Given the current state of performance management, we can now add, "Close enough for performance management." Research shows that managers are barely better than a coin flipping in identifying employee potential (Martin & Schmidt, 2010). Furthermore, a recent poll revealed an overwhelming 88% of organizations were unable to effectively plan talent for future business needs (Hanson, 2011). Performance management is the last business function employing a crumbling close enough strategy too weak to support future business pressures.
- Does accounting and finance apply a close enough strategy?
- Does engineering apply a close enough strategy?
- Does C-suite rely on a close enough strategy from these functions to support competitive pressure?
What's the consequence of the weak support offered by close enough performance management? Managers, directors, and executives assigned to mission-critical positions will only close enough drive strategy. When companies employ this performance management systems that rely on annual reviews they are unwittingly employing a business strategy to hit revenue targets close enough.
Why is this a problem? A recent Harvard Business Review article (Dobbs, Koller, & Ramaswamy, 2015) forecasts leaner times on the horizon. The 1980 to 2013 boom is coming to a close. "We forecast that in the decade ahead, although operating profits will continue to grow in absolute terms, they will fall to 7.9 percent of global GDP—around what they were when the boom began."
In this fiercely competitive environment, employees with close enough skills assigned to strategic positions will not be able to respond quickly with precise solutions to these new competitive pressures. According to the Dobbs and colleagues (2015), "competitors often play by different rules and bring an agility and an aggressiveness than many larger Western companies struggle to match."
To remain competitive under the weight of even more competitive pressures, companies will have to more than overhaul the conventional close enough performance management. They'll have to step out of the past into a totally new system focused on potential to drive future strategy.
Conventional Performance Management Fails Because the Main Mud-and-Straw Pillar Is Crumbling
Let's face it: the performance-review process is universally loathed. We continue this bureaucratic nightmare despite 98 percent of employees saying it's unnecessary (Achievers, 2012). Our friends in HR claim, "Performance reviews are a necessary evil." I don't buy it. This "necessary evil" is completely "unnecessary."
Why? Close enough is a dangerous corporate strategy. You'll never get accurate performance results when 98 percent of people engaged in the process are totally disengaged. Results will only be close enough. Step away from the conventional rear-view-mirror approach. Focus on the road ahead: Manage potential! Here are three reasons why this mud-and-straw process is crumbling:
Performance appraisals require a level of attention and detail the average manager can't build into his/her day. This problem leads to a reliance on mental shortcuts (Kahneman, 2011). These shortcuts lead managers into classic mental traps. For instance, managers rely on biased, general impressions or latest project results to appraise an employee's performance for the entire year. Without proper appraisal training, the best-intentioned manager may cause more harm than good during this process (Kaiser & Kaplan, 2005).
The typical employee usually interprets "helpful feedback" as inaccurate (Keeping & Levy, 2000). While you're lobbing feedback that may or may not be on target, they're tuning you out, because they're thinking:You don't see how hard I work. You've always hated me. No one else has ever had a problem with my approach.You've just wasted valuable time and money when you could have spent just a few seconds flipping a coin. At worst, employees feel unfairly attacked or misunderstood, which can lead to counterproductive work behaviors, including withdrawal, hostility, stealing, and quitting (Lawler, 1994).
Few people enjoy conflict; even fewer are skilled at handling conflict. Most managers don't want to get employees fired, even if they are low-performers. This usually leads to two extremes: a surprisingly harsh appraisal after no communication throughout the year, or overly lenient ratings across employees to keep from rocking the boat (Roberts & Pregitzer, 2007). Neither of these options lead to employee growth, improved performance, and stronger business outcomes.
Go Further than Patching Performance Management. Rebuild It!
Just as finance grew out of tactical accounting, we have recently witnessed the birth of a new discipline—talent management. Although this youngster is still struggling to free itself from the tactical grip of traditional HR, it gained one important realization: focus on predicting the future, not documenting the past. Since performance reviews are nothing more than bureaucratic records of the past, they have no place in talent management.
What's the alternative? Imagine turning away from your close enough process and turning towards a process that accurately predicts future potential. Imagine tying those predictions to strategic goals of your company. Imagine having an accurate picture of who's best suited to drive which goals and who could be developed quickly to drive them. Equipped with this information you would start managing potential instead of performance. You would be proactively preparing your teams to achieve future strategic goals.
"Science fiction," you claim? No. The science is already here in the form of employee assessments. Now, I don't mean the boring, old-fashioned multiple-choice personality or situational judgment tests—they're already lying in the rubble of a crumbling process. Modern technology allows real-time observations of employees in simulated situations that, combined with powerful analytics, can help you achieve strategic goals through superior talent.
Start managing potential instead of past performance. Replace your close enough annual performance-review process with a precise annual assessment program. Then, use the assessment data to drive your talent management functions, from talent reviews and succession planning, high-potential identification, to training and development.
Here are four reasons to replace your close enough annual performance-review with a precise annual assessment program:
We've all experienced the epic failure of promoting your best salesperson into regional management. Yes, her manager may have thought that she had high potential, but boy was he wrong by relying on personal bias and past performance!
By relying on accurate assessment data, you'll take the surprise out of performance management. After all, you don't make financial or purchasing decisions based on gut feelings "“ you look at hard data. So why would you identify high-potentials, successors, or make promotion decisions based on managers' biased opinions? The research is clear "“ managers have 48 percent chance of getting it wrong (Grossman, 2011).
Some employees are better skilled to increase customer satisfaction, while others are better at implementing new systems and processes. Aligning your teams' skill set with strategic goals increases their chances of achieving those goals. Although performance reviews may reveal who is strong or weak in different competency areas, you're left guessing what that really means for your business.
Turn managers into coaches, not bureaucrats. The best executive coaches rely on assessments to accurately diagnose performance gaps and set development plans; they don't trust hunches. Eliminate organizational politics from the process and provide unbiased feedback to employees. Give them a reason to care about feedback and motivate them to do something about it. Turn this annual chore into a powerful development experience.
Let's do some quick math. A manager will spend at least three hours gathering information, deciding on ratings, preparing the appraisal form, and meeting with each employee. At $50 per hour, a manager's involvement is worth at minimum $150. Similarly, each employee will spend at least a couple hours in review-meetings and going over the appraisal. At $25 per hour, an employee's involvement is worth $50. Now let's say that you use some sort of software, which runs at $50 per appraisal. That comes to $250 per employee. If your company employs 5,000 people, you end up wasting $1,250,000 every year. Convinced now?
Your Mud-and-Sticks Performance Management Won't Stand up to Future Pressure
Let me ask a few more questions. Why did you implement performance management and annual reviews in the first place? Did your HR team recommend it? Did it come with your applicant tracking software? Did some helpful consultant suggest it? Or did you simply copy your competitors during a benchmarking exercise? Was it a choice? Or was it just a "necessary evil" delivering close enough results that get you close enough to targets without hitting them.
Conventional performance management demands more than patchwork. It requires new construction from the ground up—at a cost surprisingly lower than you might expect. You need a system reinforced with accurate measures of employees' potential. You need people with specific skills to drive strategy leading to competitive advantage under the pressures of increased competition.
Interested in this topic? Register for a complimentary 30-minute webinar on how to rebuild your performance management system.
Achievers (2012). Achievers Intelligence: Insight Into Today's Workforce, http://www.achievers.com/sites/default/fi les/whitepaper-achievers-intelligence_0.pdf
Dobbs, R., Koller, T., & Ramaswamy, S. (2015, October). The Future and How to Survive It. Harvard Business Review.
Grossman, R. J. (2011, August). The care and feeding of high-potential employees. HR Magazine, 56 (8).
Hanson, E. (2011). Talent reviews and high-potential identification: Overcoming five common challenges. Pittsburgh, PA: Development Dimensions International.
Kahneman, D. (2011). Thinking, fast and slow. Macmillan.
Kaiser, R. B., & Kaplan, R. E. (2005). Overlooking overkill? Beyond the 1-to-5 rating. Human Resource Planning, 28(1), 7-11.
Keeping, L., & Levy, P. (2000). Performance appraisal reactions: Measurement, modeling, and method bias. Journal of Applied Psychology, 85(5), 708"“723.
Lawler, E. E. (1994). Performance management: The next generation. Compensation & Benefits Review, 26(3), 16-19.
Martin, J., & Schmidt, C. (2010). How to Keep Your Top Talent. Harvard Business Review, 54.
Roberts, G., & Pregitzer, M. (2007). Why employees dislike performance appraisals. Regent Global Business Review, 1(1), 14-21.