Why eliminating the annual review caused a drop in performance

Article from Lydia Dishman, June 2016 on fastcompany.com. 

Ditching the dreaded annual review provided momentary euphoria, then a drop in engagement, performance, and communication.

A small but growing cohort of Fortune 500 companies made headlines recently when they broke with tradition and ditched the annual review.

Executives claimed performance reviews were often inefficient. Neuroscience backed them up. One study found that the dread filling employees prior to a review can restrict creativity. Another revealed that performance reviews foster a fixed mind-set in which the employee believes they’ll never be able to improve and achieve professional growth.

So it made sense to toss the annual review process. Leadership advisory firm CEB found that the number of Fortune 1000 companies eliminating the annual review increased to 12% in 2015 from 1% back in 2011.

But CEB subsequently found that getting rid of the review didn’t always reverse its restrictive effects. In fact, it proved to drop employee engagement and performance by 10%.

CEB’s researchers polled nearly 10,000 employees in 18 countries. Workers came from a variety of industries and organizational sizes. The researchers then compared outcomes and perceptions of those employees in organizations that use performance ratings to those in organizations without ratings. They also did a series of interviews with heads of HR to get a handle on trends and challenges for performance management.

CEB’s analysis also found:

  • Manager conversation quality declined by 14%
  • Managers spent less time on informal reviews conversations
  • Top performers’ satisfaction with pay differentiation decreased by 8%
  • Employee engagement dropped by 6%

The original push to remove reviews and their attendant ratings should have given managers more time to discuss performance rather than defend ratings. That didn’t always occur.

Problems With Pay

In fact, after the initial glow wore off, managers reported problems. One VP of HR in the health care industry said that without the visible symbol of a rating, staff didn’t understand the process or philosophy behind the company’s pay system.

For many workers, the annual review is the one chance they have to get a raise all year, unless they get a promotion that comes with a pay increase. Could dismissing the review and ratings lessen the chance to get that crucial raise?

Brian Kropp, HR practice leader at CEB, says there certainly were some employees who reported that they received no raises in their most recent performance review. However, he points out that in most of those situations there was a broader company decision to not offer raises. It was not, he says, a reflection of the performance of employees.

Effects On Time

As for freeing up managers’ time to engage their employees rather than sweat the details of conducting a performance review, that didn’t go as planned either. The report revealed that managers do not shift that extra time toward ongoing, informal performance conversations. This, despite the fact that research shows regular feedback helps employees feel appreciated and more engaged.

Kropp says CEB’s researchers measured employee engagement by assessing whether or not the employee is rationally and emotionally committed to the organization. “In other words, does their brain believe this organization is the right place for them to have a successful career, and is their heart attached to the organization because they like being there,” he explains.

CEB’s research has been able to show that employees who are both rationally and emotionally committed to their organization perform at higher levels and are less likely to quit.

So Kropp says it would make sense for managers to boost engagement by checking in more often if the formal process was removed. But the reality is that nature abhors a vacuum. “Managers are pulled in all sorts of directions and as soon as they feel things letting up in one area, they stop focusing on it.”

Kropp says there are several related reasons why managers didn’t fill more available time with communications. Chief among them, Kropp says:

Managers felt that their organization was no longer prioritizing the performance review process as much as they have in the past. So they focused on it less. Managers didn’t feel responsible for the follow-through on any feedback. One manager told us: “When I gave someone a low score in the past, I felt responsible for helping them out, now I just don’t feel that I have to spend time doing that anymore.”

Without scores calibration, time and efforts declined. Managers didn’t have to spend time talking with their peers or getting their feedback. So there was actually less information for them to follow up on.

Without reviews, only 4% of HR leaders reported feeling they could accurately assess employee performance. “Although a handful of managers are more effective without ratings,” the report’s authors write, “most organizations will find it too difficult to get their managers to the level needed to make the change worth the significant investment.”

Kropp reports that many companies are tackling this challenge head on. He says they are making the investment to get managers to be better at informal communications and feedback. He also says they are getting employees on the bandwagon, too, by empowering them to start the conversation with their managers about their performance through training and job aides. Senior leadership can also keep track of conversations through software and surveys to ensure feedback is being given regularly.

For those adamant about banishing the performance review for good, Kropp says, “These strategies can be just as effective if organizations use scores or don’t use scores.”

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