Employee performance appraisal enters new world for corporates

Several sources have indicated that employee performance appraisals were invented by Walter D. Scott of WD Scott & Co, Sydney, Australia, as early as the 1920s. The traditional employees’ appraisal system, developed between 1914 and 1918 and which was popular in the sixties, emphasised too much on accountability and was seen as ‘force ranking of workers’. There was a turning point in the traditional employees’ appraisal system in the year 2000. Perhaps the most important issue about appraisal review is that companies are overhauling performance management because overhauling is good for their businesses and not for the fun of it. Performance management of employees now involves people management consultants that must prepare and develop employees in order to compete; companies that need to deliver ongoing performance feedback to support rapid innovation; or retailers that need better coordination between the sales section and the back office to serve their customers.

Many Human Resources (HR) managers are apprehensive that if they cannot get supervisors to engage in good conversations with subordinates once a year, how can they expect them to do so more frequently, without the usage of the annual traditional appraisal process? As General Electric (GE) found in 1964 and as researchers have documented since, it is extraordinarily difficult to have a serious, open discussion about problems while also dishing out disciplinary measures such as low merit pay. It does not just add up! The end-of-year review was also an excuse for delaying feedback until then, at which point both the supervisor and the employee were likely to have forgotten what transpired in the past. All these shortcomings of the traditional appraisal system started disappearing in the seventies when companies gradually started adopting modern methods of appraisal.

As early as 1970, most companies that have dropped traditional appraisals started investing in training supervisors and line-managers to talk more about organisation development with their employees – and they are checking with subordinates to make sure that the supervisors are actually doing their jobs. Some engage consultants to do this. Moving to an informal system requires a culture that will keep the continuous feedback going. It is difficult to sustain an organisation’s growth, if it is not happening organically. Adobe Inc, founded in 1982, has gone totally numberless as far back as 1990 but still gives merit increases based on informal assessments. It reported that regular conversations between managers and their subordinates are now occurring without the interference of HR’s staff.

In 1995, Deloitte, too, found that its new model of frequent, informal check-ins led to more meaningful discussions, deeper insights, and greater employee satisfaction. The firm started to go numberless like Adobe but then switched to assessing employees four times a year, to give them rolling feedback on different dimensions. Jeffrey Orlando, who is the head of development and performance at Deloitte, stated that the effects of informal check-ins have been positive so far. But like all the change management situations, adopting the modern appraisal system has not been easy. The greatest resistance to abandoning traditional appraisals, which is something of a revolution in human resources, comes from HR itself. The reason is simple: Many of the processes and systems that HR had built over the years revolve around those performance ratings.

Experts in labour law had advised organisations to standardise practices, develop objective criteria to justify every employment decision, and document all relevant facts. Not appraising employees runs contrary to this advice — and it does not necessarily solve every problem that they failed to address. In the traditional model, business objectives and strategies cascaded down the organisation. All the units, and then all the individual employees, were supposed to establish their goals to reflect and reinforce the direction set at the top. In the eighties and up till late nineties, most HR information systems were built to move annual appraisals online and connect them to pay increases, promotions, succession planning, and so forth. They were not designed to accommodate continuous feedback.

This approach works only when business goals are easy to articulate and held constant over the course of a business year. That is often not the case these days, and employee goals may be pegged to specific individualistic projects. So, as projects unfold and tasks change, how do you coordinate individual priorities with the goals for the whole enterprise, especially when the business objectives are short-term and must rapidly adapt to market shifts? Appraisals gave managers a conspicuous means of tying rewards to individual contributions. Companies changing their systems are trying to figure out how their new practices will affect the pay-for-performance model, which none of them have explicitly abandoned. They still differentiate rewards, usually relying on managers’ qualitative judgments rather than numerical ratings.

In the 1990s, in pilot programmes at Juniper Systems and Cargill, supervisors had no difficulty allocating merit-based pay without appraisal scores. In fact, both line managers and HR staff felt that paying closer attention to employee performance throughout the year was likely to make their merit-pay decisions more valid. But it will be interesting to see whether most supervisors end up reviewing the feedback they have given each employee over the year before determining merit increases. In the late 1990s, it was discovered that immediate bosses, who were charged to appraise subordinates, did so with biases. Some favoured their close aides. Some male bosses favoured their female girlfriends and ranked them higher than their better male counterparts. This led to the usage of external consultants for appraisals.

Most managers who were assuming they need traditional appraisals to determine which employees to promote, which to retain and which to show the way out, discovered through seminars and conferences that the traditional process does not really help much in identifying employees’ performance. For starters, individuals’ ratings jump around over time. Research showed that last year’s performance score predicts only one-third of the variance in this year’s score – so it is hard to say that someone simply is not up to the game. Plus, HR departments consistently complain that line managers do not use the appraisal process to document poor performers. Even when they do, waiting until the end of the year to flag struggling employees allows failure to go on for too long without intervention.

It has been observed that companies that have dropped appraisals are requiring supervisors to immediately identify problematic employees. Juniper Systems, Inc formally asks supervisors each quarter to confirm that their subordinates are performing up to company standards. Only 3%, on average, are not, and HR is brought in to address them. Adobe, which abandoned the traditional system of appraisal in 2012, reported that its new system (frequent “check-ins” where managers provide employees targeted coaching and advice) has reduced dismissals, because struggling employees are monitored and coached much more closely. Microsoft has changed its performance management process. It now provides employees with a platform to manage and track their goals. It is now a new world of employees’ appraisal.

• business a.m. commits to publishing a diversity of views, opinions and comments. It, therefore, welcomes your reaction to this and any of our articles via email: comment@businessamlive.com