mainly in the US about removing numbered performance ratings and annual performance reviews. Research has shown that even those who receive a good review will be negatively affected by receiving a numerical assessment: people do not like being labelled. In addition, a single annual performance review is most often less objective than more frequent ones, for example by project. However, frequently touted replacement solutions often carry significant, sometimes unexpected, impact. While managers quite often have a preference for these solutions and their appealing simplicity – such as asking “Would you like to work with this person again?” –, how do you then make, fairly, this time, the key decisions which used to depend on the rating: bonuses, trainings, promotions? In many countries, the absence of ratings increases the legal risk of asking a low performer to leave. Moreover, such new solutions do not always bring the objectiveness needed to leverage a large and diverse talent pool. Yet today, more companies need to integrate new skills and competencies mainly related to IT and digital, to be better equipped to make decisions under uncertainty and develop their business in more remote countries. Integrating such new competencies and differences will therefore require at least an update of the current, traditional processes.

In fact, very few companies are good at objectively and effectively evaluating performance. Most people fail to understand how their brain processes information and makes decisions. This is mainly because our brain operates like a computer with two processors, as described by Daniel Kahneman, 2002 Nobel laureate. System 2 is the rational processor, which we know and control. System 1 is automatic: everyone has it; no one is aware of it. System 1 manages much more information than System 2 and has more influence that we think on our behaviors and decisions. Most decision making processes are designed to address System 2 only; they do not effectively address the mistakes or biases induced by System 1. This is complex because we cannot stop it, access it or control it.

Sometimes, our biases and decision making processes even conspire to create unexpected impacts. Such impacts can be surfaced only by analyzing the process with a cognitive lens. For example, when processes are too complex, people get into cognitive overload and unconsciously focus only on the information they like and that confirms their unconscious biases. When processes are too light, they lack the facts needed to be objective.

In fact, while some key principles are helpful, there is no one-size-fits all process, as it must be adapted to the implicit culture and operations of the company. Some of the current trends in performance management such as removing annual performance evaluations come from fast paced technologies companies where annual objective setting and performance evaluations do not fit with fast changing business goals. While encouraging more frequent, informal and formal feedback is an excellent practice, completely removing annual review is not necessarily needed for more stable businesses.  They still help identifying quick learners. Best in class processes are therefore significantly different from one company to the next.

In setting up a new process, some key principles have proven successful:

  • Embed actual, business-related performance drivers to allow managers to be objective and best enhance the performance of their teams. This sounds as a no brainer, but many businesses have standard performance evaluation criteria which do not fit the company or specific jobs.
  • Sustain a growth mindset: Replace the absolute judgement of a rating with a dynamic assessment of the performance trajectory; numerical ratings would be replaced by constructive words. Provide frequent formal and informal feedback.
  • Remain simple: complexity can generate overload but also waste of time. In our experience, many stages and documents can often be eliminated with no negative impact.
  • Be calibrated: as managers tend to perceive performance of their direct reports differently depending on their age, gender… but also their own strengths and weaknesses, setting upfront clear expectations can help enhance objectiveness.
  • Strive for homogeneity: people in the same jobs should be evaluated homogenously (i.e. same frequency, criteria….). It also allows best capturing everyone’s core strengths.
  • Be culturally neutral: different cultures have different ways of perceiving and expressing the same perception of performance. In a global company, the process should ensure that people from different countries will be fairly evaluated so as to include as much as possible a wider range of talents.
  • Reduce individual inferences and biases with specific decision-making techniques such as the 7 Steps™: weighting the performance criteria, hiding the name of individual when assessing the results….
  • Fit into the organization structure: On-going feedback should be nurtured, but corporate needs should drive frequency of formal evaluations, decision makers to involve….
  • Improve continuously: key changes in the labor market or in corporate strategy – new skills needed – should directly be embedded into the process.
  • Keep line managers’ ownership: They are the ones who know their team members’ performance best and therefore should buy into the new process, which should be adapted to their understanding, needs and constraints.

Companies considering a new approach should structure the work to achieve effective results:

  1. Decide why you need to change and what you need to change:
    • Identify what you expect from your process and the key interrelationships with other business processes – people development, bonuses,…
    • Perform a quantitative analysis of current key elements such as performance distributions, differences across social groups. How many people receive each rating, do women tend to systematically receive lower ratings?…
    • Understand how managers implicitly assess performance and what changes they buy into. Managers usually intuitively know what makes a good performance and have developed habits. It is crucial to understand what drives their behavior, and what needs and can be changed. Besides, assessing their ability to provide day to day feedback can provide a clear performance enhancer moving forward.
    • Surface and quantify the biases that need to be mitigated. Some biases are unexpected. Knowing them will allow addressing them.
    • Assess effectiveness, and especially time spent. Search for simplifications.
  2. Change only what needs to change, simplify and adjust to your context. There is no one size fits all process. Involve managers in pilots, ensure the new process enhances objectiveness and leverages managers’ time.
  3. Effectively roll it out :
    • Involve line managers to set job-related performance criteria and formalize who should be involved at each stage,
    • Communicate why you changed the process and what it will bring,
    • Train managers, even if the new process is simple. Show how to provide on-going, formal and informal feedback, be fair and engage their teams. The simpler the process, the more training is needed as managers will have fewer guidelines.

Throughout the document, to avoid often unwieldy turns of phrase, we use “evaluation” to describe “performance evaluation”.

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