Risky Business – The Peril of Ditching Ratings
Risky Business – The Peril of Ditching Ratings
Performance management has been one of the hotter HR topics over the past year, partly because the process has caused so many of us angst. Along with instances of demoralisation as employees, in our manager roles, we have wrung our hands over how to approach tough conversations let alone find the time to have them. Some company practices have contributed to the flaws in this process and a refresh is definitely needed. However, ditching ratings is a cut too deep for the vast majority of companies. Well thought out and defensible outcomes are crucial for employee growth and for leader insight.
So why are a small but vocal minority of companies putting an end to ratings? The way in which they have been used within their organisation has been highly destructive. The side-effects of forced distribution, a previous ratings fad, are worse than the cure it was supposed to provide. In one high-performing group I managed, picking someone to take a hit hurt both team morale and my credibility. Even without forcing a curve, often too much weight has been given to a single, reductive number. If major job decisions from pay and promotion to work allocation are 100% bound to this number, careers can feel won or lost through the process. This defeats the purpose of performance management, which is to increase the value created by each employee. Add in the bureaucracy created to ostensibly “keep managers honest” and provide central “objective” control of an inherently dispersed and subjective view, and you have a cocktail of pain for most involved.
Behavioural Economics has also emerged as a powerful force in the past decade, and it rightly identifies that employees are not likely to be unemotional about a rating placed upon them. While it may be true that employees will not rationally receive their ratings, this is equally true with salary increases, bonus awards or promotions, none of which are going away soon. Athletes, stars, and indeed businesses are constantly being assessed by fans, critics, consumers, and analysts. The noble idea of freeing the individual from experiencing discomfort comes at too high of a cost for organisations. Clear communication on progress against expectations provides the necessary context for growth in roles and careers.
Ratings both convey and document the manager’s viewpoint. This viewpoint should be peer reviewed and used as an input, but not sole factor, for major job decisions. This de-pressures ratings but still requires managers to take and convey a position. This creates a wonderful feedback loop for employees to push managers to be better at setting and supporting goals. The outcome of performance assessment is also highly valuable for HR and business leadership in analysing several dimensions of company talent. In the absence of ratings, employees and leaders, including the Board, lose clarity on how decisions are being made, the health of the company’s talent, and how this talent is or isn’t contributing to the achievement of company goals.
While the move away from ratings is still a recent phenomenon, there are already troubling examples. In one company that removed documented outcomes a few years ago, a majority of employees have since been registering dissatisfaction. Unsurprisingly, many managers have used the removal of ratings to avoid having complex conversations. Other large companies that have ditched ratings are now tying themselves in knots over how to validate pay decisions. In particular, their Boards are demanding insight into how annual bonuses will be distributed across wide swathes of employees. While pay should not be a formulaic result of ratings, there will be useful correlations across reasonable employee populations. Otherwise, leadership has a diminished ability to understand what type of performers are staying versus leaving, valuable information that increasingly guides the most important people initiatives!
To use ratings more effectively, companies should certainly rotate away from previous poor practices. Three approaches that we have found enable a better conversation between employees and managers are:
- Removal of rankings
- Greater tolerance for manager judgment
- Rate multiple factors
These have a high impact by trading off laboratory precision for better situational decisions, acknowledgement of development progress, and consideration of expected future contribution. However, employees, the company, and the Board retain a useful fact base for important insights. This is the best hope to achieve the company purpose, creation of value. Further, employees gain the necessary context to progress in their careers. Ratings are the right vehicle for progress!