Boards rethinking annual employee reviews

A new generation of staff who value consultative and collaborative feedback is reshaping the way businesses conduct performance management, writes Graham Kenny.

The formal performance appraisal has been a central feature in managing organisations for some considerable time. So the announcement by the San Jose-based software giant Adobe Systems that it was abandoning its annual performance review process sent shock waves through the business community.

Today, more than 30 Fortune 500 companies have followed suit, as have many more outside this group. Numbered in the ranks of followers are IBM, GE, Amazon, Accenture, Deloitte, Microsoft, Gap, Juniper, Cigna, Dell, Motorola and many more.

As a director, it’s important to understand why boards are supporting these changes in their organisations and the issues to consider when making decisions about performance appraisals.

Cost benefit analysis

Adobe found the administrative cost of its appraisal system when weighed against benefits just didn’t add up. In 2012, the company calculated the annual review process for its 11,000 employees required 80,000 hours of time from its 2,000 managers. It estimated this was the equivalent of 40 full-time staff.

Internal surveys showed the appraisal episodes left staff feeling less inspired and motivated than before. It became a no brainer for the company to ditch everything associated with the traditional performance review: the forms, the rating and ranking of staff and the annual calibration of employees.

The CEO of another organisation that has joined the movement, Pierre Nanterme of Accenture, has observed, “the process is too heavy, too costly for the outcome. And the outcome is not great.”

Achieving organisational agility

In redesigning its appraisal process IBM overhauled a 10-year-old system that asked staff to set goals for the year in January and follow up with a mid-year review. This was followed by a final assessment in December. The process required the production of a single performance score for each employee.

IBM found this approach encumbered the business. During the year, events and work requirements would change so employees weren’t necessarily working towards their original goals. Despite this, the system rolled on, ending up with what Diane Gherson, IBM’s chief human resources officer, has described as an irrelevant discussion.

This took place in December as a conversation against objectives set 11 months earlier. On the issue of agility, Gherson observed, “we’re already doing work differently than the system assumed.”

In its pursuit for greater flexibility Deloitte has also ditched its traditional reviews. As Alec Bashinsky MAICD, Deloitte’s chief human resources officer in Australia, and the Asia Pacific and the person who managed the change to their performance management system globally, explains, “we need something nimble to operate in real time that can be managed at a local office level, and fuels future performance rather than assessing it in the past.”

Deloitte wanted a simple system that generated real-time data points that could help the company make smarter business decisions.

Engaging organisational culture

GE talks in terms of systemic change to drive its pivot in culture. It studied the language and methods of start-up businesses with their emphasis on new product innovation, prototyping and testing with customers. GE initiated FastWorks, which emulates methods from lean start-ups.

This requires a rapid learning cycle with customers developing a minimum viable product, en route to producing new products and services. While GE used to keep its developments under wraps, revising its products every five years, the company’s new approach has produced an openness to customer review and employee input not previously witnessed.

As Kevin Nolan, vice president of technology, observed, “With FastWorks we’re learning speed is our competitive advantage. How do we become much more open and collaborative with the customer base? You can’t do that if you want to be secretive.”

GE recognised it couldn’t drive and maintain this cultural change through its old performance management system. The company has moved away from a command and control climate to one that empowers and inspires.

This has resulted in a more open, less rules-based and formal company, mirroring the style of their start-up exemplars. It has opted for more frequent staff conversations via an app called “PD@GE” for “performance development at GE”.

Managing employee expectations

While Adobe, IBM, GE and others point to cost savings and the need for greater business agility as drivers of much needed change, there’s another feature at play that leads to employee dissatisfaction with the status quo. There’s a growing desire for a different form of performance management by employees. This starts in the modern school.

In previous generations schools followed a teach-and-test model. You were taught and tested but you were rarely nurtured. It was a relatively harsh system in which you either made it or fell by the wayside. Performance appraisals, as we’ve known them, fitted perfectly with this educational model.

Two generations on and organisations are now also populated by Millennials. These individuals were born in the early 1980s, reaching young adulthood around the year 2000.

The schools they experienced followed a more supportive route. The emphasis was on raising low performers rather than simply grading them as fails. The result is that younger employees expect to be supported and encouraged by an organisation, not just graded.

Donna Morris from Adobe appears to have picked up on this when she described the company’s old system thus: “It’s a process that looks in the rear-view mirror, that’s focused on what you’ve done a year ago. That just isn’t current with how I think we’re working and how many of the employees that we’re looking to attract or grow have been raised.”

Becoming involved

It’s important boards don’t sit on their hands when it comes to the current shift in thinking and practice around employee performance reviews. They’re too pivotal to corporate success to be left to HR. Boards and directors must get up to speed on the issue and take an active role in how employees in their organisations are being assessed. The future of the organisation depends on it.

APPRAISALS IN THE PUBLIC SECTOR

When you look at the companies that have deserted annual performance reviews you’re bound to be struck by one thing – these are stellar performers and in many cases household names like Adobe, Microsoft and Deloitte. The question is, can these examples be transferred to organisations in the public sector?

1. Capable managers are the first requirement to achieve this. Individuals who have the necessary coaching and mentoring skills to bring people along are essential.
2. Performance-oriented staff who report to managers is the second requirement. Additionally, it’s important to ensure people with great coaching skills manage subordinates.
3. It’s also important to recognise the function of systems. If check-ins rather than formal performance appraisals are introduced, employees must be able to apply a reliable process to achieve a consistent outcome.

The traditional performance appraisal system was designed to avoid inconsistency in evaluation procedures and, consequently, variation in an assessment outcome. Systematising rules out random application of methods.

This is not easy and businesses must work hard to make their system a success. It’s necessary to put time and effort into developing managers’ skills by role playing check-in processes and training in coaching.

It’s also important to make managers aware of nuances of using check-ins by providing and receiving feedback. Developing any changes with employees rather than for them is also a must.