Performance appraisals may be a ubiquitous feature of HR departments in businesses economy-wide, doubts remain about their use.
Now that the world's second largest and most conservative consulting firm, PwC, has come out against performance appraisals – via their internal strategy consultant the firm formerly known as Booz and Co – it is time for a serious review.
Management scientists of every stripe have been stabbing it with their steely knives since 1957 but they still have not killed the beast. 'Abolish it', says PwC, 'and reap productivity gains and considerable cash savings'.
In a 1957 Harvard Business Review article, Douglas McGregor portrayed performance management practice as a symbol of control culture inherited from the time and motion studies of Frederick Taylor (considered among the world's first 'management consultants'). He would later call this 'theory X management' and contrast it to the 'theory Y management' needed to drive a productive enterprise.
Two decades later the man who revolutionised manufacturing, W Edwards Deming, called it one of the seven deadly sins of management. Frequently his disciples would say 'choose quality or choose performance appraisal, you can't have both'. A long line of experts followed warning of the perils of the process, but it still persists in the majority of organisations.
In 2006, Stanford University management guru Bob Sutton spoke out against performance appraisal apologists, including software companies, which were pleading that the practice was fine as long as it was done correctly.
"Doing performance appraisal well" Sutton said, "is like doing blood-letting well – it is the wrong thing to do no matter how it is done or who does it."
In 2012, David Rock, director of the NeuroLeadership Institute, summarised the empirical findings of neuroscience on the topic.
He noted that the experience of performance appraisal triggered a fight or flight response that not only killed productivity, but creativity and innovation too. Perhaps the most harmful kind of performance appraisal, the forced ranking, inspired terror because it required the dismissal of the lowest 10 per cent. It wasn't until 2013 that GE and Microsoft abolished this form of appraisal – called 'rank and yank' internally – realising that grading on a bell curve was bad science and was causing them to lose irreplaceable talent.
What are the facts concerning the consequences of performance appraisal? Management consultant Fred Nickols did some research on the numbers in 2000. He found that the cost of the process alone, including management time, averaged around $2,300 per employee. He also found a reduction in productivity of about 10 per cent in the period around the appraisal. Added to this considerable sum was the hard to quantify cost of lowering individual goals to make them more achievable.
Subsequent research shows performance-robbing disengagement and increased turnover also follow the performance appraisal period.
Why then with all this negative evidence and criticism does the performance appraisal process persist? Many reasons are given but companies say there is no substitute for performance appraisal for these basic three:
• to increase productivity, including goal setting, coaching, training and giving performance feedback;
• to identify and reward high performers and select high potentials for future promotion; and
• to weed out underperformers and terminate them without legal problems.
Critics say all of these objectives are better met outside of a one-size-fits-all annual appraisal process.
Most business students are taught that great marketing makes selling unnecessary. I would paraphrase that and say great management makes appraisal unnecessary.
Renowned organisational analyst Elliott Jacques discovered that high-performing organisations were accountability hierarchies where each level of management is accountable for their subordinates' performance; for objective tasking of team members and developing their abilities to achieve tasks.
Fred Nickols puts it best when he notes that the only kind of feedback that is not harmful is the kind you ask for. Hence he recommends that the manager should be the audience and the team member the author of the appraisal. One company I have worked with has maintained for 20 years that performance appraisals are completely unnecessary.
It runs weekly scoreboard meetings where each employee has a line to report on, all of which add up to that week's performance. If a team member fails to meet their forecasts, the business helps them; and if they continue to fail to perform, the business seeks to find them a more suitable role where they can succeed.
I have rarely encountered such an engaged and energetic workforce and the performance and growth of the business in question is outstanding. Its great management system has made performance appraisal unnecessary.
Great management requires an entirely different mindset and a system for managing work that enables leaders to treat their teams as accountable adults and not naughty children.
Partner, Somerville Partners