1 INTRODUCTION
Performance appraisals provide a common method for assessing employee performance over a specified time-period. This has been a common practice in the field of HR management, with 63 percent of British workplaces operating formal appraisals for non-managerial employees in 2011, up from 38 percent in 2004 (van Wanrooy et al., 2013). According to Swan (1991) performance appraisals have a long history, with Stroul (1987) noting that performance appraisals have been a staple element of personnel management for over 35 years.
It is important to distinguish performance appraisal from performance management, the latter being a broader practice including other activities to drive performance for example: goal-alignment with strategy, merit-pay increases and rewards, coaching, training and development. According to Williams (1998), there are at least three different models, classifying performance management as a system for: (i) managing organisational performance, (ii) managing employee performance; and (iii) integrating organisational and employee performance.
The process is formal in nature and is typically two-folds, firstly the manager and employee discuss, define and agree on the expected performance for the period ahead and subsequently use this expectation to evaluate performance and provide feedback to the employee once the assessment period has ended. Performance appraisal usually involves “evaluating performance based on the judgements and opinions of subordinates, peers, supervisors, other managers and even workers themselves” (Jackson and Schuler 2003: 455).
Performance appraisals have historically had a high level of interest in business and academia in Britain and have evolved from management to operational front-line staff (Townley, 1991). This interest has been backed by the focus by businesses to empower their workforce (Kirkpatrick, 1992) and maximise employee voice (McCabe and Lewin, 1992) by moving towards integrated HR management (Storey, 1992).
2 ANALYSIS OF PERFORMANCE APPRAISALS
2.1 BENEFITS OF PERFORMANCE APPRAISALS
Performance appraisals allow organisations to assess employees, develop their skills, improve performance and determine rewards (Fletcher, 2001). Managers use performance appraisals with intended consequences of improved employee performance, communication and availability of HR data (Coens and Jenkins, 2000).
2.1.1 Co-ordination of activities and performance expectations
Performance appraisals provide an opportunity for an organisation to plan the year ahead to set goals and cascade to departments, teams and employees to ensure all activities in the business are co-ordinated to fulfil the strategic goals of the business.
Performance appraisals also allow an organisation to specify the performance expectations from each employee in pursuit of the strategic goals. The appraisal process also provides a clear structure which allows the manager and employee to formally discuss performance against business goals.
2.1.2 Feedback and employee development
Performance appraisals consist of both an evaluative and developmental dimension (Boswell and Boudreau, 2002). Evaluation dimension allows managers to assess achievement of goals, identify strengths and weaknesses, areas of improvement and provide feedback. The developmental dimension allows managers to identify required skills and experience to fulfil and associated training and development needs.
2.1.3 Reward and motivation
Performance appraisals determine the merit-based pay increases to recognise performance and increase motivation. Employees believe the process offers procedural justice, where the outcomes are decided by a fair process, that is consistent, ethical, inclusive of all concerns, free from bias and based on accurate information (Leventhal, 1980). However, some subjectivity in manager’s assessment remains, but research shows that this typically improves the validity of performance appraisals (Mero, Motowidlo and Anna 2003). An effective rewards and compensation strategy is positively related to, and a key driver of, employee satisfaction (Huselid and Becker, 1996).
2.1.4 Basis for documentation
Performance appraisals formally document employee performance over a specific time-period. This is filed in the employee record, and can be particularly useful as evidence, in the case of any litigation or disciplinary action. Furthermore, Diaye, Greenan, and Urdanivia (2008) argue that capturing and documenting a performance appraisal leads to a higher level of individual performance compared to not documenting it.
2.2 CONSTRAINTS OF PERFORMANCE APPRAISALS
2.2.1 Rating accuracy
The performance appraisal process is complex and error-prone by design, the most notable limitation being the accuracy of the rating that the manager assigns to an employee at the end of the appraisal period. The process is further complicated by a rating calibration process by a group of managers.
There are a few cognitive issues that underpin this, including the halo effect, which is the result of an assessment which is based on one specific criterion that distorts the assessment of others (Guilford, 1954), the reverse of this is the horn effect, possibility of Veblen Effect, where the manager may rate all employees in the middle category (Dorfman, 1961) and Crony Effect, which can result from the personal relationship between manager and employee (Wexley and Yukl, 1977). Ratings may also be deliberately kept low due to political reasons. Buckingham and Goodall (2015) argue that due to the unique rating tendencies of the manager, the ratings reveal more about the manager than the employee.
The Veblen Effect conflicts with assumptions about normal distributions and have resulted in some organisations introducing forced-ranking to compel managers to rate on a normal distribution (Kessler and Purcell, 1992). Evidence also suggests that ratings are unreliable as the mean inter-rater reliability was low at 0.52 (Gerhart, Rynes & Fulmer, 2009). Lefkowitz (2000) concluded that managers give lenient appraisal ratings, which have high halo effects and reduced accuracy. These collectively make it harder to achieve procedural justice in practice and can increase negative competitiveness among employees which can impair team-working.
2.2.2 Psychological aspects
The performance appraisal process may cause stress amongst employees and managers. It can also generate negative experiences if appropriate training is not provided to managers. According to Edwards (1989:17) “many managers prefer dental appointments to play ‘god’ in preparing appraisals”. This view is also supported Ridley (1992) on motivating and rewarding staff, which highlights anxiety as the starting point for approaching performance appraisals.
The appraisal process is often criticised for being political in nature, where employees tend to believe that managers, like their schemes, are often dishonest and untrustworthy (Longenecker and Gioia, 1988). Galin (1989) also argues that differences in manager’s leadership styles distorts the appraisal process.
2.2.3 Time and cost
Performance appraisals are time-consuming. In a study conducted by Buckingham and Goodall (2015) on Deloitte, they identified that the organisation spent two million hours every year on performance appraisals, which included formfilling, meetings and deciding the ratings. In a separate survey, Willis Towers Watson found that 45 percent of organisations did not see value in the current process (Cappelli and Tavis, 2016). The process is also costly, with Gap reporting that it cost US$3m per year to run the performance appraisals (Peck, 2016).
2.2.4 Employee engagement and performance
In a public survey conducted by Deloitte, more than half of the executives believed that their current performance appraisal approach drives neither employee engagement nor high performance (Buckingham and Goodall, 2015). Others have argued that the performance appraisals are an out-of-date practice and inhibits collaboration and innovation. Most performance appraisals are deemed ineffective as they lead to lower employee performance (Latham et al., 2005) and higher employee dissatisfaction (Shrivastava and Purang, 2011).
These observations highlight that, performance appraisals do not contribute towards HR management (Chiang and Birtch, 2010) or organisational effectiveness (Taylor et al., 1995).
2.2.5 Retrospective Focus
Cappelli and Tavis (2016) note that the emphasis on financial rewards, punishment, an annual structure holds employees accountable for past behaviour. This view is also shared by managers, who question the fairness of the process (Bretz, Milkovich and Read, 1992).
The feedback is also inconsistent in helping to improve the performance (Kluger and DeNisi, 1996).
Performance appraisals provide a transactional view of performance, which is limited in use in the world of low inflation and smaller budgets.
3 RECENT TRENDS AND IMPLICATIONS
3.1 DRIVERS FOR CHANGE
Whilst performance appraisals have some advantages, the number and severity of the constraints limit their usefulness. Fletcher (1997) claims that within the UK, most organisations express dissatisfaction with performance appraisal schemes. Most scholars agree that performance appraisals fail to develop, motivate and increase commitment amongst employees (Pearce and Porter, 1986).
This is particularly important in the current fast-paced and continuously evolving business environment, where driving employee performance improvement and nurturing future talent are the hallmarks for a long-term survival. Furthermore, the ability of an organisation to be innovative and agile is becoming increasingly important to remain competitive. In this environment, team-work is becoming imperative, where forced-ranking and individual accountability play a lesser role in measuring success.
3.2 ABOLISHING / DEPRIORITISING PERFORMANCE APPRAISALS
Several organisations have abolished or significantly deprioritised performance appraisals , a high-level summary is included below:
Organisation / Summary of change / Type
Colorcon
Instant feedback that is linked to goals
Managers distribute small weekly bonuses to reward good performance – Abolished
Adobe
Regular feedback and frequent and less formal performance check-ins
Encourage timely “tough discussions” without option to defer to next year – Abolished
Gap
Monthly check-in conversation with employees
The “grow, perform, succeed” rebranding alleviates threat from the process – Abolished
Accenture
Capture on-going performance discussions in a real-time fashion
Use of internal app to facilitate and capture feedback – Abolished
Eli Lilly
Focus on theme of “trust” by encouraging employees to “voice their ideas”
Regular check-ins to strengthened manager/employee relationship – Abolished
Deloitte
Quarterly or project-specific “performance snapshots”
Weekly check-ins to ensure development is on track – Deprioritised
General Electric
Annual conversations continue, but focussed on development and coaching
Internal app to facilitate and capture feedback with focus on development – Deprioritised
Cargill
Introduction of “everyday performance management” system
Daily constructive and forward-looking feedback focused on development – Deprioritised
Never used traditional performance appraisals, focus is on goal-setting
Continued focus on coaching, increased feedback and tone-at-the-top – Never used performance appraisals
Source: Author’s summary from Fig. A, Appendix C.
In almost all the examples above, the changes involve the implementation of frequent and less formal performance check-ins to focus on development, and a stronger emphasis on regular feedback using technology. There is a growing trend to abolish/deprioritise performance appraisals with frequent, informal check-ins between managers and employees across different industries. Technology companies have led the way (e.g. Adobe, Juniper Systems, Dell, Microsoft, and IBM), joined by professional services firms (e.g. Deloitte, Accenture, PwC), early adopters in other industries (e.g. Gap, Lear, OppenheimerFunds), and even the utilities giant General Electric, that was a long-time role model for traditional appraisals (Cappelli and Tavis, 2016).
This also demonstrates a shift from Theory X, which suggests that organisations must motivate employees with material rewards and punishment to Theory Y, which argues that employees want to perform well and will do so if supported properly (McGregor, 1957).
3.3 PRACTICAL IMPLICATIONS OF ABOLISHING OR DEPRIORITISING
3.3.1 Data capture and information overload
If performance appraisals are abolished/deprioritised, they need to be replaced with a system that is able track work patterns. This requires frequent and real-time conversations between managers and employees, for example when issues come to light or project/task has been completed. Cappelli and Tavis (2016) argue that his will allow managers to promptly address problems in current performance and develop future skills.
However, with a move towards real-time and frequent feedback, the number of data points will undoubtedly increase. Cappelli and Tavis (2016) define this as feedback firehose, which can lead to information overload. Additionally, whist HR systems have played an important role in performance appraisals (Sulsky and Keown, 1998), their design is limited to documenting performance appraisals, and therefore these existing systems are not always able to accommodate continuous feedback.
This requires organisations to think strategically about HR systems and how feedback will be collected, collated and provided to employees (e.g. mobile apps, web-based tools). Getting this right is important as feedback is positively related to job satisfaction, which can be linked to higher productivity and performance (Fletcher and Williams, 1996)
3.3.2 Cultural aspects
Much of the research published on performance appraisals originates from developed countries. Employees within UK and USA tend to react differently to feedback, despite having similarities in culture (Early and Stubblebine, 1989). Therefore, academic research needs to consider the culture dynamics of other cultures, particularly in the emerging economies.
Moreover, abolishing/deprioritising performance appraisals to focus on continuous and multi-source feedback, gives managers and employees the power to provide critical assessments across the organisation’s hierarchy. This approach can be met varying reactions based on the cultural backgrounds of employees.
3.3.3 Legal issues
Performance appraisals are formally documented in the employee’s file and can mitigate litigation risk. Separately, some HR specialists are concerned of a possible rise in legal actions by employees if their organisation ceases to provide merit-pay increases based on numerical ratings, which on the surface appear more objective than having no ratings.
3.3.4 Reward fairness
Performance appraisal processed and resulting rating is linked to procedural justice, as it gives the perception of a clear and fair way of linking rewards to performance. Removing numerical ratings can make it difficult to determine the new basis for reward. Cappelli and Tavis (2016) provide an example where New York Life eliminated formal ratings, and this resulted in merit-pay increase to be shared internally and interpreted as performance scores. These led to the issue of “shadow ratings” and impacted other HR decisions, prompting the business to reintroduced formal appraisals.
Whilst some organisations have abolished/deprioritised performance appraisals, they have maintained the performance-related-pay model and looking for ways to determine merit-pay increases by relying on feedback/qualitative judgments by managers instead of a numerical rating.
3.4 CONDITIONS FOR ABOLISHING OR DEPRIORITISING
3.4.1 Institutionalise feedback through effective systems
To manage the volume, variety and frequency of the feedback under the new approach, the process needs to be institutionalised through effective systems. Particularly as it begins to play a bigger role in determining merit-pay increases and promotion. This should include integration with current HR systems as well as development of accessible mobile apps or web-based tools that allow prompt feedback delivery. There is evidence to suggest that feedback is more likely to be sought electronically than in person (Kluger and Adler, 1993).
To construct of the feedback should be simple, structured and centred around objective questions, such as those from Deloitte managers about their employees . The maximise usefulness, the feedback should be supportive and focussed on improvement (Dorfman et al., 1986).
Institutionalising feedback is vital to provide a fair and equitable system and audit trail for organisations to evidence and support critical decisions including merit-pay increases, bonuses, promotions and termination of employment. The feedback can be accumulated over the course of the year using systems and used in allocating reward, using a defined and agreed feedback-related metric and scale.
3.4.2 Internal behavioural changes
Firstly, it is important to understand what is important to employees and translate that into the objectives of the feedback system to ensure ownership. Deloitte did this successfully through an internal survey to understand the most important aspects.
Secondly, training must be provided to managers on how to structure and provide feedback. Research shows that some companies that abolished rating systems saw an overall decline in employee performance by almost as much as 10 percent mainly, due to managers failing to provide clear feedback without the rating system to help guide them (Peck, 2016).
Finally, the HR function must embrace this change and challenge the status-quo to move away from standardised processes, defined criterion to justify employment decisions and formal performance appraisal processes.
3.4.3 Leadership commitment
There needs to be a strong leadership commitment and engagement to define the tone-at-the-top for the system to be successful. This is particularly important as the transition directly impacts employees and how they are rewarded. There needs to be clear alignment of strategy and goals and how these cascaded to teams, with clear ultimate ownership of performance management by the leadership team.
4 SUMMARY AND CONCLUSIONS
4.1 SUMMARY
Performance appraisals play a pivotal role in co-ordinating activities in organisations, setting performance expectations, providing annual feedback, determining merit-pay increases and reward and providing formal documentation. However, academic research is unable to improve the practicality of performance-appraisals as a HR decision making tool, and whilst most organisations continue to adopt traditional performance appraisals methods, these are considered to be highly ineffective.
The embryonic nature of work, necessity for collaboration, importance of attracting and keeping talent and developing people faster are compelling some organisations to rethink their approach to HR management. Current practices are further constrained by seismic shifts in the business environment, with flatter management structures, pressure to reduce staff costs and levels, federated/decentralised business models to give business units more autonomy, and new working methods.
Traditional performance appraisals are flawed in their ability to determine accurate performance ratings, lead to several adverse psychological impacts on managers, employees and the relationship between them. These methods are inherently focussed on past performance, unable to drive employee engagement performance and considered to be time-consuming and costly.
To overcome some of these challenges, several organisations are claiming reinvent performance management by introducing quarterly goals, regular check-ins and objective feedback collation through technology (e.g. mobile apps, web-based tools) to create performance snapshots. Amongst these organisations, the focus is shifting to employee development and future potential, instead of past performance.
This report has provided a critical analysis of performance appraisals, their feasibility, whether they should to exist in organisations, current trends and the implications of abolishing or deprioritising these.
4.2 CONCLUSION
Organisations are recommended to carefully consider and deprioritise the current performance appraisal process (instead of completely abolishing) by introducing real-time project/task specific feedback from relevant stakeholders. Instead of a single performance rating on a three of five-point scale, the feedback should have four to five objective dimensions/competencies (e.g. would I reward this person, hire them, promote them), allowing stakeholders to rate the employees on each. These ratings, along with developmental feedback throughout the performance period should be aggregated to form the basis for merit-pay increases and bonuses.
Simultaneously, regular performance check-ins should be held between managers and employees to discuss performance against the team goals, feedback received, progress against personal and development goals. Focus should be to minimise documentation and capture only the information that is pertinent to deciding whether the employee is on-track. Managers should also play a coaching role to make the development more real-time.
Employees work as teams and succeed as team, instead of individual performance goals, team level goals should be set. Each team should have six to eight team goals, which captures the main areas of achievement, are stretching but achievable. The teams should collectively agree the annual goals and derive quarterly goals from these to determine the roles each team member will play each quarter. The goals must be linked to strategy to ensure clear alignment. Each employee should also have personal/development goals for the next quarter, with the aim of delivering incremental gains. This approach will significantly reduce the amount of documentation and number of performance appraisals.
However, it must be noted that for the approach to work, the feedback should be; institutionalised through appropriate data capture systems, focussed, relevant to avoid information overload, and easy to provide (e.g. mobile apps, web-based tools). This should also provide an audit trail and evidence in case of litigation. Furthermore, it is important to drive internal behavioural changes by understanding the exact needs of employees through surveys and reflecting this in the revised performance management system, training managers on providing feedback and getting commitment from the HR function to drive changes to the wider performance management system to facilitate the new approach. The leadership commitment and active support is a cornerstone to successfully implementing this change.
It is important to point out, that culture plays a pivotal role performance management and how employees react to feedback, both within the organisation in one location and across different countries. Furthermore, the current academic research is heavily USA and Western Europe focussed and does not necessarily reflect the culture dimensions of other continents and economies.
Further systematic research should also be conducted to prove the benefits of removing performance appraisals altogether. Despite the shortcomings of performance appraisals and the academic criticism, most large companies have complex and rigid structures, which only allow for subtle incremental changes to improve current performance appraisals processes to make them more effective.
Other areas of research could focus on further understanding linkages between performance appraisals and merit-pay, effectiveness of managers in evaluating performance and application of performance appraisals in non-office-based scenarios (e.g. technical roles, front line and operational staff).
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