Joseph A Hopper

Joseph A Hopper is Principal Consultant at the Theory of Constraints Institute (www.tocinstitute.org) and Executive Director at Sunstone Business School (www.sunstone.in). Prior to this, he headed Corporate Development at NIIT Ltd. where he oversaw the strategy, budgeting & review processes for 13 independent business units.

“Performance Appraisal” Gone Wild

Joseph A Hopper

7 Reasons Why the Performance Review System is Broken Beyond Repair


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Our performance appraisal system forms the cornerstone of how we motivate, incentivize and develop human capital in our organisation.” An uncertain silence followed the triumphant close of the HR Director’s presentation. No wanted to jeopardize their next increment. After all, the entire leadership team averaged one major promotion/grade change every two years.

Yet, the company was close to filing bankruptcy. Their parent organisation had given them three chances to improve profitability and cash flows. But competition was fierce and the situation was only growing worse.

In performance appraisal land, however, the situation appeared considerably brighter. Expectations had been deftly managed from the start of the review cycle and all goals stood comfortably within reach. Everyone knew how the game was played:

Rule #1: Pad your targets

Rule #2: Never take on any goal that seems remotely challenging or unachievable

Rule #3: Always keep something hidden in your back pocket “just in case”

Rule #4: Do anything and everything necessary to meet your targets

Rule #5: Make as much noise as possible upon successful achievement of your targets

It was the CEO who finally pointed out the elephant in the room: “How can our overall performance be so poor when each of you is doing so great in your individual performance rating? I cannot continue defending these excesses. We will all have to take 30% salary cuts this year to survive.”

What Went Wrong?

Situations like this are all too common.  Managers mean well and the fallout is rarely due to lack of effort. In fact, performance appraisals tend to take up enormous amounts of time, energy and attention across all levels of organisations.

Web 1.jpegAt the same time, managers and employees agree that their own annual performance review system is bankrupt. According to researchers, 95% of managers are dissatisfied with their companies’ performance management process and almost 90% of HR professionals do not believe that performance reviews provide accurate information. But too often, they blame the outcome on HR and/or the leadership team, never suspecting that these issues are endemic across the vast majority of all modern organisations.

Let’s examine seven key reasons why performance appraisal systems are broken beyond repair.

1) Performance Appraisals Create a False Sense of Accountability

Our focus on individual performance measurement stems from the belief that the sum of the contribution of each individual adds up to the overall performance of the larger organisation. So, it is only fair that each employee should be accountable for her part.

But how true is this, really? Take the task of billing a single customer. It seems simple and straightforward, and the responsibility of a single individual. But consider the complex web of dependencies leading up to it:

  • – Impossible unless the salesperson was able to convince a customer in the first place
  • – Impossible unless the product/service design was fundamentally appealing
  • – Impossible unless the delivery team built up a reliable prior track record
  • – Impossible unless the procurement team lined up the necessary raw materials at the right time, without creating excess inventory
  • – Impossible unless HR recruited and trained the right people
  • – Impossible unless the treasury function sourced adequate funds
  • – Impossible unless the bills of earlier customers were collected successfully

No man is an island! Any meaningful accomplishment in business requires close coordination and synchronised efforts of an entire team. Spectacular individual performance is worthless without adequate support across the entire value chain.

Like it or not, there is no practical way to separate the contribution of one individual from the performance of the whole. Yet, the importance of isolating and measuring ‘individual’ performance persists as one of the most sacred business myths of our day.

2) Achievable Goals Create a Hard Ceiling (Cap) on Performance

Achievement is a function of the goal attempted. Consider the dilemma of a sales person who has already achieved their quota. Suddenly, they are faced with an opportunity to land a large deal which might potentially double their sales contribution to the organisation. What would you do if faced with such a windfall opportunity?

Remember that performance evaluation is a multi-period game. If you massively exceed your quota for this year, your target for future years will surely be hiked up. So it would be foolish for you to go out of your way to develop this opportunity.

You will not pass on the opportunity to a colleague either. If someone else lands the deal, it might, in comparison, diminish your achievement for the year. Hence, you will string the customer along, hoping to delay their decision till the next year, if at all possible. Never underestimate the power of strong incentives to undermine the very performance which we seek to improve! An interesting corollary is the case of a sales person who is unable to meet their quota for the current year. Should they work to complete any remaining small sales now (especially when they are insufficient to meet individual targets) or push them to the next year, so they can start a fresh cycle with some deals already in their bag?

3) Our Target Setting Process is a Recipe for Lack of Ownership

Combine:

– 1 pound of intense shareholder pressure

– A hint by Sr. management to “zero-base your budgets/targets”

– Two baskets of ambitious employees

– Sprinkle with future uncertainty

– Add a pinch of discretion in measuring outcomes

– Mix in a bowl of vague strategic priorities

– Finish with heavy rounds of negotiation and second guessing

– Voilà, guaranteed lack of ownership on targets & goals!

4) KPIs Incite a Wide Range of Destructive Behaviors

More of a good thing is always better, right? Yet, the key performance indicators (KPIs) that we choose often backfire into harmful effects for the organisation. Take for example the core KPIs of certain common roles:

KPI - Destructive BehaviourFurther, these measurements tend to create a sense of us-vs-them in the organisation. We lose track of the main reason for cooperating with other departments – overall performance/profitability of the organisation – as we blindly chase our individual or departmental numbers. Our attention shifts towards non-value-adding activities such as maximizing divisional “profits” through better transfer pricing and looking good by making other departments look bad. Micromanagement by numbers is one of the surest and fastest ways to undermine team spirit and poison the well of cooperation.

We are all aware that measurements drive behavior. Don’t turn a blind eye to the unintended havoc caused by seeking to artificially measure local performance!

5) Static Goals Fail to Respond to a Rapidly Changing Environment

Individual targets are like concrete; practically impossible to modify once set.

But during the year, the external environment never stops changing. When the rupee depreciates drastically, do plans for export sales get ramped up? Does the engineering department work harder to develop local vendors to reduce reliance on the now expensive imported items?

Although both these strategies suddenly represent big opportunities, it is unlikely that they will ever be attempted (much less realised) due to the frozen-in-time nature of the underlying incentive structure.

6) Punishing Failure Leads to Chronic Risk Avoidance

Would you take on a risky stretch goal if you knew that your performance would be evaluated based on the success of it? Enough said.

7) KPAs/KPIs Ignore Critical Unplanned Contributions

Predetermined goals can never take into account impromptu initiatives which arise based on the need of the hour. For example:

  • – An unknown colleague who convinced the star salesperson not to quit
  • – The manager who consistently grooms fresh talent (including a future CEO) by on-boarding unproven youngsters at the risk of short-term delivery hiccups?
  • – Someone being promoted, who ensures a smooth transition for their successor
  • – Those “connectors” in the organisation who spread important information and build a sense of community, but contribute less directly to specific tasks
  • – A whistleblower who prevents a financial scam before it can become a headline

None of these unplanned contributions will ever be adequately captured or rewarded in the context of a formal performance appraisal system. Yet, acts such as these are what make organisations truly great.

Realization is Dawning

Web 2Industry prognosticators have long predicted the demise of performance management as we know it. Quality guru W. Edwards Deming was known to claim that “it nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, nourishes rivalry and politics.” Justin Roff-Marsh, a thought leader in sales process design, has hailed the “end of commissions, bonuses and other artificial management stimulants” for years. UCLA’s Sam Culbert called performance reviews “bogus” and urged companies to abolish them at the earliest.

The industry is beginning to realise the dangers of prevailing performance appraisal techniques. According to Rajul Garg, an Indian entrepreneur and angel investor, “as GlobalLogic (the company I co-founded) grew above 1,000 employees, we instituted an annual performance review process. It was a complete disaster. Until this time, we were all buddies and liked to hang out. But starting from the day after our first annual performance review, almost everyone was unhappy. The top performers felt they were so outstanding that they should have got better raises. The next 20% couldn’t really believe that they are not top performers. The next 50% – the thick middle, were extremely unhappy since they felt they were not being given any importance. But in reality, they were strong performers and crucial to the success of the company. The bottom 10% hung on for dear jobs till we put them in Performance Improvement Plans and took years to let them go. This became an annual nightmare year after year. It bred mediocrity, fiefdom, haves vs. have not’s, difficulties in budget allocations and rate increases, I can keep going.”

According to Pierre Nanterme, the CEO of Accenture, “People want to know on an ongoing basis … am I moving in the right direction? Do you think I’m progressing? Nobody’s going to wait for an annual cycle to get that feedback.”

Academia is also waking up to the damage caused by traditional appraisal systems. Hayagreeva Rao, Professor of OB & HR at Stanford Graduate School of Business, likes to joke that “If the performance review was a drug, it would not be approved by the U.S. Food and Drug Administration because it is so ineffective and has so many vile side effects!”

Alignment is Not Difficult

It is remarkably straightforward to achieve near-perfect alignment to overall team performance.

The first critical success factor is a genuine desire to create win-win outcomes with employees. Employee profit-sharing plans have been around for centuries and ESOPs are by no means new. But too often, such plans are doomed to failure due to stinginess in sharing the spoils of success; the lack of an “abundance mindset.”

The second critical success factor is delinking of the goal-setting process from the definition of achievement. Teams need “Big Hairy Audacious Goals” which get discussed and revised on a regular basis with their managers, without feeling threatened or penalized if they fall a bit short. Here, continuous improvement (vs. the past) is the goal rather than performance against some arbitrary target. Google ensures this crucial distinction through their process of OKRs.

The third critical success factor is to put the right company strategy and infrastructure in place to ensure success. The underlying objective is to ensure that the team (and therefore employees) tastes success. If your corporate planning is targeting 3% growth, no ESOP pool on the planet is likely to improve employee welfare/lifestyle significantly. Like crack cocaine, team success is super-addictive and tends to compound on itself. In the words of Sun Tzu: “Opportunities multiply as they are seized”.

Rays of Hope

Six percent of Fortune 500 companies have already begun to replace at least one aspect of the traditional annual performance review, and this number is growing. Accenture, for example, recently abolished performance ranking across all 336,000+ employees (110,000 of which are based in India).

In an internal survey, Deloitte discovered that more than 50% of executives did not believe that their employee review systems drove employee performance or engagement. According to Marcus Buckingham and Ashley Goodall of Deloitte as quoted in Harvard Business Review “Our consulting and advisory firm employs more than 65,000 people, and when we tallied the number of hours managers were spending on reviews — completing the forms, holding the meetings — we realized they consumed close to 2 million hours a year. The firm ultimately wants reviews that don’t focus excessively on the past, but rather ‘fuel performance in the future’.”

In addition to the recently announced changes at Accenture and Deloitte, other stalwarts such as Microsoft, Adobe, Gap and Medtronic have already moved away from aging performance review practices and adopted more employee friendly, transparent and mature strategies to motivate their employees.

Call to Action

Measurement is the primary means of communication within most organisations. Current systems and processes encourage us to find ways to feel good about ourselves without making significant progress forward as organisations.

Will you perpetrate the myth that individual performance can (and should) be measured through balanced scorecards? Will you dare to tackle the issue of organisational and individual performance head on? Or in the words of Sumantra Ghoshal, will you and your organisation remain “satisfied with your underperformance?”


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