Off late I have heard and read a lot about performance appraisal, especially in the aftermath of some of the progressive companies doing away with bell-curve and annual appraisal system. Performance appraisal system, in the way that it exists today across most organizations, is a hangover from 1950’s when Management By Objectives (MBO as is popularly referred to) first came into being. While most of the world and way we live and do business has changes completely since then, the performance appraisal system has by & large remained unchanged. Hypothetically, if someone had left civilization in 1958 and gone off to the Himalayas and returned to civilization today, one of the only things he would find unchanged would perhaps be the performance appraisal system! Having said, anything which has withstood the test of time of half a century and has stood its ground despite all the changes around it, must have had some merits; else it would have changed long ago. Hence the traditional performance appraisal system definitely deserves to be analyzed, even if as an obituary, on what made it survive for so long across the globe.
There were a number of advantages associated with the traditional performance appraisal system. First and foremost, it helped to link performance with the objectives set at the beginning of the performance year. So the appraisal became as objective as possible since it was not based on qualitative or subjective evaluation of performance but was linked to specific, measurable and time bound objectives set right at the beginning of the period. Certainly that was the intent even if not followed in letter everywhere and every time. This method of performance appraisal provided clarity to employees on what was expected of them right at the beginning of the performance period and hence enabled focus on performance right from the beginning. Second, it went a long way in differentiating performance on a year to year basis depending on achievements of objectives. Depending on the number of points in the performance appraisal scale (i.e. 5 point scale or 4 point scale or anything else), it did provide a mechanism for bucketing employees basis their performance, or at least in its pristine form it did provide an opportunity. Third, linked to the previous point, it allowed differentiation in compensation increases depending on the bucket of performance the employee fell in. Employees who exceeded their objectives would be given a compensation increase higher than the market, those who met their objectives would get compensation increases in line with the market, whereas those whose performance was below their objectives would be either not given any compensation increase or would be given an increase which is less than the market trend. This was a fair way of allocating compensation increases, again, provided followed in a pristine manner. Fourth, with this method of linking compensation to performance, on paper at least, employees should be motivated to exceed their objectives and hence should have ideally created a performance-driven culture in the organizations. Finally, this method of performance appraisal provided an objective methodology of providing feedback to employees on their performance with a view to improve performance in the future.
This method of performance appraisal consumed a lot of time for almost the entire organizations. For starters, every employee was supposed to spend time in drafting objectives for self which should have ideally met the conditions of being specific, measurable, attainable, realistic and being time bound. Then every people manager was supposed to ratify the objectives set by his/ her direct reports to ensure that the objectives had equitable “stretch” for everyone so that at the end of the performance period, exceeding objectives for one did not appear “too easy” whereas meeting objectives for the other would be considered “unrealistic”. Then there was the entire paraphernalia in the Human Resources Function which would document/ store/ retrieve these either in electronic form, or until a few years ago, in paper form. Then in the middle of the performance period, there would be a mid-year assessment where there would be detailed discussions on each of the objectives and that would typically entail the employee writing her achievements on each of the objectives set at the beginning of the period and the manager putting her assessment of the same. There again, the Human Resources Function would facilitate the process and spend enormous amount of time and energy in following up that this process is done for all employees. The entire rigmarole will repeat itself at the end of the year all over again, and usually with much larger fanfare than it would have been done during the mid-year process.
All of this would have still made and did make sense for a long time, if all the objectives of this exercise mentioned earlier, were being met. First, more often than not the objectives were often not set at the beginning of the performance period; rather there are numerous instances where such objectives get set during the course of the performance period. This is not just because of any laziness on the part of employees nor does it reflect any lackadaisical approach towards the process by managers; this often happens because the objectives or goals keep changing so often that it is better to wait for a while during the performance period before freezing on the objectives for employees. Second, since the objectives were rarely set at the beginning of the performance period, the very purpose of providing a clear direction for employees got lost. Instead it became more a ritual to be followed rather than something which was adding value in the way business was getting done. Third, the compensation differentiation for every point difference in rating caused greater stress and anxiety instead of motivating employees to strive for greater performance. There is adequate research in the field of behavioral economics which categorically prove that marginal differences in performance ratings leading to pay differentiation creates significant stress & anxiety amongst employees. Worse, it has not been very rare when a rating has been given to an employee so that the employee can get a particular raise in compensation- that is, the ratings are reverse engineered to ensure a compensation increase which is the exact opposite of pay-for- performance. That significantly erodes the credibility of the system. Fourth, while this system did provide an opportunity to provide feedback with the objective of improving performance in the future, since the feedback was provided with a significant time lag, even when delivered in the best possible manner, it did not quite serve the very objective itself. Lastly, it has been increasingly felt that the time, effort and resources invested in executing this performance appraisal system does not provide the organizations with commensurate returns in any manner – it has not helped in creating a performance based culture nor has it helped in motivating employees for superlative performance and at the end of it all, most employees in several organizations do not have much faith on the system per se.
Therefore, what is the way forward?
One, we should remember that Pareto Principle applies to the area of performance management as well. 20% of the employees in any Function/ Team/ Business Unit/ Organization are responsible for 80% of the results. If that is the case, then should we not give inordinate focus on these 20% of employees instead of dissipating it amongst the entire employee population? Focusing on these 15%- 20% of the employee base would have a disproportionate impact on the results and save a lot of time by not doing the same performance appraisal process for the entire organization. At the other end of the spectrum, every team would have that 10%-15% of employees who are actually passengers and do not add any meaningful value to the goals of the organization. Hence, the entire objective and purpose of performance management system in an organization should be to focus on the top 15%- 20% and the bottom 10%-15% of employees and hence save the time and energy spent on performance appraisal of the balance 70% -75% of the employee population who fall in the middle of the scale. Neither the top 15%- 20% of nor the bottom 10%-15% of employees are ever identified by going through their objectives in the traditional performance appraisal system. They are identified by the quality of their work and the results they achieve (or the glaring absence of the same).
Second, in a volatile, complex, uncertain and ambiguous world it would be naïve to assume that objectives could be set at the beginning of the year and then remain unchanged for an entire year. In today’s environment, the expectations and deliverables are likely to change much more frequently than the traditional performance appraisal system would assume and hence very tenet of the traditional performance appraisal falls flat. What is required in its place is continually evaluating the requirements of the business and focusing employees on the same in a dynamic manner instead of the static focus which had been the case historically.
Third, for feedback to be effective and impactful it is essential that the same is provided as much close to the occurrence of the behavior / result as feasible and not quite after a significant time lag. Therefore, the need of the hour is to build a culture of coaching where managers provide real time coaching to employees instead of doing the same after several months. That way it could be far more future oriented instead of appearing like a post mortem like it would if provided after several months. Therefore, the impact on future performance is likely to be much more significant.
Fourth, as research in behavioral economics tells us, there is no point in creating unnecessary anxiety and stress within the system by creating differences in compensation increases for marginal differences in performance for every rating point. It is quite a different matter to provide extra ordinary increments to the top 15%-20% of the employees and not to provide anything at all to the bottom 10%-15%. As far as the middle 70%-75% of employees are concerned, it would be much better to have a standard compensation increase for them without creating unnecessary differentiation where none really exists in terms of performance.
Some organizations have already started moving in the above direction and my own hunch is that sooner than later there would be others who follow suit. It is time to bid good bye to the traditional performance appraisal system which was born in late 1950’s and by now has lived well past its expiry date. Continuing with it for too long hereinafter may well prove to be injurious for organizational health.
Kinjal has over 20 years of experience and has worked with organizations like PepsiCo, ITC Infotech India Limited, Hindustan Unilever Ltd & ITC Limited. Kinjal holds a Master’s Degree, Human Resources Management/Personnel Administration from XLRI Jamshedpur.