There is a fundamental change in the way to manage your employees and the relationship with them.

Peter Cappelli – Wharton management professor Peter Cappelli, and director of Wharton’s Center for Human Resources

 

Cappelli cites studies showing that 91% of companies worldwide have performance appraisals.

A good performance review gives employees constructive, unbiased feedback on their work. A bad one demonstrates supervisor bias and undermines employee confidence and motivation.

David Insler, a senior vice president at New York-based Sibson Consulting, estimates that only about 35% to 40% of companies do performance reviews well.

Recently, Adobe, Kelly Services, GE, Deloitte and PwC have ended annual performance reviews.

“It’s a big change, the extent to which it seems to be happening, and it’s happening broadly,” says professor Peter Cappelli who has researched the usefulness and accuracy of performance reviews. What’s happening now is nothing less than a revolution in performance management systems, he notes.

Anna Tavis, a clinical associate professor in leadership and human capital management at New York University confirms that annual performance reviews are defunct.

For example, because more and more companies are heavily project-oriented, reviews are often done when projects are completed or at set points along the way.

Millennials (those born between the late 1970s and early 1990s) are accustomed to constant and instant feedback — from parents, text messaging friends or social media sites. They expect the same from their employers. As Daniel Pink, a workplace expert and author, noted in a recent article in The Telegraph titled “Think Tank: Fix the Workplace, Not the Workers,” millennials have “lived [their] whole lives on a landscape lush with feedback.” Yet when they enter the workforce, they find themselves “in a veritable feedback desert…. It’s hard to get better at something if you receive feedback on your performance just once a year.”

“The idea of getting feedback to help you improve is natural. Millennials are clear on what they want their career to be about. They don’t expect to be in one company forever, but rather to develop a reputation and skill set that will carry them from job to job and help them establish their personal brand.” Says Daniel Debow is co-CEO of Rypple.

Frequency is clearly one of the issues, says Peter Cappelli,  with reviews occuring annually. “If you wait a year to tell employees how they are doing, they are almost always surprised and unhappy if the results are not positive. Humans are hard-wired to focus on the negative,” Cappelli notes. “So ‘balanced’ feedback always leaves us concentrating on the bad parts” of the reviews.

Samuel Culbert, a professor in the Anderson School of Management at UCLA, is an outspoken critic of performance reviews. “They destroy the trust between the boss and the employee, and cost the company enormous amounts of money in terms of time and wasted effort. The people being reviewed worry about pleasing their boss before they concern themselves with delivering results to the company,” states Culbert, author of Get Rid of the Performance Review! How Companies Can Stop Intimidating, Start Managing — and Focus on What Really Matters.

In addition, reviews encourage employees not to speak out about problems they observe because it could adversely affect their career paths and compensation, Culbert states. As examples, he points to “employees at Toyota, BP and the nuclear reactor site in Japan who knew about defects” in their companies’ products, but failed to report them because of a lack of trust between employees and management.

The alternative is about relationships and developing people and encouraging them to perform better.

Wharton management professor Matthew Bidwell suggests that reviews tend to have competing goals: Employees, for their part, are looking for frank, honest and helpful feedback, but know that if they don’t use the review time to pump up their performance, they might not get the top bonus or best raise.

Insler points to another problem with the traditional review. “Companies are concerned that if it isn’t a quantifiable, very objective measure, then it’s not a good measure.” But in recent years, with the explosion of knowledge-based companies, “the ability to assess performance in a subjective and qualitative way” requires a process that looks at “first, what are the key performance criteria that are important, and second, how do you measure them when they are qualitative.”

Despite criticism of performance reviews from all sides, very few experts would suggest throwing them out.

According to the Sibson Consulting/WorldatWork survey, “an overall performance management process — one that focuses on goal setting, feedback, coaching and clear statements of the company’s performance expectations — is absolutely critical” and indeed, is found in the highest-performing companies, says Insler.

“But organizations also have to make tough decisions about who ranks higher and what kinds of bonuses people get. If the organization — in trying to make everybody feel good — doesn’t allocate rewards according to performance, then it will be seen as an unfair process.” says Wharton management professor John Paul MacDuffie.

And while some companies have tried to do away with performance reviews, the bottom line seems to be that, in some form or another, these reviews play a necessary role in company culture.

There are useful aspects of the annual review well worth saving, according to Wharton management professor Adam Cobb.

Some firms are successfully replacing the annual review with something better, says Tavis. Companies like GE and Cisco, for example, prepared carefully for change, and clearly communicated their objectives.

The best companies have shifted to conversations with workers that occur much more frequently than once a year, are less focused on the past and more on the future, and involve continuous adjusting of goals. These firms also are giving managers the skills to be coaches, “rather than task masters,” she says. “Getting feedback once a year is totally not serving a purpose,” says Tavis. “It comes as a verdict, a judgment, whereas the intention here is to be course-correcting, to have coaching throughout the year, so at the minimum companies are recommending or requiring managers to hold quarterly conversations and [to develop] more trust and better relationships overall, which obviously becomes a much more collaborative culture in the long run.”

“Now it’s expected that when a performance system goes in, you are going to launch your own app,” says Tavis. And even firms that aren’t developing their own are using apps being developed by others, she says — tools that allow managers to provide real-time feedback to employees, give workers quick access on how to navigate certain situations, and create a record that is more reliable than memory months after the fact.

And some apps almost have coaching on demand, more real time learning built into them.

The  potential development of new performance management systems aided by apps and people analytics combined is enormous, says Tavis.

The Rypple system is built to allow an employee to ask for anonymous feedback — shown only to the employee and not to his or her manager or HR department. In addition, notes Debow, feedback is done in “small continuous loops” in real time so that employees can act on that feedback immediately. “It may be that someone says, ‘Let me give you a constructive tip: You need to stop interrupting customers when they talk because it bothers them.’”

The system also includes the concept of recognition — thanking and rewarding a team member for good work (with badges, for example), “which directly links to an employee’s increased motivation,” says Debow. The third part of the system is coaching. “Being a good manager means being a good coach. That involves setting goals and helping people achieve them through collaborative one-on-one meetings.”

Joe Cruz, senior IT project leader at Wharton, has been using Rypple to set up teams,  provide to-do lists, goals and feedback about each other’s performance. Also to drive our biweekly, one-on-one discussions and monthly group meetings.

Other advocates of non-traditional performance reviews suggest 360-degree feedback — a process whereby individuals are reviewed not just by their bosses, but by their subordinates, peers and, if appropriate, their customers and suppliers. The feedback is often anonymous and the idea is to have more than one evaluator.

Besides feedback, a key theme in discussions about performance reviews is the need to “better train and educate supervisors and managers around how to conduct these discussions,” says Insler. “We have all experienced good managers and bad managers. Good managers provide feedback and direction that will help individuals achieve success. Bad managers don’t. They worry about who is at fault and who can get blamed if something goes wrong.”


Wharton’s Peter Cappelli discusses his new research on performance appraisals.

[email protected]: Is the performance appraisal as important now as it was 20 years ago?

Peter Cappelli: It’s more important in the sense that more people have to do it. If you look around the United States, there haven’t been a lot of recent studies. But the last ones that were done show that more than 90% of the work force has a performance appraisal. Basically, if you’re not in a union — where they tend not to get them because of collective bargaining agreements — you’ve got a performance appraisal. The federal government mandates it for employees. State governments do it. The Army does it. The Navy does it. I think the big change has been when you leave the United States. It used to be kind of a U.S. thing, but now you see them all around the world.

[email protected]: Are companies seeing a level of importance to performance appraisals that they want to bring to their business strategy?

Cappelli: I think some of it is just the increasing attention to the workforce and recognizing that managing your employees is a smart thing to do, given how important they are to the organization. You’re crazy if you don’t, right? And a lot of companies outside the U.S. just copy what they think are best practices in the U.S., even if they’re not sure why they’re doing it. I think that’s why it’s spreading around the world. You see it all through India and China. Unless you get to the countries like in the Middle East, which still have Soviet-era labor and employment laws — you probably don’t see them very often there. But otherwise, all over.

[email protected]: The work with Martin Conyon and this paper is trying to bring together information from a variety of sources about performance appraisals?

Cappelli: The thing about performance appraisals is they are ubiquitous. There’s probably nothing in the field of management that is more common. And there’s also almost no practice in the world of business that people hate more. The evidence on this is pretty overwhelming. It’s also surprising how little we actually know about it. There’s an awful lot that’s been done on psychologists with little slices of the performance-appraisal question. Mainly, what psychologists are interested in is, how did the person [doing the] rating and the person being rated get along? And how do the characteristics of the rater and the ratee affect the results? One of the things that we know from this is one of the best predictors of your score is bias. That is, how you and your appraiser map onto each other. Are you similar? [Then] you get higher scores. The more different you are in terms of ethnicity or age or sex, the less well you’re going to do.

That’s one of the things we know. But how do they actually work inside companies? Quite remarkably, almost nobody has looked at this. We got data from a large Fortune 50 company on all their performance appraisals over a 10-year period. There were a couple of the questions that we were after. One of them is, there’s a kind of view in a lot of places and among a lot of executives that employment is like a contract. At the beginning of the year, you set goals, then we assess how well you’ve done. At the end of the year, we give you a pay increase based on how much you have achieved of your goals and how well you’ve done, maybe compared to everybody else. But there’s another view that it is not like a contract. That it’s really kind of a relationship. If you think about employment, you don’t really have a contract with your boss. The boss is telling you to do different things all the time. And based on what they’re hearing from their bosses, [employees] decide, “Oh, I’ve got to go this way or that way.” Your circumstances are unpredictable, too. It could be, “We’ve got this goal.” But then business collapses, and we change the goal. Or even if you’ve got the same goal, we have to adjust the target. There’s all kinds of stuff that’s in play, so it’s not really a contract. It’s kind of a relationship.

“A lot of companies outside the U.S. just copy what they think are best practices in the U.S., even if they’re not sure why they’re doing it.”

One of the questions that we wanted to look at was to what extent is a performance appraisal a contract, and to what extent is it a relationship where it is used to encourage you? We also wanted to see some basic things. There are some people who claim that it really doesn’t drive very much about your outcomes. Merit pay is based on something else. It’s about bias or how the company is doing, and that if you get cozy with your supervisor, you get good appraisals. If you don’t, then you get bad ones. But here’s maybe the biggest thing, which we weren’t so interested in academically when we started this. But practically, it’s really important. Do people who perform well always perform well? And people who perform poorly, do they always perform poorly? The reason this matters is because there is a very prominent theory in the practice of management — something that Jack Welch made famous — about the A-player, B-player, C-player model. The folks at McKinsey & Co. were making a similar case that there are really good executives and there are kind of lousy ones. The big thing you want to do if you believe that is to hire the good ones and get rid of the bad ones. If that’s the story, then management’s kind of simple, right? You just hire the good people, screen them and see how they do. If they do bad, out they go.

As far as we can tell, no one has ever looked at this before or at least published it. Are the people who do well always doing well, or not? If we know your scores this year for everybody in the company, how much of next year’s score could we predict or explain? If the good people are always good and the bad people are always bad, we can explain 100% of your scores because next year’s score will be identical to this year’s score. If it’s random, which would be kind of astonishing, then it would be zero. There’d be no relationship between how people on average perform this year and how they perform next year. The good people could be good, the bad people could be good or bad.

[email protected]: But you would think that they would follow a pattern. If you’re good in 2014, unless something has drastically changed, you’re going to be pretty good in 2015 as well.

Cappelli: Right. It’s between zero and 100%. If you think this A-player, B-player, C-player model is right, it’s going to be closer to 100. If you think it’s all just random or it’s kind of noise or people vary a lot, you’re closer to zero. So, that’s the question.

[email protected]: I’m going to say that it would probably be closer to 70 or 75.

Cappelli: That’s a very common answer. People in human resources guess 80%. The correct answer is 27%, so it’s way closer to zero than it is to 100%.

[email protected]: Why so much lower? I would think that it would be almost an automatic that it would be on the higher end.

Cappelli: Many people seem to believe that, especially people in human resources. But when I ask them if they have ever actually looked at it, the answer is no. They just assume it’s that way. Maybe they assume it’s that way because that’s what you hear from the A-player, B-player, C-player kind of story, and you could see some of this is a cognitive bias. There’s something in psychology known as the fundamental attribution error. It means that when you see somebody behave in a particular way, we are inclined to assume it is because of who they are rather than the circumstances. The classic example is somebody racing by you on the expressway going home. They’re driving on the shoulder and whipping past. Your inclination is to say, “That guy’s a jerk,” rather than to even entertain the idea that maybe it’s an emergency. We seem to be wired to think everything is due to the person. If you believe that, then you would be inclined to think the A-player, B-player, C-player model is right and good players this year are going to be good players next year, etc.

“If you think about employment, you don’t really have a contract with your boss. The boss is telling you to do different things all the time.”

The other thing we looked at was to see whether it actually changed your appraisal scores when you got a new supervisor, because the other view is that you get comfy with a particular supervisor, then your scores are always sort of the same. You get a new supervisor, and they can really sort out whether you’re good or bad. Well, we didn’t see that either.

[email protected]: I can see that happening on both sides. Either you have a supervisor that you just don’t get along with right from the start and your performance appraisal would be lower, or it could be the same if you get along with somebody.

Cappelli: We didn’t go in with a prior expecatation, saying, “Gosh, this is silly to think that it’s all disposition.” Or, “Boy, it’s almost all random.” We had no idea what we were going to find. In fact, we were looking at that as a way to test the real things we thought were going to be interesting, which was is it more like a contract or not? It turns out there’s a lot of variation in how people perform. One of the things that calls into question are these forced ranking systems, or they call them “rank and yank” or “rack and whack.” General Electric used to force out the bottom 10% because they believed it was the A-player, B-player, C-player model. If your company’s doing that, you might want to actually look to see whether it’s true that your bottom 10% this year are the same as your bottom 10% next year. The problem is, if you keep firing your bottom 10%, you’re never going to know because you’ll never know what those guys would have done. But you could at least look at the appraisal scores for everybody else and see whether they remain constant over time. If they’re bouncing around a lot, it is insane to fire the bottom 10% because there’s no reason to think those guys are going to be bad next year.

[email protected]: Is that 50th percentile kind of the perfect area?

Cappelli: I don’t know what is good or bad out of this. I think if you believe management matters, you would like to think that it’s not a perfect correlation. You’d like to think that the numbers are a little lower because you could shape it. You could take the same person with a different manager, a different context, and they could perform differently — better or worse. I think it’s encouraging to management as a field that the relationship is lower. But it makes it harder for people running businesses and employers because now it’s not just picking the good people and then getting out of their way.

[email protected]: But performance appraisals have seemingly taken on more importance in the last 20, 30 years because the elements of psychology now are factored into business so much. Companies want to know what their employees are thinking, more so than ever before.

Cappelli: Honestly, there was a high watermark of that stuff about 40 years ago or so. For example, AT&T had a team of about 15 psychologists, through 1980, that just tinkered with the performance appraisal form every year. And in the 1960s, performance appraisals were so thorough that you were assessed on the appraisals you gave your subordinates. They would read your appraisals, and if you didn’t do a good job, it affected your appraisal. They’d also see how your subordinates did years later. If they did better in their careers, that affected your own appraisal. They used to take this stuff way more seriously, and we don’t anymore.

[email protected]: It has been pared down because of what factors?

Cappelli: There are a couple. The first one is that we’ve given supervisors a ton of other stuff to do. It used to be that your job was to supervise people and that was it. Now, you’re an individual contributor, and you’re supervising these folks. The second thing that’s happened is the span of control has increased. That means a number of people reporting to you. There used to be a rule that six or seven were the most people you ought to supervise. Now, it’s up in the 20s in lots of places. If you’re trying to follow 20 employees and pay attention to what they’re doing and be an individual contributor, it’s almost impossible to pay much attention to them.

“If you’re a subordinate, it’s hard to be objective about [appraising] your boss. It’s hard, always, to like your boss.”

[email protected]: Did you look at employees involved in sales whose performance could be measured objectively?

Cappelli: We looked at a retail organization, and we could see the store managers. They had 10 attributes that they were assessed on, and I think six of them were actually hard numbers — financial performance, store sales, things like that. So, they were objective numbers, and the performance bounced around a lot. We couldn’t tell who the manager was and go in and interview that manager. As you’d imagine, there were hundreds of managers, so it would have been pretty hard to do. As we were saying before, the best predictors seem to be things which have more to do with bias than with good management practice. Although you would think that good management practice ought to matter. It’s just a little hard to measure in a study.

[email protected]: You mentioned that in certain situations that the boss is asking the employee questions such as, “What kind of job did I do over the course of the year?”

Cappelli: You know, 360-degree feedback is the formal way in which that gets done, where you ask people all the way around you, “How do you think I did as a boss?” That has not had a terrific track record, partly because there’s a lot of venting going on. If you’re a subordinate, it’s hard to be objective about your boss. It’s hard, always, to like your boss.

Let me tell you the punch line of what we found on the academic side: Things don’t look very much like a contract, and supervisors tend to reward people for improvements as well as the level of performance. So, if you’re doing better this year than last year, it’s not like, “You did well. You get this much.” Also, counter to the prevailing view, they over-reward high performers. It’s not a linear relationship. If you’re a poor performer, they really do whack your merit pay increases. And if you’re a better performer, they really do load them up.

[email protected]: And that increases that separation between the upper end and the lower end, in the course of the job.

Cappelli: Within the job, that’s right. And it is true that as you move up the organization, the average scores increase. Why is that? There’s two explanations. One is that you’re selecting better people if it’s promotion from within. So, it’s not surprising that the scores would go up. And is it bias once you get near the top? They say that CEOs always give their personal assistants the top score.