Monday Mornings with Madison

Choosing the Right Employee Performance Review Method… or Methods

Every so often, the business world rethinks its methods for evaluating employee performance.  Old approaches are replaced with new ones.  Then, in time, those are tossed aside for yet newer methods of assessing worker efficiency, output, creativity, and attitude.  Because employee performance is – by its very nature – tied to a company’s productivity and thus its bottom line and long-term success, methods for evaluating employee performance are constantly being considered and reconsidered… a pendulum swinging from one end of the spectrum to the other.

At one end of the scale are harsh assessment methods, such as the stack ranking approach that General Electric CEO Jack Welch employed in the 1980s.  On the other end of the continuum is the “no evaluation” method in which employees are never formally evaluated at all.  Between one extreme and the other, of course, are many strategies with varying degrees of rigor and results.  For those wondering which method of performance reviews helps motivate and improve employee performance most, the simple answer is that it depends.

A Plethora of Performance Review Strategies

Most companies use a single approach to do employee performance reviews.  However, a comprehensive employee appraisal can be comprised of several different performance evaluation methods. While a company can choose to use just one evaluation process in assessing an employee’s performance, using multiple evaluation methods provides a broader and clearer picture of an employee’s performance.  With multiple methods, a manager can get a better idea of areas where an employee might need to improve and what recommendations would support employee development.

There are certainly a variety of employee evaluation methods available.  But there is no single method deemed ‘best’ by management gurus.  The best employee evaluation method(s) for a particular company depends on that company’s culture, the state of the company’s financial health and employee morale, the company’s short and long-term goals, industry-accepted evaluation methods, and a number of other variables.  In other words, there is no single right approach or approaches.  Each company’s leadership has to consider a multitude of factors to determine which method makes the most sense for that companyat that time.  Even after careful consideration, often only time can tell if an employee evaluation system improves or hurts performance.  After all, that is the goal… to improve performance, boost productivity and ultimately better the bottom line. Let’s consider a few approaches.

Stack Ranking

Let’s start with one of the most controversial performance review systems.  Stack ranking, an employee performance evaluation method used at GE in the 1980s, was ubiquitous in large companies for over two decades. Dubbed ‘Rank and Yank’ because of its ruthlessness, this method requires managers to evaluate and score every employee’s work (either quarterly or annually) and place scores on a bell curve to reflect how employees rank in relation to one another.  Employees who rank at the top are rewarded and employees who rank at the bottom are fired.  At some companies, as much as the bottom 10% of ranked employees are let go each evaluation cycle.

Although popular from the 1980s to the early 2000s, in recent years, the use of stack ranking has plummeted as research has shown that the policy actually tends to do more harm than good.  In fact, by 2009, the Institute for Corporate Productivity (i4cp) asked big companies if they used a stack ranking system for performance reviews and 49% said they did. By 2011, only 14% used stack ranking.  In particular, companies identified by researchers as high-performing were steadily moving away from the notorious system. Only 7% of high-performing companies used stack ranking in 2009 and only 6% were still using it by 2011.  Most recently, Microsoft, which used stack ranking for a long time, dropped that method of employee evaluation.

Why is stack ranking on the decline?  With the rise of evidence-based human resource management over the last 20 years, HR departments have begun to closely examine the data related to stack ranking.  The data did not point to success.   In fact, quite the opposite.  A negative correlation was found between employee engagement and innovation related to stack ranking.  Stack ranking actually hurt performance.  Stack ranking pitted employees against employees and created a cut-throat environment which discouraged innovation and collaboration.  In a hyper-competitive workplace, where management was essentially asking employees to outperform teammates and colleagues, employees were discouraged from sharing ideas or working together.  Instead, the incentive was to focus on the most visible and individual aspects of performance, rather than work as a team to achieve the company’s goals. In some cases, employees even focused on preventing others from excelling.  That was the case at Microsoft.

Stack ranking was also deemed unfair.  Many workplace skills were deemed hard to measure or seen as subjective.  Take communication skills, for example.  Tallying the number of phone calls made or answered was measurable but hardly valuable.  But measuring the quality of the communication was much more subjective.  So rankings often ended up being arbitrary, unpleasant, and poorly linked with performance.

With such evidence, it is not surprising that large companies such as Microsoft shifted to more flexible systems with a greater focus on employee improvement. Employees might still be rated or ranked, but not along a bell curve or with strict cutoffs.

Of course, stack ranking is not dead.  Yahoo’s CEO Marissa Mayer recently implemented a form of stack ranking — what Yahoo calls a “Quarterly Performance Review” system.  Yahoo’s QPR system requires managers to rank 10% of employees as “Greatly Exceeds,” 25% as “Exceeds,” 50% as “Achieves,” 10% as “Occasionally Misses” and 5% as “Misses”.  Because of the bell curve, some employees must be ranked lower than others.  Managers feel forced to rank some staff with designations of “Occasionally Misses” and “Misses”, even if that is not the case.  As a result, more than 600 Yahoo employees were recently fired because they had gotten lower scores at least two times in recent quarters.

Is the stack ranking system working for Yahoo?  It’s hard to tell.  It has certainly not been well-received by employees, according to comments on internal message boards.  For a business where innovation and collaboration are essential to survival, this performance evaluation system seems to undermine the organization’s mission.  But the real tell will be whether employee performance moves the company toward success.  It hasn’t yet.  Yahoo has not shown sales growth or market share gains since Mayor took over in July 2012 and implemented tougher HR policies including stack ranking. Yahoo’s sales were flat in the last year and the company lost market share. Yahoo’s share of the U.S. online ad market is expected to drop from 8.6% in 2012 to 7.7% by the end of 2013. Meanwhile Google’s share is expected to jump to 41.1% in 2013 from 40.9% in 2012 as Facebook gains the most share from a smaller base – 5.9% to 7.1%.  On the other hand, Yahoo’s stock has gone up 110% since Mayor’s arrival.  That is at least a small indication that Wall Street thinks Yahoo is on the right track.  It is too soon to tell if that is attributed to stack ranking (which is supposed to eliminate underperforming/weak employees and make room for better-quality hires).

Self-Evaluation

Besides stack ranking, there are many other methods.  The self-evaluation method can be effective when teamed up with another type of performance review. As the self-evaluation method implies, the employee is asked to judge his/her own performance by using a form that requires multiple choice answers, essay-type answers or a combination of the two. One of the benefits of a self-evaluation is that a manager can compare the self-evaluation to other appraisals and see the areas where there is a discrepancy. This opens the door for a dialogue between the manager and the employee that can benefit employee development.

360 Evaluation

A 360 degree performance evaluation is one that involves input from the individual’s direct supervisor as well as managers in other departments with whom the employee works with on a regular basis.  An employee’s development is judged on progress made within the department, and the effectiveness of the employee’s interaction with the rest of the company.  Employees are also evaluated on their effectiveness according to their job descriptions, and on how well they fit in and get along with others.  All evaluations are combined to get a full, 360 degree picture of the employee’s performance.  This method is time-consuming but effective.

Graphic Scale

According to the United Nations, the graphic scale of performance evaluation is one of the more common ones used by managers around the world. The employee’s performance in various areas of her job duties is graded on a scale. The value in a graphic evaluation system is that it allows managers to compare the performance of several employees simultaneously. The system can be done with numbers or letters, and it usually consists of a range, running from poor to excellent.  However, though a scale is used, promotions, raises, demotions and terminations are not forced according to scale results.

Checklists

A checklist evaluation method is simplistic but effective. It consists of a series of performance questions that are traditionally given the option of yes or no, according to online educational resource Open Learning World. An excessive number of negative responses indicates developmental training is needed for that employee. The checklist can be used as a quick way to identify employees that have deficiencies in too many performance areas.

Critical Incident

The Critical Incident method involves an ongoing form of evaluation.  A proactive manager keeps an ongoing log throughout the year of an employee’s performance, and then uses that information to fuel discussion during the employee periodic performance review. This method of keeping a list of good and bad incidents of employee performance helps to jog memory and ensure that performance issues are backed up by data and that single incidents occurring right before a review don’t skew review results.

Organizations have different cultures, and company cultures change over time.  Corporate leadership also changes over time. An employee evaluation system that works for one company at a given point in time – such as Yahoo in the midst of trying to make a comeback — may not be the right solution for other companies. The key is for performance reviews (and the compensation tied to it) to be aligned with and support the organization’s overall mission and values.  It must also have the backing of top leaders, and be clearly communicated and explained to managers and employees throughout the company.  Only then can a company truly monitor its most valuable resource:  its employees.

Quote of the Week

“For a business to strengthen its position on the market, its managers should become skillful at helping their subordinates to set and achieve specific and measurable goals with realistic deadlines and clear expectations. Managers should also mentor employees through challenges, helping them grow and develop new skills.” Anna Stevens


 

© 2013, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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