Many large global companies have abandoned performance ratings. But this new trend highlights the importance of training managers and holding them accountable for goal setting, says Susan Doughty.

It is a universal truth that for a business to grow and to succeed in rapidly shifting and dynamic markets, it needs peak performance from all its assets and resources, including its people.

So the new paradigm of performance management poses a unique conundrum for organisations—if they don’t rate staff on past performance, then how do they continue to align performance with business strategy, and measure and reward individual outcomes? What will fill the gap?

How key outcomes are measured without performance ratings

Although many large global companies (Adobe, Deloitte, Microsoft, GE and Accenture to name a few) have abandoned performance ratings, how do they determine key outcomes such as:

•  Differentiating rewards in both base salaries and incentives;

•  Determining key talent profiles and promotions;

•  Communicating how decisions have been made.

The recurring themes of the “new” approach are regular check ins (Adobe), immediate feedback on assignments (Accenture) and evaluating staff incrementally throughout the year (Deloitte).

Although Adobe says managers “make their own decisions about salary increases and are trained on the most effective ways to make those decisions”, other organisations remain relatively silent on their approach.

 Risks of changing processes

This raises important questions about the consequences of changing such processes, particularly in an age where employees increasingly seek transparency and clarity around their remuneration and career prospects.

Let’s be clear—regardless of whether a company applies a performance rating, it still rates its employees in some shape or form. As soon as an employee is awarded a higher increase or tagged for potential or given a promotion or placed onto juicy projects, he or she has been assessed above peers.

So have some organisations simply ditched the outward appearance of ratings, but are really operating business as usual behind the scenes?

The answer for many is probably yes. A few leaders in the field, however, are re-thinking their approach to performance and compensation, with a major shift in how they fundamentally perceive “value” in employees.

Few people would argue that the traditional approach to performance management doesn’t have its faults. After all, it was born in an era when organisations were quite different to the agile and flexible businesses of today. It is also clear both employees and managers have a love/hate relationship with performance management.

Establishing a middle ground

On the one hand, many regard the process of setting objectives as difficult, with the annual assessment process subjective and arduous. But for others, the opportunity for timely two-way feedback and acknowledgement of achievement via quarterly assessments and an end-of-year performance rating is validating and motivating. So there must be a middle ground.

Here’s what some experts suggest:

• Regular touch points. This emphasises regular meetings between employees and managers—ie, at the end of every project or assignment—to assess outcomes against set goals, tasks or project milestones. The focus is on an observable demonstration of the outcomes. This places the accountability on the employee to document his or her accomplishments and provide supporting evidence. This information can then be discussed at round table sessions, with the evidence provided determining “performance” levels. The key, of course, will be the fair assignment of projects and goals to ensure employees are treated consistently and have equal opportunity to be recognised as “valuable” to the organisation.

• Resetting goals. This focuses not only on what has been observed, but also requires re-setting goals for the future. Important goals are weighted more highly than others, with the results determining career advancement and reward differentiation between pay increases. This will be difficult for those in business-as-usual roles, where setting challenging goals has always been problematic. This could lead to an “us and them” division, with some groups disadvantaged over others.

• Weighing future actions instead of past performance. In this approach, employees are rated more on their potential. As an example, are they tagged as the next successor? Are they a critical individual contributor whose loss would have a heavy impact on the business? Are they ready for bigger projects and goals?

What each of these approaches has in common is the rater (or manager). Not one of the fundamental issues with performance management has been about the performance rating itself.

The role of the manager

But the manager’s ability is critical when it comes to setting quality goals, holding honest conversations and rating employees based on a body of evidence, rather than overlaying their own biases (conscious or unconscious) which have little to do with performance.

Studies have shown more than half a given performance rating relates the traits of the person conducting the evaluation, rather than those of the person being rated.

Radford’s Q2 Hot Topics Survey 2014 results found 56 percent of companies without performance ratings rely on managers to use discretion when determining merit increases.

If this is the case, then the importance of training managers in the new paradigm and holding them accountable for goal setting and assessment processes will increase substantially. Without giving managers the necessary tools, we could revisit the days of inconsistency, “one size fits all” pay increases or, worse, the rise of favouritism—none of which is an attractive proposition.

Role of HR professionals in ratings

As recognition and differentiation is the key for high (and low) performing employees, this will become the primary focus for HR professionals. Ultimately, employees will fall into two buckets, either considered as “valuable” goal/project contributors or those who deliver business-as-usual outcomes.

Regardless of how employees are categorised, both will present challenges.

There is little empirical evidence to support this new trend so it will be interesting to see how organisations deal with a full performance cycle.

Our prediction is that although employees may enjoy better conversations and a de-emphasis on the ratings, how increases to base salaries, the allocation of incentives/bonuses (both short- and long-term) and career promotions are determined will require better explanation and need to fundamentally change.

Unless companies are prepared to make this level of commitment, they may as well stick with performance ratings.

SUSAN DOUGHTY is a partner, People Advisory Services, at Ernst & Young Limited. 

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This article, “Performance ratings: dead or dormant?”, is one of three free-to-browse from the current issue of our HR magazine: Employment Today.

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