Performance Management Systems from Dysfunctional to Effective

Joan walked in at about 7:00 p.m.; another long day at the office. Tired, frustrated and angry, she slammed her briefcase in the corner. Her husband, Tom, looked up from the dinner he was preparing and asked, "What's wrong?" She responded, "I got my annual performance evaluation today. I was rated a 3. I should have been a 4. The whole thing is so darned subjective.

It's all about how my boss thinks I compare to the competencies for a Director." Her husband empathized, "That stinks. Who came up with those competencies anyway?" Joan responded, "Some taskforce full of people who couldn't do my job if they tried." Tom countered, "But, isn't a 3 considered to be a very good rating?" "Sure," Joan said, "But, I thought for sure I would be rated a 4. My boss said I was right on the borderline. It could have gone either way, but in the final evaluation, I came up just a little bit short. Well, that little bit just cost us $10,000 of bonus money and the vacation to Amsterdam that we've been planning."

Joan is a good employee. Her evaluation reflected that. But, it left her angry, dejected, and anything but motivated. Further, Joan was completely focused on her rating rather than on how to improve her effectiveness going forward. Unfortunately, this is all too often the outcome because many performance management systems are fundamentally flawed. But, this doesn't have to be the case if a few basic principles are followed.

1. Performance Management should support the company's strategy - For optimal effectiveness, every system in a company must support the company's strategy. A Performance Management system is no exception. Senior management should establish a set of goals that, if achieved, will ensure that the strategy is executed as desired. These top level goals must then be cascaded down through the organization so that each individual has a set of goals that are consistent with the overall strategy and with the goals of his or her peers. The first step in performance management is to establish clear direction.

2. Competencies should be replaced with goals - Many Performance Management systems, like the one Joan's company used, are competency based systems. The underlying assumption of competency based performance evaluations is that if the employee exhibits the right set of behaviors, he or she will be an effective leader. But, great leaders come in many different flavors. George Patton and Mother Teresa were both great leaders. They accomplished their goals. But, the characteristics they exhibited and the techniques they used could not have been more different. Great leaders are people who achieve their goals, regardless of the behaviors they exhibit in doing so. Rather than rewarding employees based on a subjective assessment of behaviors, it is much more effective to simply measure whether or not the employee achieved his or her goals. An employee's goals begin with the cascaded organizational goals described above. To these, individual goals may be added. If employees achieve their goals while operating within the value system of the organization, their efforts should be rewarded.

3. Subjectivity should be minimized - Experience tells us that a boss's subjective assessment of how an employee stacks up relative to a set of competencies will inevitably lead to disagreement and hard feelings; we've seen it happen too many times. Whenever possible, the goals which will replace the subjective competencies should be objective and preferably quantified. For example, were productivity targets met, were sales goals achieved, or was the project delivered on time and on budget?

4. Discontinuities should be eliminated - Joan just missed having her performance characterized as "Outstanding." In fact, her manager thought that her performance was about midway between "Outstanding" and "Very good." But, that's not the message she heard. Most performance evaluation systems lump people into buckets. This is a genuinely bad idea. The discontinuities that are created at the margin inevitably result in problems. This is further exacerbated when the difference between the buckets has significant monetary consequences. The result is that employees focus more on what bucket they are in than on what they need to do to improve performance; the antithesis of what is intended. A better approach would be to have the overall rating objectively calculated from the individual ratings for each goal. This would result in overall ratings such as 3.43 in a system where 4 is "Outstanding" and 3 is "Very Good". Communicating to the employee that their overall rating was a 3.43 indicates that they are better than "Very Good," but not yet "Outstanding," which is, in fact, the case. Further, if a rating of 4.00 would warrant a $4,000 bonus and a rating of 3.00 would result in a $3,000 bonus, the employee receiving a 3.43 rating would get a $3,430 bonus. The discontinuity is eliminated. There isn't a $1,000 increase in compensated associated with being just a little bit better.

5. Performance Management should be a process not an event - The annual evaluation should never be a surprise. Rather it should be the summary of a discussion that has gone on throughout the year. An employee's progress relative to objective, quantified goals can be easily tracked. This facilitates monthly, or at least quarterly, discussions with the employee. Managers should be held accountable for holding these discussions (e.g., it should be one of their goals). These periodic meetings will then drive a host of other activities such as specific coaching, employee development or discipline when necessary. Most performance evaluation systems, while well intentioned, are dysfunctional. Rather than helping employees focus on what they can do to help the company achieve its strategic goals and improve performance, they result in anger and resentment. But, following the guidelines above can move performance management from dysfunctional to effective.