Performance Management Revolution
SOLUTION AT Australian Expert Writers
Reinventing Performance Management1ASSESSING PERFORMANCEThe Performance Management RevolutionPeter Cappelli & Anna TavisVIEW MORE FROM THEOctober 2016 IssueExplore The ArchiveWhen Brian Jensen told his audience of HR executives that Colorcon wasn’t bothering withannual reviews anymore, they were appalled. This was in 2002, during his tenure as thedrugmaker’s head of global human resources. In his presentation at the Wharton School,Jensen explained that Colorcon had found a more effective way of reinforcing desiredbehaviors and managing performance: Supervisors were giving people instant feedback,tying it to individuals’ own goals, and handing out small weekly bonuses to employees theysaw doing good things.Back then the idea of abandoning the traditional appraisal process—and all that followedfrom it—seemed heretical. But now, by some estimates, more than one-third of U.S.companies are doing just that. From Silicon Valley to New York, and in offices across theworld, firms are replacing annual reviews with frequent, informal check-ins betweenmanagers and employees.As you might expect, technology companies such as Adobe, Juniper Systems, Dell, Microsoft,and IBM have led the way. Yet they’ve been joined by a number of professional servicesfirms (Deloitte, Accenture, PwC), early adopters in other industries (Gap, Lear,OppenheimerFunds), and even General Electric, the longtime role model for traditionalappraisals.Without question, rethinking performance management is at the top of many executiveteams’ agendas, but what drove the change in this direction? Many factors. In a recentarticle for People + Strategy, a Deloitte manager referred to the review process as “aninvestment of 1.8 million hours across the firm that didn’t fit our business needs anymore.”One Washington Post business writer called it a “rite of corporate kabuki” that restrictscreativity, generates mountains of paperwork, and serves no real purpose. Others havedescribed annual reviews as a last-century practice and blamed them for a lack ofcollaboration and innovation.Employers are also finally acknowledging that both supervisors and subordinates despise theappraisal process—a perennial problem that feels more urgent now that the labor market ispicking up and concerns about retention have returned.But the biggest limitation of annual reviews—and, we have observed, the main reason moreand more companies are dropping them—is this: With their heavy emphasis on financialrewards and punishments and their end-of-year structure, they hold people accountable forpast behavior at the expense of improving current performance and grooming talent for thefuture, both of which are critical for organizations’ long-term survival. In contrast, regularconversations about performance and development change the focus to building theworkforce your organization needs to be competitive both today and years from now.Reinventing Performance Management2Business researcher Josh Bersin estimates that about 70% of multinational companies aremoving toward this model, even if they haven’t arrived quite yet.The tension between the traditional and newer approaches stems from a long-runningdispute about managing people: Do you “get what you get” when you hire your employees?Should you focus mainly on motivating the strong ones with money and getting rid of theweak ones? Or are employees malleable? Can you change the way they perform througheffective coaching and management and intrinsic rewards such as personal growth and asense of progress on the job?With traditional appraisals, the pendulum had swung too far toward the former, moretransactional view of performance, which became hard to support in an era of low inflationand tiny merit-pay budgets. Those who still hold that view are railing against the recentemphasis on improvement and growth over accountability. But the new perspective isunlikely to be a flash in the pan because, as we will discuss, it is being driven by businessneeds, not imposed by HR.First, though, let’s consider how we got to this point—and how companies are faring withnew approaches.How We Got HereHistorical and economic context has played a large role in the evolution of performancemanagement over the decades. When human capital was plentiful, the focus was on whichpeople to let go, which to keep, and which to reward—and for those purposes, traditionalappraisals (with their emphasis on individual accountability) worked pretty well. But whentalent was in shorter supply, as it is now, developing people became a greater concern—andorganizations had to find new ways of meeting that need. TIMELINETalent ManagementThe tug-of-war between accountability and development over the decades• Accountability• Development• A hybrid “third way”WWIThe U.S. military created merit-rating system to flag and dismiss poor performers.WWIIThe Army devised forced ranking to identify enlisted soldiers with potential to becomeofficers.Reinventing Performance Management31940sAbout 60% of U.S. companies were using appraisals to document workers’ performance andallocate rewards.1950sSocial psychologist Douglas McGregor argued for engaging employees in assessments andgoal setting.1960sLed by General Electric, companies began splitting appraisals into separate discussions aboutaccountability and growth, to give development its due.1970sInflation rates shot up, and organizations felt pressure to award merit pay more objectively,so accountability again became the priority in the appraisal process.1980sJack Welch championed forced ranking at GE to reward top performers, accommodate thosein the middle, and get rid of those at the bottom.1990sMcKinsey’s War for Talent study pointed to a shortage of capable executives and reinforcedthe emphasis on assessing and rewarding performance.2000Organizations got flatter, which dramatically increased the number of direct reports eachmanager had, making it harder to invest time in developing them.2011Kelly Services was the first big professional services firm to drop appraisals, and other majorfirms followed suit, emphasizing frequent, informal feedback.2012Adobe ended annual performance reviews, in keeping with the famous “Agile Manifesto” andthe notion that annual targets were irrelevant to the way its business operated.Reinventing Performance Management42016Deloitte, PwC, and others that tried going numberless are reinstating performance ratings butusing more than one number and keeping the new emphasis on developmental feedback.FROM “The Performance Management Revolution,” October 2016©HBR.ORGFrom accountability to development.Appraisals can be traced back to the U.S. military’s “merit rating” system, created duringWorld War I to identify poor performers for discharge or transfer. After World War II, about60% of U.S. companies were using them (by the 1960s, it was closer to 90%). Though seniorityrules determined pay increases and promotions for unionized workers, strong merit scoresmeant good advancement prospects for managers. At least initially, improving performancewas an afterthought.And then a severe shortage of managerial talent caused a shift in organizational priorities:Companies began using appraisals to develop employees into supervisors, and especiallymanagers into executives. In a famous 1957 HBR article, social psychologist Douglas McGregorargued that subordinates should, with feedback from the boss, help set their performancegoals and assess themselves—a process that would build on their strengths and potential. This“Theory Y” approach to management—he coined the term later on—assumed that employeeswanted to perform well and would do so if supported properly. (“Theory X” assumed you hadto motivate people with material rewards and punishments.) McGregor noted one drawbackto the approach he advocated: Doing it right would take managers several days persubordinate each year.By the early 1960s, organizations had become so focused on developing future talent thatmany observers thought that tracking past performance had fallen by the wayside. Part of theproblem was that supervisors were reluctant to distinguish good performers from bad. Onestudy, for example, found that 98% of federal government employees received “satisfactory”ratings, while only 2% got either of the other two outcomes: “unsatisfactory” or“outstanding.” After running a well-publicized experiment in 1964, General Electric concludedit was best to split the appraisal process into separate discussions about accountability anddevelopment, given the conflicts between them. Other companies followed suit.Back to accountability.In the 1970s, however, a shift began. Inflation rates shot up, and merit-based pay took centerstage in the appraisal process. During that period, annual wage increases really mattered.Supervisors often had discretion to give raises of 20% or more to strong performers, todistinguish them from the sea of employees receiving basic cost-of-living raises, and gettingno increase represented a substantial pay cut. With the stakes so high—and withantidiscrimination laws so recently on the books—the pressure was on to award pay moreobjectively. As a result, accountability became a higher priority than development for manyorganizations.Reinventing Performance Management5Three other changes in the zeitgeist reinforced that shift:First, Jack Welch became CEO of General Electric in 1981. To deal with the long-standingconcern that supervisors failed to label real differences in performance, Welch championedthe forced-ranking system—another military creation. Though the U.S. Army had devised it,just before entering World War II, to quickly identify a large number of officer candidates forthe country’s imminent military expansion, GE used it to shed people at the bottom. Equatingperformance with individuals’ inherent capabilities (and largely ignoring their potential togrow), Welch divided his workforce into “A” players, who must be rewarded; “B” players, whoshould be accommodated; and “C” players, who should be dismissed. In that system,development was reserved for the “A” players—the high-potentials chosen to advance intosenior positions.Second, 1993 legislation limited the tax deductibility of executive salaries to $1 million butexempted performance-based pay. That led to a rise in outcome-based bonuses for corporateleaders—a change that trickled down to frontline managers and even hourly employees—andorganizations relied even more on the appraisal process to assess merit.Third, McKinsey’s War for Talent research project in the late 1990s suggested that someemployees were fundamentally more talented than others (you knew them when you sawthem, the thinking went). Because such individuals were, by definition, in short supply,organizations felt they needed to take great care in tracking and rewarding them. Nothing inthe McKinsey studies showed that fixed personality traits actually made certain peopleperform better, but that was the assumption.So, by the early 2000s, organizations were using performance appraisals mainly to holdemployees accountable and to allocate rewards. By some estimates, as many as one-third ofU.S. corporations—and 60% of the Fortune 500—had adopted a forced-ranking system. At thesame time, other changes in corporate life made it harder for the appraisal process toadvance the time-consuming goals of improving individual performance and developing skillsfor future roles. Organizations got much flatter, which dramatically increased the number ofsubordinates that supervisors had to manage. The new norm was 15 to 25 direct reports (upfrom six before the 1960s). While overseeing more employees, supervisors were alsoexpected to be individual contributors. So taking days to manage the performance issues ofeach employee, as Douglas McGregor had advocated, was impossible. Meanwhile, greaterinterest in lateral hiring reduced the need for internal development. Up to two-thirds ofcorporate jobs were filled from outside, compared with about 10% a generation earlier.Back to development…again.Another major turning point came in 2005: A few years after Jack Welch left GE, the companyquietly backed away from forced ranking because it fostered internal competition andundermined collaboration. Welch still defends the practice, but what he really supports is thegeneral principle of letting people know how they are doing: “As a manager, you owe candorto your people,” he wrote in the Wall Street Journal in 2013. “They must not be guessingabout what the organization thinks of them.” It’s hard to argue against candor, of course. ButReinventing Performance Management6more and more firms began questioning how useful it was to compare people with oneanother or even to rate them on a scale.So the emphasis on accountability for past performance started to fade. That continued asjobs became more complex and rapidly changed shape—in that climate, it was difficult to setannual goals that would still be meaningful 12 months later. Plus, the move toward teambased work often conflicted with individual appraisals and rewards. And low inflation andsmall budgets for wage increases made appraisal-driven merit pay seem futile. What was thepoint of trying to draw performance distinctions when rewards were so trivial?The whole appraisal process was loathed by employees anyway. Social scienceresearch showed that they hated numerical scores—they would rather be told they were“average” than given a 3 on a 5-point scale. They especially detested forced ranking. AsWharton’s Iwan Barankay demonstrated in a field setting, performance actually declinedwhen people were rated relative to others. Nor did the ratings seem accurate. As theaccumulating research on appraisal scores showed, they had as much to do with who therater was (people gave higher ratings to those who were like them) as they did withperformance.And managers hated doing reviews, as survey after survey made clear. Willis TowersWatson found that 45% did not see value in the systems they used. Deloitte reported that58% of HR executives considered reviews an ineffective use of supervisors’ time. In a study bythe advisory service CEB, the average manager reported spending about 210 hours—close tofive weeks—doing appraisals each year.As dissatisfaction with the traditional process mounted, high-tech firms ushered in a new wayof thinking about performance. The “Agile Manifesto,” created by software developers in2001, outlined several key values—favoring, for instance, “responding to change overfollowing a plan.” It emphasized principles such as collaboration, self-organization, selfdirection, and regular reflection on how to work more effectively, with the aim of prototypingmore quickly and responding in real time to customer feedback and changes in requirements.Although not directed at performance per se, these principles changed the definition ofeffectiveness on the job—and they were at odds with the usual practice of cascading goalsfrom the top down and assessing people against them once a year.So it makes sense that the first significant departure from traditional reviews happened atAdobe, in 2011. The company was already using the agile method, breaking down projectsinto “sprints” that were immediately followed by debriefing sessions. Adobe explicitly broughtthis notion of constant assessment and feedback into performance management, withfrequent check-ins replacing annual appraisals. Juniper Systems, Dell, and Microsoft wereprominent followers.CEB estimated in 2014 that 12% of U.S. companies had dropped annual reviews altogether.Willis Towers Watson put the figure at 8% but added that 29% were considering eliminatingthem or planning to do so. Deloitte reported in 2015 that only 12% of the U.S. companies itsurveyed were not planning to rethink their performance management systems. This trendReinventing Performance Management7seems to be extending beyond the United States as well. PwC reports that two-thirds of largecompanies in the UK, for example, are in the process of changing their systems.Three Business Reasons to Drop AppraisalsIn light of that history, we see three clear business imperatives that are leading companies toabandon performance appraisals:The return of people development.Companies are under competitive pressure to upgrade their talent management efforts. Thisis especially true at consulting and other professional services firms, where knowledge work isthe offering—and where inexperienced college grads are turned into skilled advisers throughstructured training. Such firms are doubling down on development, often by putting theiremployees (who are deeply motivated by the potential for learning and advancement) incharge of their own growth. This approach requires rich feedback from supervisors—a needthat’s better met by frequent, informal check-ins than by annual reviews.Now that the labor market has tightened and keeping good people is once again critical, suchcompanies have been trying to eliminate “dissatisfiers” that drive employees away. Naturally,annual reviews are on that list, since the process is so widely reviled and the focus onnumerical ratings interferes with the learning that people want and need to do. Replacing thissystem with feedback that’s delivered right after client engagements helps managers do abetter job of coaching and allows subordinates to process and apply the advice moreeffectively.Kelly Services was the first big professional services firm to drop appraisals, in 2011. PwC triedit with a pilot group in 2013 and then discontinued annual reviews for all 200,000-plusemployees. Deloitte followed in 2015, and Accenture and KPMG made similar announcementsshortly thereafter. Given the sheer size of these firms, and the fact that they offermanagement advice to thousands of organizations, their choices are having an enormousimpact on other companies. Firms that scrap appraisals are also rethinking employeemanagement much more broadly. Accenture CEO Pierre Nanterme estimates that his firm ischanging about 90% of its talent practices.The need for agility.When rapid innovation is a source of competitive advantage, as it is now in many companiesand industries, that means future needs are continually changing. Because organizationswon’t necessarily want employees to keep doing the same things, it doesn’t make sense tohang on to a system that’s built mainly to assess and hold people accountable for past orcurrent practices. As Susan Peters, GE’s head of human resources, has pointed out, businessesno longer have clear annual cycles. Projects are short-term and tend to change along the way,so employees’ goals and tasks can’t be plotted out a year in advance with much accuracy.Reinventing Performance Management8At GE a new business strategy based on innovation was the biggest reason the companyrecently began eliminating individual ratings and annual reviews. Its new approach toperformance management is aligned with its FastWorks platform for creating products andbringing them to market, which borrows a lot from agile techniques. Supervisors still have anend-of-year summary discussion with subordinates, but the goal is to push frequentconversations with employees (GE calls them “touchpoints”) and keep revisiting two basicquestions: What am I doing that I should keep doing? And what am I doing that I shouldchange? Annual goals have been replaced with shorter-term “priorities.” As with many of thecompanies we see, GE first launched a pilot, with about 87,000 employees in 2015, beforeadopting the changes across the company.The centrality of teamwork.Moving away from forced ranking and from appraisals’ focus on individual accountabilitymakes it easier to foster teamwork. This has become especially clear at retail companies likeSears and Gap—perhaps the most surprising early innovators in appraisals. Sophisticatedcustomer service now requires frontline and back-office employees to work together to keepshelves stocked and manage customer flow, and traditional systems don’t enhanceperformance at the team level or help track collaboration.Gap supervisors still give workers end-of-year assessments, but only to summarizeperformance discussions that happen throughout the year and to set pay increasesaccordingly. Employees still have goals, but as at other companies, the goals are short-term (inthis case, quarterly). Now two years into its new system, Gap reports far more satisfactionwith its performance process and the best-ever completion of store-level goals. Nonetheless,Rob Ollander-Krane, Gap’s senior director of organization performance effectiveness, says thecompany needs further improvement in setting stretch goals and focusing on teamperformance.Implications.All three reasons for dropping annual appraisals argue for a system that more closely followsthe natural cycle of work. Ideally, conversations between managers and employees occurwhen projects finish, milestones are reached, challenges pop up, and so forth—allowingpeople to solve problems in current performance while also developing skills for the future. Atmost companies, managers take the lead in setting near-term goals, and employees drivecareer conversations throughout the year. In the words of one Deloitte manager: “Theconversations are more holistic. They’re about goals and strengths, not just about pastperformance.”Perhaps most important, companies are overhauling performance management because theirbusinesses require the change. That’s true whether they’re professional services firms thatmust develop people in order to compete, companies that need to deliver ongoingperformance feedback to support rapid innovation, or retailers that need better coordinationbetween the sales floor and the back office to serve their customers.Reinventing Performance Management9Of course, many HR managers worry: If we can’t get supervisors to have good conversationswith subordinates once a year, how can we expect them to do so more frequently, withoutthe support of the usual appraisal process? It’s a valid question—but we see reasons to beoptimistic.As GE found in 1964 and as research has documented since, it is extraordinarily difficult tohave a serious, open discussion about problems while also dishing out consequences such aslow merit pay. The end-of-year review was also an excuse for delaying feedback until then, atwhich point both the supervisor and the employee were likely to have forgotten what hadhappened months earlier. Both of those constraints disappear when you take away theannual review. Additionally, almost all companies that have dropped traditional appraisalshave invested in training supervisors to talk more about development with their employees—and they are checking with subordinates to make sure that’s happening.Moving to an informal system requires a culture that will keep the continuous feedback going.As Megan Taylor, Adobe’s director of business partnering, pointed out at a recent conference,it’s difficult to sustain that if it’s not happening organically. Adobe, which has gone totallynumberless but still gives merit increases based on informal assessments, reports that regularconversations between managers and their employees are now occurring without HR’sprompting. Deloitte, too, has found that its new model of frequent, informal check-ins has ledto more meaningful discussions, deeper insights, and greater employee satisfaction. (Formore details, see “Reinventing Performance Management,” HBR, April 2015.) The firm startedto go numberless like Adobe but then switched to assigning employees several numbers fourtimes a year, to give them rolling feedback on different dimensions. Jeffrey Orlando, whoheads up development and performance at Deloitte, says the company has been tracking theeffects on business results, and they’ve been positive so far.Challenges That PersistThe greatest resistance to abandoning appraisals, which is something of a revolution in humanresources, comes from HR itself. The reason is simple: Many of the processes and systemsthat HR has built over the years revolve around those performance ratings. Experts inemployment law had advised organizations to standardize practices, develop objective criteriato justify every employment decision, and document all relevant facts. Taking away appraisalsflies in the face of that advice—and it doesn’t necessarily solve every problem that they failedto address.Here are some of the challenges that organizations still grapple with when they replace theold performance model with new approaches:Aligning individual and company goals.In the traditional model, business objectives and strategies cascaded down the organization.All the units, and then all the individual employees, were supposed to establish their goals toreflect and reinforce the direction set at the top. But this approach works only when businessgoals are easy to articulate and held constant over the course of a year. As we’ve discussed,Reinventing Performance Management10that’s often not the case these days, and employee goals may be pegged to specific projects.So as projects unfold and tasks change, how do you coordinate individual priorities with thegoals for the whole enterprise, especially when the business objectives are short-term andmust rapidly adapt to market shifts? It’s a new kind of problem to solve, and the jury is stillout on how to respond.Rewarding performance.Appraisals gave managers a clear-cut way of tying rewards to individual contributions.Companies changing their systems are trying to figure out how their new practices will affectthe pay-for-performance model, which none of them have explicitly abandoned.They still differentiate rewards, usually relying on managers’ qualitative judgments ratherthan numerical ratings. In pilot programs at Juniper Systems and Cargill, supervisors had nodifficulty allocating merit-based pay without appraisal scores. In fact, both line managers andHR staff felt that paying closer attention to employee performance throughout the year waslikely to make their merit-pay decisions more valid.But it will be interesting to see whether most supervisors end up reviewing the feedbackthey’ve given each employee over the year before determining merit increases. (Deloitte’smanagers already do this.) If so, might they produce something like an annual appraisalscore—even though it’s more carefully considered? And could that subtly underminedevelopment by shifting managers’ focus back to accountability?Identifying poor performers.Though managers may assume they need appraisals to determine which employees aren’tdoing their jobs well, the traditional process doesn’t really help much with that. For starters,individuals’ ratings jump around over time. Research shows that last year’s performance scorepredicts only one-third of the variance in this year’s score—so it’s hard to say that someonesimply isn’t up to scratch. Plus, HR departments consistently complain that line managersdon’t use the appraisal process to document poor performers. Even when they do, waitinguntil the end of the year to flag struggling employees allows failure to go on for too longwithout intervention.Reinventing Performance Management11Reinventing Performance Management• Marcus Buckingham• Ashley GoodallFrom the April 2015 IssueApril 2015 IssueAt Deloitte we’re redesigning our performancemanagement system. This may not surprise you. Likemany other companies, we realize that our currentprocess for evaluating the work of our people—and thentraining them, promoting them, and paying themaccordingly—is increasingly out of step with ourobjectives.In a public survey Deloitte conducted recently, more thanhalf the executives questioned (58%) believe that theircurrent performance management approach drivesneither employee engagement nor high performance.They, and we, are in need of something nimbler, realtime, and more individualized—something squarelyfocused on fueling performance in the future rather thanassessing it in the past.What might surprise you, however, is what we’ll include in Deloitte’s new system and whatwe won’t. It will have no cascading objectives, no once-a-year reviews, and no 360-degreefeedback tools. We’ve arrived at a very different and much simpler design for managingpeople’s performance. Its hallmarks are speed, agility, one-size-fits-one, and constantlearning, and it’s underpinned by a new way of collecting reliable performance data. Thissystem will make much more sense for our talent-dependent business. But we might neverhave arrived at its design without drawing on three pieces of evidence: a simple counting ofhours, a review of research in the science of ratings, and a carefully controlled study of ourown organization.Counting and the Case for ChangeMore than likely, the performance management system Deloitte has been using has somecharacteristics in common with yours. Objectives are set for each of our 65,000-plus people atthe beginning of the year; after a project is finished, each person’s manager rates him or heron how well those objectives were met. The manager also comments on where the person didor didn’t excel. These evaluations are factored into a single year-end rating, arrived at inlengthy “consensus meetings” at which groups of “counselors” discuss hundreds of people inlight of their peers.Internal feedback demonstrates that our people like the predictability of this process and thefact that because each person is assigned a counselor, he or she has a representative at theReinventing Performance Management12consensus meetings. The vast majority of our people believe the process is fair. We realize,however, that it’s no longer the best design for Deloitte’s emerging needs: Once-a-year goalsare too “batched” for a real-time world, and conversations about year-end ratings aregenerally less valuable than conversations conducted in the moment about actualperformance.But the need for change didn’t crystallize until we decided to count things. Specifically, wetallied the number of hours the organization was spending on performance management—and found that completing the forms, holding the meetings, and creating the ratingsconsumed close to 2 million hours a year. As we studied how those hours were spent, werealized that many of them were eaten up by leaders’ discussions behind closed doors aboutthe outcomes of the process. We wondered if we could somehow shift our investment of timefrom talking to ourselves about ratings to talking to our people about their performance andcareers—from a focus on the past to a focus on the future.We found that creating the ratings consumed close to 2 million hours a year.The Science of RatingsOur next discovery was that assessing someone’s skills produces inconsistent data. Objectiveas I may try to be in evaluating you on, say, strategic thinking, it turns out that how muchstrategic thinking I do, or how valuable I think strategic thinking is, or how tough a rater I amsignificantly affects my assessment of your strategic thinking.How significantly? The most comprehensive research on what ratings actually measure wasconducted by Michael Mount, Steven Scullen, and Maynard Goff and published in the Journalof Applied Psychology in 2000. Their study—in which 4,492 managers were rated on certainperformance dimensions by two bosses, two peers, and two subordinates—revealed that 62%of the variance in the ratings could be accounted for by individual raters’ peculiarities ofperception. Actual performance accounted for only 21% of the variance. This led theresearchers to conclude (in How People Evaluate Others in Organizations, edited by ManuelLondon): “Although it is implicitly assumed that the ratings measure the performance of theratee, most of what is being measured by the ratings is the unique rating tendencies of therater. Thus ratings reveal more about the rater than they do about the ratee.” This gave uspause. We wanted to understand performance at the individual level, and we knew that theperson in the best position to judge it was the immediate team leader. But how could wecapture a team leader’s view of performance without running afoul of what the researcherstermed “idiosyncratic rater effects”?Putting Ourselves Under the MicroscopeWe also learned that the defining characteristic of the very best teams at Deloitte is that theyare strengths oriented. Their members feel that they are called upon to do their best workevery day. This discovery was not based on intuitive judgment or gleaned from anecdotes andhearsay; rather, it was derived from an empirical study of our own high-performing teams.Reinventing Performance Management13Our study built on previous research. Starting in the late 1990s, Gallupconducted a multiyear examination of high-performing teams thateventually involved more than 1.4 million employees, 50,000 teams,and 192 organizations. Gallup asked both high- and lower-performingteams questions on numerous subjects, from mission and purpose topay and career opportunities, and isolated the questions on which thehigh-performing teams strongly agreed and the rest did not. It foundat the beginning of the study that almost all the variation betweenhigh- and lower-performing teams was explained by a very smallgroup of items. The most powerful one proved to be “At work, I havethe opportunity to do what I do best every day.” Business units whoseemployees chose “strongly agree” for this item were 44% more likelyto earn high customer satisfaction scores, 50% more likely to have lowemployee turnover, and 38% more likely to be productive.We set out to see whether those results held at Deloitte. First weidentified 60 high-performing teams, which involved 1,287 employeesand represented all parts of the organization. For the control group,we chose a representative sample of 1,954 employees. To measurethe conditions within a team, we employed a six-item survey. Whenthe results were in and tallied, three items correlated best with highperformance for a team: “My coworkers are committed to doingquality work,” “The mission of our company inspires me,” and “I havethe chance to use my strengths every day.” Of these, the third was themost powerful across the organization.All this evidence helped bring into focus the problem we were tryingto solve with our new design. We wanted to spend more time helpingour people use their strengths—in teams characterized by great clarityof purpose and expectations—and we wanted a quick way to collectreliable and differentiated performance data. With this in mind, weset to work.Radical RedesignWe began by stating as clearly as we could what performancemanagement is actually for, at least as far as Deloitte is concerned.We articulated three objectives for our new system. The first wasclear: It would allow us to recognize performance, particularly throughvariable compensation. Most current systems do this.But to recognize each person’s performance, we had to be ableto see it clearly. That became our second objective. Here we facedtwo issues—the idiosyncratic rater effect and the need to streamlineour traditional process of evaluation, project rating, consensusReinventing Performance Management14meeting, and final rating. The solution to the former requires a subtle shift in our approach.Rather than asking more people for their opinion of a team member (in a 360-degree or anupward-feedback survey, for example), we found that we will need to ask only the immediateteam leader—but, critically, to ask a different kind of question. People may rate otherpeople’s skills inconsistently, but they are highly consistent when rating their own feelings andintentions. To see performance at the individual level, then, we will ask team leaders notabout the skills of each team member but about their own future actions with respect to thatperson.At the end of every project (or once every quarter for long-term projects) we will ask teamleaders to respond to four future-focused statements about each team member. We’verefined the wording of these statements through successive tests, and we know that atDeloitte they clearly highlight differences among individuals and reliably measureperformance. Here are the four:1. Given what I know of this person’s performance, and if it were my money, I would awardthis person the highest possible compensation increase and bonus [measures overallperformance and unique value to the organization 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 myteam [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 thecustomer 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].In effect, we are asking our team leaders what they would do with each team member ratherthan what they think of that individual. When we aggregate these data points over a year,weighting each according to the duration of a given project, we produce a rich stream ofinformation for leaders’ discussions of what they, in turn, will do—whether it’s a question ofsuccession planning, development paths, or performance-pattern analysis. Once a quarter theorganization’s leaders can use the new data to review a targeted subset of employees (thoseeligible for promotion, for example, or those with critical skills) and can debate what actionsDeloitte might take to better develop that particular group. In this aggregation of simple butpowerful data points, we see the possibility of shifting our 2-million-hour annual investmentfrom talking about the ratings to talking about our people—from ascertaining the facts ofperformance to considering what we should do in response to those facts.We ask leaders what they’d do with their team members, not what they think of them.In addition to this consistent—and countable—data, when it comes to compensation, wewant to factor in some uncountable things, such as the difficulty of project assignments in agiven year and contributions to the organization other than formal projects. So the data willserve as the starting point for compensation, not the ending point. The final determinationReinventing Performance Management15will be reached either by a leader who knows each individual personally or by a group ofleaders looking at an entire segment of our practice and at many data points in parallel.We could call this new evaluation a rating, but it bears no resemblance, in generation or inuse, to the ratings of the past. Because it allows us to quickly capture performance at a singlemoment in time, we call it a performance snapshot.The Third ObjectiveTwo objectives for our new system, then, were clear: We wanted to recognize performance,and we had to be able to see it clearly. But all our research, all our conversations with leaderson the topic of performance management, and all the feedback from our people left usconvinced that something was missing. Is performance management at root more about“management” or about “performance”? Put differently, although it may be great to be ableto measure and reward the performance you have, wouldn’t it be better still to be able toimprove it?Our third objective therefore became to fuel performance. And if the performance snapshotwas an organizational tool for measuring it, we needed a tool that team leaders could use tostrengthen it.How Deloitte Built a Radically Simple Performance MeasureResearch into the practices of the best team leaders reveals that they conduct regular checkins with each team member about near-term work. These brief conversations allow leaders toset expectations for the upcoming week, review priorities, comment on recent work, andprovide course correction, coaching, or important new information. The conversationsprovide clarity regarding what is expected of each team member and why, what great worklooks like, and how each can do his or her best work in the upcoming days—in other words,exactly the trinity of purpose, expectations, and strengths that characterizes our best teams.Our design calls for every team leader to check in with each team member once a week. Forus, these check-ins are not in addition to the work of a team leader; they are the work of ateam leader. If a leader checks in less often than once a week, the team member’s prioritiesmay become vague and aspirational, and the leader can’t be as helpful—and the conversationwill shift from coaching for near-term work to giving feedback about past performance. Inother words, the content of these conversations will be a direct outcome of their frequency: Ifyou want people to talk about how to do their best work in the near future, they need to talkoften. And so far we have found in our testing a direct and measurable correlation betweenthe frequency of these conversations and the engagement of team members. Very frequentcheck-ins (we might say radically frequent check-ins) are a team leader’s killer app.That said, team leaders have many demands on their time. We’ve learned that the best wayto ensure frequency is to have check-ins be initiated by the team member—who more oftenthan not is eager for the guidance and attention they provide—rather than by the teamleader.Reinventing Performance Management16To support both people in these conversations, our system will allow individual members tounderstand and explore their strengths using a self-assessment tool and then to present thosestrengths to their teammates, their team leader, and the rest of the organization. Ourreasoning is twofold.• First, as we’ve seen, people’s strengths generate their highest performance today andthe greatest improvement in their performance tomorrow, and so deserve to be acentral focus.• Second, if we want to see frequent (weekly!) use of our system, we have to think of itas a consumer technology—that is, designed to be simple, quick, and above allengaging to use. Many of the successful consumer technologies of the past severalyears (particularly social media) are sharing technologies, which suggests that most ofus are consistently interested in ourselves—our own insights, achievements, andimpact.So we want this new system to provide a place for people to explore and share what is bestabout themselves.TransparencyThis is where we are today: We’ve defined three objectives at the root of performancemanagement—to recognize, see, and fuel performance. We have three interlocking rituals tosupport them—the annual compensation decision, the quarterly or per-project performancesnapshot, and the weekly check-in. And we’ve shifted from a batched focus on the past to acontinual focus on the future, through regular evaluations and frequent check-ins. As we’vetested each element of this design with ever-larger groups across Deloitte, we’ve seen thatthe change can be an evolution over time: Different business units can introduce a strengthsorientation first, then more-frequent conversations, then new ways of measuring, and finallynew software for monitoring performance. (See the exhibit “Performance Intelligence.”)But one issue has surfaced again and again during this work, and that’s the issue oftransparency. When an organization knows something about us, and that knowledge iscaptured in a number, we often feel entitled to know it—to know where we stand. Wesuspect that this issue will need its own radical answer.It’s not the number we assign to a person; it’s the fact that there’s a single number.In the first version of our design, we kept the results of performance snapshots from the teammember. We did this because we knew from the past that when an evaluation is to be shared,the responses skew high—that is, they are sugarcoated. Because we wanted to captureunfiltered assessments, we made the responses private. We worried that otherwise we mightend up destroying the very truth we sought to reveal.But what, in fact, is that truth? What do we see when we try to quantify a person? In theworld of sports, we have pages of statistics for each player; in medicine, a three-page reporteach time we get blood work done; in psychometric evaluations, a battery of tests andReinventing Performance Management17percentiles. At work, however, at least when it comes to quantifying performance, we try toexpress the infinite variety and nuance of a human being in a single number.Surely, however, a better understanding comes from conversations—with your team leaderabout how you’re doing, or between leaders as they consider your compensation or yourcareer. And these conversations are best served not by a single data point but by many. If wewant to do our best to tell you where you stand, we must capture as much of your diversity aswe can and then talk about it.We haven’t resolved this issue yet, but here’s what we’re asking ourselves and testing: What’sthe most detailed view of you that we can gather and share? How does that data support aconversation about your performance? How can we equip our leaders to have insightfulconversations? Our question now is not What is the simplest view of you? but What is therichest?Our question now is not What is the simplest view of you? but What is the richest?Over the past few years the debate about performance management has been characterizedas a debate about ratings—whether or not they are fair, and whether or not they achievetheir stated objectives. But perhaps the issue is different: not so much that ratings fail toconvey what the organization knows about each person but that as presented, thatknowledge is sadly one-dimensional. In the end, it’s not the particular number we assign to aperson that’s the problem; rather, it’s the fact that there is a single number. Ratings are adistillation of the truth—and up until now, one might argue, a necessary one. Yet we want ourorganizations to know us, and we want to know ourselves at work, and that can’t becompressed into a single number. We now have the technology to go from a small dataversion of our people to a big data version of them. As we scale up our new approach acrossDeloitte, that’s the problem we want to solve next.A version of this article appeared in the April 2015 issue (pp.40–50) of Harvard Business Review.Marcus Buckingham is the head of people and performance research at the ADP ResearchInstitute and a coauthor of Nine Lies About Work: A Freethinking Leader’s Guide to the RealWorld (Harvard Business Review Press).Ashley Goodall is the senior vice president of leadership and team intelligence at Cisco Systemsand a coauthor of Nine Lies About Work: A Freethinking Leader’s Guide to the RealWorld (Harvard Business Review Press).
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