Are We Realizing the Value Promise of Performance Management?
Performance management is often portrayed as the most strategic of core talent management processes. It has captured the attention of C level leaders with the following value promises:
Focus all employees on priorities and maximize individual productivity
Provide a foundation and process for improving the overall capabilities of organizational talent
Align individual efforts with the business unit and organizational goals to maximize efficiency and effectiveness of organizational execution
Align rewards and recognition with performance outcomes to ensure retention of key performers
However, the question needs to be asked, “How well has performance management delivered on these promises?” Survey data have not been encouraging. Consider the following findings:
It is an inconsistently implemented process – A recent study by Mercer found that just one third of survey respondents said they had had a formal performance appraisal in the last year.
It has had little impact on performance improvement – The same study by Mercer also found that nearly half of those that had received a formal performance appraisal indicated that it did not help them identify actions they could take to improve.
There is little alignment with organizational goals – A recent Performance Management Practices Survey Report published by Development Dimensions International found that “Aligning performance management to support organizational goals and to integrate with other systems proved to be the least common quality of performance management systems”.
Aligning pay with performance has been only marginally successful – A recent survey of American Compensation Association members found that the majority of members felt that merit pay plans tying pay to performance were only marginally successful.
Does It Deliver Value in Best of Class Organizations?
If the value realized from performance evaluation systems has been modest for most organizations, one would wonder if there is greater value for best of class organizations. These data are much more encouraging:
Organizations exercising world-class enterprise performance systems, including widespread dispersal of the tools, enjoy 2.4 times the three-year equity market returns of typical companies in their industry (BusinessWeek Research Services 2008)
Organizations in which employees are measurement-managed were identified as being in the top one-third of their industry. Performance measurement was the single most important measurement area that separates successful firms from less successful firms (Towers Perrin 2002)
The Keys to Delivering Value
If value is delivered in best of class organizations, what are they doing differently than most organizations? Various authors and research studies have attempted to identify what are the key drivers in delivering real value from their performance processes. A summary of key findings are offered below:
Avoid making it too complicated – Many organizations make the mistake of creating too many goals and gathering too many metrics in their performance evaluation process. The result is tremendous time investment and employee confusion. BusinessWeek Research Services (2008) found that “Determining the appropriate number of goals and types of metrics was considered the number one performance management success factor.”
Provide a supportive culture – Performance appraisal has to be supported by senior executives. They need to foster a supportive culture in order to realize real value. The same study from BusinessWeek Research Services (2008) found that “The biggest obstacles to widespread execution of performance management are “lack of accountability” and “a culture that does not support measurement.”
Make it widespread and consistent – Performance evaluation needs to be an enterprise wide practice in order to realize full value. This was a finding supported by BusinessWeek Research Services (2008). This study indicated that, “The biggest return comes from extending performance management to front line workers”. Typically, technology is needed to provide widespread access and use. However, remember rule #1 to keep it simple. Lot’s of bells and whistles not only results in difficult and costly implementations, the added complexity also results in line managers and front line workers rejecting the technology.
Don’t forget foundation skills – Performance management is more than standardizes processes and measurements. Real value is dependent on the interactions between employees and managers. In an international cross study of performance practices published in SASCOM magazine (4th qtr. 2006), the authors concluded “Overall the research shows that successful efforts combine the measurement process with appropriate infrastructure, skills, and culture.” Managers need to have basic skills to manage performance effectively. These skills include:
Setting Performance Goals
Providing Performance Feedback
Conducting Performance Reviews
Conducting a Developmental Planning Meeting
Align individual performance goals with organizational goals – Linking the goals of an individual with the broader goals of a business unit or an organization is called cascading. In order to optimize strategic value, performance processes should help ensure that the efforts of all employees are in alignment with the goals of the organization. Aligning performance management to support organizational goals and to integrate with other systems proved to be the most critical differentiator in system effectiveness (DDI – Performance Management Practices Survey Report).
Focus on both the “what’s” and the “how’s” of performance – Job performance is not one-dimensional. Focusing only on what was accomplished ignores the importance of how the results were achieved. Adding goals for competencies that are needed to support results in the plan ensures both aspects of performance are considered. Performance against competency goals can be reliably tracked using multi-rater or 360 data. These data along with appropriate development content and support processes also help drive individual development planning. In spite of the value received from including competencies, the DDI Performance Management Practices Survey Report found only 38% of organizations followed this practice.
Make it a process not an event- In most organizations, the Performance Review is typically treated as a single event, looking backwards rather than forward. Making it an ongoing process requires anticipating problems and focusing on the present or future. This means that managers need to have frequent ongoing discussions through out the year planning and communicating with employees to improve current and future performance.
Focus on development and improvement, keep pay discussions separate – Rensis Likert offered this critique of the performance review discussion in the July 1959 issue of the Harvard Business Review, “The aim of reviewing the subordinate’s performance is to increase his effectiveness, not to punish him. But apart from those few employees who receive the highest possible ratings, performance review interviews, as a rule, are seriously deflating to the employee’s sense of worth… not only is the conventional performance review failing to make a positive contribution, but in many executives’ opinions it can do irreparable harm.” Samuel Culbert, a professor of management at UCLA and Lawrence Rout, a senior editor at the Wall Street Journal concur in their book, “Get Rid of the Performance Review!,” These authors contend that the typical performance review discussion derails due to differences in the mindsets of the two participating parties. The employee is concerned about the impact of the review on his/her pay. This leads to the employee focusing on defending mistakes, justifying actions, promoting their accomplishments, and challenging the manager’s evaluations. At the same time the manager is trying to engage the employee in a discussion of how performance could be improved. The net result is that both parties feel frustrated by the discussion.
The purpose of performance review discussions should be on development and improvement. Discussions about pay should occur separately and recognize that pay decisions are only partially informed by performance. Organizational performance, the employee’s position within their pay range, and external supply and demand factors also contribute significantly to pay decisions.
It appears that performance management practice does not deliver on the promise of real value for most organizations. Best in class organizations are realizing real value and it is the direct result of applying best practices. In these organizations, senior leaders consider performance evaluation a key aspect of the organization’s culture and drive enterprise-wide usage. They provide visibility to organizational goals and ensure that employee goals are linked to broader business goals to accomplish focus and alignment of efforts.
Wide spread and consistent practices are enabled by practical, simple, and easy to use technology. In addition to simplicity in technology, there is discipline in only focusing on those goals and metrics that truly matter to keep administrative overhead to a minimum.
In addition to infrastructure, measurements, and processes, there is recognition that managers need training in specific performance management skills. Effective organizations provide ready access to core training and just in time refresher skill training.
There is a balanced approach to managing performance. Result goals are important but competency performance is also considered a necessary component of the process. Competency development is supported by multi-rater or 360 surveys, formal developmental planning, and ready access to developmental content, processes, and forms.
Following these best practices should allow all organizations to realize the value promise of performance management.
The Payoff of Pervasive Performance Management, BusinessWeek Research Services (May, 2008).
Performance Management Do’s and Don’ts, SASCOM magazine (4th qtr. 2006).
Mercer Survey results cited inPerformance Appraisals: some improvement needed – Executive Briefing (HR Magazine (2003).
Performance Management Practices Survey Report, Development Dimensions International (1997).
Patrick Hauenstein, Ph.D.
President, Omni Leadership
Dr. Patrick Hauenstein serves as President and Chief Science Officer for Omni. He has held senior leadership roles in the world’s foremost human resource consulting companies and has an impressive record of successfully developing world class talent management solutions. He is the principal architect of Omni Leadership solutions.