Monday, June 20, 2016

Reinventing Performance Management

At the best of times, performance management tends to be a sticky business. Whatever the method used, some employees are likely to be disgruntled and some likely to feel they did not receive a fair deal. Contrary to popular understanding, most ratings reveal more about the rater than they do about the ratee. Mount, Scullen, and Goff (2000) refer to this phenomenon as the "idiosyncratic rater effect." This effect accounts for nearly two-thirds of the variance in ratings while actual performance accounts for only one-fifth of the variance. A recent survey of executives found that 58% believed that their current performance management approach drives neither employee engagement nor high performance. It should come as no surprise, therefore, that many organizations have said goodbye to multiple objectives, backward-looking assessments, yearly reviews, and even 360-degree feedback tools.

It is one thing to find that existing systems are no longer useful in a fast-changing world. It is another to find a solution that is agile, real-time, individualized, and future oriented. This is precisely what Deloitte has done. Building on a longitudinal study by Gallup involving 1.5 million employees, 50,000 teams, in 192 organizations, Deloitte found that the variation between high-performing teams and low-performing teams could be attributed to a small number of factors. To develop a high-performance organization and to sustain it, it was important to focus on three objectives: first, to recognize performance; second, to be able to measure and see in real-time and not long after the event; and third, to overcome the idiosyncratic rater effect. For the latter, it was decided to ask team leaders not about the skills of each team member but about their own future actions with respect to that person.

At the end of every project (or once every quarter for long-term projects), Deloitte asks team leaders to answer (on a rating scale from strongly agree to strongly disagree) four future-oriented statements about each team member. For example, "Given what I know of this person's performance, and if it were my money, I would award this person the highest possible compensation increase and bonus", "I would always want him or her on my team", "This person is at risk for low performance", and "This person is ready for promotion today (yes or no)". In other words, team leaders are asked what they would do with each team member instead of what they think of that individual. These are called performance snapshots and plotted through the year for each individual. Responses are tested for both construct validity and criterion-related validity. The net result is recognition of performance on a real-time basis, the ability to see what is going on clearly, and sustained strengthening of high-performance teams by fueling exceptional goal orientation.

The questions and responses would obviously vary from one organization to another. However, the common thread has to be the three-legged stool of recognition, clear and real-time measurement, and future orientation. Deloitte has decided not to reveal the snapshots to avoid sugarcoating and skewness that are inevitable if it becomes known that each of the snapshots would be shared. The aggregates are shared through carefully crafted conversations. The dread of having to go through a list of failures as an excuse for not being rewarded is replaced by a confidence that everyone is being enabled to become a superior performer. At some point, the organization needs to balance the need for transparency with the need to avoid exaggerated responses. Deloitte is still trying to figure this out.

Deloitte's radical redesign demonstrates that as practiced, conventional performance management systems tend to be sadly one-dimensional. In trying to reduce something as complex as performance to a single number, organizations seem to be missing the point. What is required is not just simplicity. What is required is a richly insightful view.

For a detailed discussion, please read: Buckingham, Marcus, and Ashley Goodall (2015): Reinventing Performance Management; Harvard Business Review, Cambridge, MA; April 2015.


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