Annual reviews is a last-century practice
The Performance Management Revolution
When Brian Jensen told his audience of HR executives that Colorcon wasn’t bothering with annual reviews anymore, they were appalled. This was in 2002, during his tenure as the drugmaker’s head of global human resources. In his presentation at the Wharton School, Jensen explained that Colorcon had found a more effective way of reinforcing desired behaviors and managing performance: Supervisors were giving people instant feedback, tying it to individuals’ own goals, and handing out small weekly bonuses to employees they saw doing good things.
Back then the idea of abandoning the traditional appraisal process—and all that followed from it—seemed heretical. But now, by some estimates, more than one-third of U.S. companies are doing just that. From Silicon Valley to New York, and in offices across the world, firms are replacing annual reviews with frequent, informal check-ins between managers and employees.
As you might expect, technology companies such as Adobe, Juniper Systems, Dell, Microsoft, and IBM have led the way. Yet they’ve been joined by a number of professional services firms (Deloitte,Accenture, PwC), early adopters in other industries (Gap, Lear, OppenheimerFunds), and even General Electric, the longtime role model for traditional appraisals.
Without question, rethinking performance management is at the top of many executive teams’ agendas, but what drove the change in this direction? Many factors. In a recent article for People + Strategy,a Deloitte manager referred to the review process as “an investment of 1.8 million hours across the firm that didn’t fit our business needs anymore.” One Washington Post business writer called it a “rite of corporate kabuki” that restricts creativity, generates mountains of paperwork, and serves no real purpose. Others have described annual reviews as a last-century practice and blamed them for a lack of collaboration and innovation. Employers are also finally acknowledging that both supervisors and subordinates despise the appraisal process—a perennial problem that feels more urgent now that the labor market is picking up and concerns about retention have returned.
But the biggest limitation of annual reviews—and, we have observed, the main reason more and more companies are dropping them—is this: With their heavy emphasis on financial rewards and punishments and their end-of-year structure, they hold people accountable for past behavior at the expense of improving current performance and grooming talent for the future, both of which are critical for organizations’ long-term survival. In contrast, regular conversations about performance and development change the focus to building the workforce your organization needs to be competitive both today and years from now. Business researcher Josh Bersin estimates that about 70% of multinational companies are moving toward this model, even if they haven’t arrived quite yet.
The tension between the traditional and newer approaches stems from a long-running dispute about managing people: Do you “get what you get” when you hire your employees? Should you focus mainly on motivating the strong ones with money and getting rid of the weak ones? Or are employees malleable? Can you change the way they perform through effective coaching and management and intrinsic rewards such as personal growth and a sense of progress on the job?
With traditional appraisals, the pendulum had swung too far toward the former, more transactional view of performance, which became hard to support in an era of low inflation and tiny merit-pay budgets. Those who still hold that view are railing against the recent emphasis on improvement and growth over accountability. But the new perspective is unlikely to be a flash in the pan because, as we will discuss, it is being driven by business needs, not imposed by HR.
First, though, let’s consider how we got to this point—and how companies are faring with new approaches.
How We Got Here
Historical and economic context has played a large role in the evolution of performance management over the decades. When human capital was plentiful, the focus was on which people to let go, which to keep, and which to reward—and for those purposes, traditional appraisals (with their emphasis on individual accountability) worked pretty well. But when talent was in shorter supply, as it is now, developing people became a greater concern—and organizations had to find new ways of meeting that need.
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