Performance review time brings excitement and dread in the workplace. The dread comes in because, for many employees, the yearly review is the only time they receive meaningful feedback on their performance, good or bad. Employees may be nervous about it, and most likely, the managers are not looking forward to it any more than employees. Performance reviews can be emotionally fraught, and they take up a lot of time and energy that contributes very little to the bottom line, so managers often are tempted to put them off. What’s more, they are subject to many common errors, on both sides of the desk, which could be avoided.
But in truth, the performance review system—the metric of choice in most businesses for years, and at times, an employee’s only indication of his or her value—isn’t working and has, in fact, become a major point of contention between many employees and their bosses.
Performance Reviews in Theory
Each year, an employee promises his or her employer a set of deliverables and agrees to areas of accountability. The organization agrees to a price for the employee’s services. In order to keep his or her job, and qualify for raises or other benefits, the employee needs to meet or exceed expectations. The annual review process is meant to provide an objective, non-personal, transparent, and up-front view of the value an employee added over the last 12 months, along with suggestions for growth, and behavior changes that would increase the employee’s chances of adding value in the future.
In a company where this system is working well, employee performance numbers should be represented by a bell-shaped curve. The majority of employees would be rated as “average” and fall in the middle of the curve. The left-hand tail of the curve would represent those who lagged behind and were rated “below average.” The right-hand tail would represent the highest performers, the curve-breakers whose practices should be rewarded and replicated throughout the organization so that, next year, results would improve—in effect, picking that curve up and moving the whole thing to the right. The hope is that, through clear differentiation of performance levels, happiness and satisfaction will increase, as everyone will be clear on what is expected of them, get good feedback on any shortfall, and be rewarded according to his or her contribution.
Wouldn’t it be great if that was what actually happened?
Performance Reviews in Reality
The main reason I believe performance reviews, as they are used in most companies, are an inadequate measure of true value, is that they seem to create an alternate reality that is divorced from companies’ actual results. In other words, in most organizations there is no correlation between employees’ yearly performance ratings and the results the company actually is experiencing.
Many times as a leader, and later as a consultant, I have had the experience of hearing, on the same day, two opposing messages within the same organization. From HR, I’d hear that many hardworking and effective employees had delivered results that merited high “exceeds expectations” performance ratings, and, therefore, would receive pay raises. Then the CFO would describe the company’s challenging financial outlook, and explain how results had fallen far below expectations. I often sat wondering, “How can that be? Top performance by the majority of employees at the same time results are coming in far below projections? Should we be rewarding this? How will we remain competitive?” There seemed to be a disconnect in many organizations—not just a few. Shouldn’t the contributions employees have made add up to results for the company? I went out to study the reality of it, to try to solve the mystery of why this simple math had become so complicated.
I wanted to know how tightly correlated (and, therefore, how accurate, honest, and true to intent) performance ratings were to organizational results. So I gathered statistics from 37 companies over the course of five years, involving more than 275,000 employees in total. I conducted an audit comparing each company’s yearly results with that year’s overall performance rating distribution. How were employees’ results stacking up by comparison to the company as a whole? In companies where the average employee is assessed as “exceeding expectations,” I expected to see great results overall. In companies where the most performance scores were “average” or “below average,” I’d have expected to see results that conformed to a lower standard.
What I actually found was that, in companies where the majority of employees had been rated as “above average” for performance, actual results were 10 percent below even industry standards in a variety of categories, including profitability, market share, employee retention, and customer satisfaction. Those companies whose overall performance ratings mapped most closely to a bell-shaped curve over five years—meaning that the majority of employees were rated as “average,” and just a few rated as “above” and “below average”—achieved far better outcomes year after year.
I found that in less successful businesses, employees actually were more likely to be highly rated for performance. In other words, there was a lot of “grade inflation” going on. Within many companies I studied, the performance numbers skewed so high, it would appear they were all claiming to have all the best performers in their industry, which would be impossible. Meanwhile, successful companies were far more likely to be rate the employees responsible for their success as “average,” i.e., delivering as expected, as promised, and as needed to stay competitive.
Sorry to be the one to break the news to you, but in many companies, individual performance reviews have become disconnected from results.
How Performance Reviews Go Wrong
Although my research proves that performance reviews aren’t working well for many employees as a measure of value, there are other reasons to take them with a grain of salt.
First, performance reviews are static and retrospective. They only measure how an employee has performed to the minimum standards of his or her job.
Second, performance reviews compare employees to their colleagues within the company, when, in fact, the company’s competition is across the industry as a whole. If you’re not rating your employees against the highest level of professionalism and competence in your field, you’re not getting the true measure of your employees’ values in terms of what it takes for your company to compete in the marketplace.
Third, we tend to confuse effort with results. Your organization gets no return on employees’ investment for effort. It is hard to give an employee an average or below-average rating when you know he or she has worked hard, but in reality, it is outcomes—not effort—that count, and that is what we should measure. To avoid conflict, leaders have lowered their standards and stopped differentiating, which is the very thing the best employees would like to see more of. In a survey I ran in 2011, 75 percent of employees said the most important motivator for them was to be paid and rewarded according to their actual contribution. So lack of differentiation backfires in both directions. Those who are lagging behind are lulled into a false sense of security, and those who are truly stepping up are robbed of the recognition and rewards they deserve.
The New Value Equation
First, you need to look at employee performance in a new way—as the price of admission to the game, one of several factors that determine where an employee stands. Those other factors are taken into account in The New Value Equation:
Employee Value = Current Performance + Future Potential – 3X Emotional Expensiveness
I give each employee a score of 1-5 in each category. Current Performance answers the question, “How is this employee doing today?” This is what traditional performance reviews are supposed to measure. Future Potential answers the question, “Is this employee ready for what’s next?” Growth in any company requires employees and leaders to challenge themselves to grow and call one another up to greatness. This means proactively seeking out training, keeping up with industry news, and finding new ways of doing things in a constantly shifting world. The third factor—Emotional Expensiveness—is the one almost no one talks about but everyone senses. Everyone has had the experience of working with someone who, while performing his or her job unimpeachably, exacts a high cost for that performance. Emotional Expensiveness is such a huge drain on the organization that I multiply it by three before subtracting it from the balance.
Ideally, employees will end up with a positive number, but a zero in this context counts for a lot, because most people I work with start out in the negative digits, due to the high cost of Emotional Expensiveness. Don’t be surprised if employees who previously received high scores on their performance reviews are shocked to see a negative number or zero on their New Value Equation. It can be a tough pill to swallow, but it’s an essential first step to reimagining the evaluation practices that form the bedrock of your organization’s talent management.
Adapted by permission from the publisher, John Wiley & Sons, Inc., from “The Reality-Based Rules of the Workplace” by Cy Wakeman Copyright (c) 2013 by Cy Wakeman.
Cy Wakeman is a national keynote speaker, business consultant, author, and trainer. After a successful career as a counselor, Wakeman has spent the last 18 years consulting with some of the biggest companies in industries such as manufacturing, banking, government, high-tech, and health care, to help them incorporate reality-based concepts into leader and employee training programs. Wakeman has delivered more than 150 keynote programs and reaches a combined audience of 250,000-plus annually. She holds a Certified Speaking Professional (CSP) designation from the National Speakers’ Association. Wakeman also received the 2012 Outstanding Leadership Award from the World HRD Congress in Mumbai. Wakeman’s first book, “Reality-Based Leadership,” is a straight-forward and practical guide for leaders who want to reduce office drama and improve personal accountability with their teams. Her new book, “The Reality-Based Rules of the Workplace,” looks at this issue from an individual employee perspective. For more information, visit www.cywakeman.com
