Remove the Shackles from Performance Management so it can Serve your Business
Over the past couple years I have documented the problems with traditional performance management (PM), which I call “Last Generation Performance Management,” or PM 1.0 for short. I have been critical of its broad, diffused purpose, the lack of research support for its practices, the antiquated paradigms on which it is based, and the forces holding these practices in place. And with good reason—nearly everyone is unhappy with PM 1.0. According to recent Gallup statistics, 95% percent of managers are dissatisfied with their PM system and only 14% of employees feel PM helps them improve. PM costs organizations about $3000 per employee and an estimated $345B per year in merit increases and bonuses are distributed in the US alone in large part based on PM ratings. These are sobering statistics. Companies invest a lot of in PM and they see little return on that investment. Organizations succeed despite the way they manage and motivate the performance of their employees not because of it.
Now it’s time to focus on what organizations should do instead. In this and future articles, I will describe four big ideas for “Next Generation Performance Management” --PM 2.0 for short. This article explores the first of these ideas: Purpose. Everyone agrees, performance management should focus on performance, improving and ensuring individual and organizational performance. But how?
PM has many Masters
A recent book by Herman Aguinis identified 22 different purposes in 6 categories: Strategic; Administrative; Informational; Developmental; Organizational Maintenance; and Documentation. PM has a long list of stakeholders many of whom have conflicting expectations. This list reflects the evolution of PM 1.0. Performance appraisal focused on measuring performance to help make promotion and other decisions, and changes in employment law in the US made documentation an important part of legal defensibility of these decisions. Management by Objectives added a focus on objectives (versus traits), measures and targets, and aligning objectives across a company. Modern PM added a focus on future planning (vs. past performance), differentiated “Whats” and “Hows”, and an emphasis on coaching, feedback and development, including adding a separate development plan. Modern PM was also co-opted by the pay-for-performance movement that began in the 1980’s, creating a formal link between PM and rewards. All of these changes were additive, like barnacles attaching themselves to one-another. Few organizations stopped to think strategically about PM during this period, to rationalize this long list of objectives. So, PM 1.0 is not the result of deliberate, strategic design; it is the result of institutionalization, inattention, and strategic neglect. Little wonder PM 1.0 is underperforming today. How can a process pointed at 22 things improve the performance of employees or organizations?
PM Really has one Master
You can get a good understanding of what PM really does in organizations by proposing to get rid of it. The first question out of people’s mouths is “but how will we pay people?” Make no mistake, the real purpose of PM is evaluating performance, so organizations can differentiate rewards. Recent research by WorldatWork showed “the ability to differentiate rewards” was the top goal of PM programs. Rewards is the tail that wags the PM dog.
As I documented in my recent book, using PM to evaluate performance and differentiate rewards ignores the significant problems with performance ratings and reflects outdated motivation principles from psychology and economics. Many of these principles were long ago discredited by the scientific community as sufficient for motivating high performance and rigorous scientific research today provides little support for their effectiveness. Even if you don’t read scientific research, the general malaise present in organizations after the year-end PM/pay cycle should be evidence enough that a PM process focused on evaluating performance and differentiating rewards isn’t working. Nearly everyone dreads the start of the cycle and feels terrible after the cycle ends. The hangover lasts until the pressure of the day-to-day work makes everyone forget the pain and organizational life returns to normal. The cycle begins again 8 months later. PM is something to be endured in organizations, not leveraged. How can a process that alienates most of your people be good for business?
A Better Mouse Trap
The idea for thinking differently about PM came to me many years ago when I was designing and implementing a new strategic planning and organization design process. The output of this process was a multi-year change agenda and transformation map describing the activities required to take the organization from current state to future state. The last stage of this process integrates activities on the transformation map into annual business plans.
This didn’t happen.
What happened is the strategy work, change agenda and transformation map ended up as binders on a shelf; organizations didn’t effectively resource the plans. There was no discipline that kept transformation activities in front of leaders. So, we created our own process and PM was a key part of it. Leaders had two different sets of responsibilities, they had “run-the-business” objectives and “change-the-business” objectives. PM and local work unit plans connected lofty strategies, goals and roadmaps to day-to-day activities. PM became the bridge between strategy and real work.
Only later did I learn this problem wasn’t unique. Many strategy execution and change efforts fail, and they fail in part because they simply don’t get implemented. Research by Arnold Judson and Daniel Gray found that almost 90% of companies were unhappy with their strategic planning process and nearly 60% attributed their discontent to the implementation process. Wharton’s Larry Hrebiniak summed up this challenge well:
“The picture of strategy execution is not yet complete because the creation of strategy, objectives, structure, and coordinating mechanisms is not sufficient to ensure that individuals will adapt their own goals to those of the organization. Some method of obtaining individual and organizational goal congruence is required.”
Leveraging PM--Designing Organizations with Implementation Capability
There are dozens of models to guide you in organization design. Most have an element that includes work processes. This element includes the horizontal work processes that reflect the flow of work, transforming inputs into outputs. This element also includes the vertical processes that sit on top of the work flow that manage and make decisions about the work. These decision processes allocate scarce resources (e.g. money, management attention, and talent) controlling what gets worked on. Strategic planning, long range planning, business planning and budgeting are examples of these processes. I see PM as an extension of these processes. After organizations define strategic priorities and make decisions about resources (headcount and financial targets), responsibility shifts to local work units to decide how best to use the resources available to them to address the organization’s priorities. Work units set objectives and priorities and supervisors work with employees to set individual objectives. Supervisors then work with their teams to monitor progress and help employees achieve their objectives.
From an organization design perspective then, PM is best seen as a management process that provides direction for employees, helping align their efforts to the goals and objectives of the company. It serves as a control mechanism ensuring the right things get worked on and that there is help and support to ensure progress is made. This is big idea number 1 for PM 2.0: It provides direction, alignment, control, and progress, in the service of organizational performance. In Aguinis’ list, “strategic” should be king.
The Failure of Strategy Execution isn’t an Incentives Problem
It is important to note that some scholars also blame the failure of strategy execution on misalignments of rewards and incentives, believing that execution fails when no one has “skin in the game.” PM frequently becomes the default way of ensuring everyone has skin in the game. Anyone who has managed PM has seen this movie before. Every new change initiative (e.g., branding, compliance, culture change, leadership model) results in a new list of behaviors that is incorporated into PM so employees and leaders can be held accountable for them. The result is PM becomes a bloated mess of confusing, competing expectations, most of which is ignored. The problem is PM and the link to rewards are weak leverage points for driving, reinforcing and institutionalizing organizational change. If you want to communicate that compliance is important, fire everyone who violates your compliance policies, don’t build compliance behaviors into your PM process. If you want a culture of innovation, fire all the leaders standing in the way of good ideas and promote people who facilitate them, don’t build innovation behaviors into your PM system. If you are Wells-Fargo or Uber and you are serious about reforming your company after recent scandals, you don’t start by embedding customer-friendly behaviors in your PM system. You fire everyone that created the problems, you promote and hire people with different values and you redesign the entire organization to create a different culture that will drive different outcomes. PM and rewards alignment are the last things you do, not the first things, and certainly not the only things.
Blaming mis-aligned incentives for the failure of strategy execution reflects old thinking. It is classic agency theory, based on the principle that employees and companies have different goals, that employees will not identify with the goals of the organization, and some “external force” must be applied to align them (contracts, threats, surveillance, monitoring, incentives…,“teeth” if you will). I don’t believe this thinking reflects the reality of employee-organizational relationships today. Research on organizational commitment and employee engagement shows employees can and do identify with the goals of their organizations. And the purpose-driven organization movement shows employees are searching for purpose and meaning in their work, and progressive organizations are leveraging these desires to motivate their employees. This thinking also presumes you can perfectly specify the behaviors you want and set up the perfect reward contingencies. In a VUCA world, creating specific, stable behavioral contracts simply won’t be possible. Things change too fast. You can motivate your employees without teeth and adding teeth to your change initiatives will simply cost money, slow you down and frustrate your employees.
So What About the Remaining 22 Objectives?
For the rest of the 22 objectives, either PM shouldn’t be the primary way to accomplish it, there are better ways to do it without PM or organizations shouldn’t be doing it in the first place. In the case of administrative decisions, organizations shouldn’t be using performance ratings as input to most of these decisions since they simply aren’t accurate enough. There are better sources of information to support these decisions (e.g. objective assessments) and if organizations can’t live without performance input for a specific decision (e.g. for talent identification or staffing), they can create a special performance measurement process specific to this decision.
My perspective on using PM for development is simple: PM isn’t about development, it’s about performance. If an employee needs to learn something new to make progress in their work, this should be a performance objective not a development objective. Development needs outside of the current performance plan should be incorporated in a separate process (a career development process). Competency assessments and 360-degree feedback can be included as a part of this process. Long-term development is too important to be tethered to PM.
Finally, over-reliance on PM for documentation and legal defensibility is simply bad practice. Why penalize 99% of your employees with onerous documentation requirements when administrative consequences are only likely for the 1%? Create a separate performance improvement process with strict documentation requirements to manage the 1%. Research also shows detailed PM documentation frequently does not help companies defend their decisions anyway. Creating defensible decision processes has more to do with providing due process than detailed documentation.
A new Charter and new Practices
So, PM 2.0 starts with a more robust, meaningful purpose for organizations. It is a management process focused on direction, alignment, control, and progress, in the service of organizational performance. PM is about performance and creating purpose, meaning, and context is a better way to achieve it than carrots and sticks. With this purpose in mind, goals and the process for setting them become the centerpiece of PM 2.0. This is the second big idea, which I will take up in Part II of this series.
References and Readings
Colquitt, A. L. (2017). Next generation performance management: The triumph of science over myth and superstition. Charlotte, NC: Information Age Press.
Gallup (2017). State of the Global Workplace.
Chun, J, Brockner, J., & De Cremer, D. (2018). People don’t want to be compared with others in performance reviews. They want to be compared with themselves. Harvard Business Review, March 22.
Shaw, J. D., & Mitra, A. (2017). The science of pay-for-performance systems. Six facts that all managers should know. WorldatWork Journal, Third Quarter.
Aguinis, H. (2013). Performance management. Upper Saddle River, NJ: Pearson.
Murphy, K. R. & Cleveland, J. N. (1995). Understanding performance appraisal. Thousand Oaks, CA: Sage Publications.
WorldAtWork (2017). WorldatWork research report: Performance management and rewards 2017.
Judson A. S. (1996). Making strategy happen. Malden, MA: Blackwell.
Gray, D. H. (1986). Uses and misuses of strategic planning. Harvard Business Review, January, 1986.
Hrebiniak, L. G. (2013). Making strategy work: Leading effective execution. Upper Saddle River, NJ: Pearson.
Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14, 57–74.
Coens, T., & Jenkins, M. (2002). Abolishing performance appraisals: Why they backfire and what to do instead. San Francisco: Berrett-Kohler.
Malos, S. B. (1998). Current legal issues in performance appraisal. In J. W. Smithers (Ed.) Performance appraisal: State of the art in practice (pp. 49-95). San Francisco: Jossey-Bass.