The case for keeping performance evaluations: Dispensing with ratings will make it harder to issue bonuses

In July, Accenture announced that it would be scrapping performance evaluations in favour of continuous feedback. “Imagine, for a company of 330,000 people, changing the performance management process — it’s huge,” chief executive Pierre Nanterme told the Washington Post.

 

Accenture’s change in policy is representative of a wider corporate shift away from expensive and stressful annual appraisals, towards less formal and more frequent discussions between managers and their employees. 

 

But dispensing with formal reviews altogether would cause problems for firms wishing to standardise performance, both to distribute bonuses and stave off complacency. Here’s how companies can get the best of both worlds. 

 

Employees not only fear a low rating, many also feel that their efforts have gone unrecognised if they are simply lumped into a “satisfactory” band along with the majority of their colleagues. Yet, when it comes to distributing bonuses, there are obvious advantages to having a standardised ratings system.

 

PwC’s 2015 Performance Management Research, which surveyed 100 UK-headquartered companies, found that 53 per cent of staff bonuses are directly linked to individual performance. Without a framework for calculating and distributing bonuses, remuneration would be at the discretion of individual managers. And it would be more difficult to determine exactly which behaviours were worthy of reward, across departments with diverse goals and capabilities. “Without the year end rating, the danger is that the distribution of pay and bonuses can become even more of a dark art, as shadow systems evolve without proper governance and infrastructure behind them,” said Alastair Woods, director in PwC’s reward team.

 

But developing more sophisticated ratings systems will not necessarily make it impossible for employers to tie pay to performance, according to David Rock and Beth Jones of the NeuroLeadership Institute. They told the Harvard Business Review that “post-ratings” firms should develop a “specific language” to provide an evaluation which is more nuanced, and which accounts for the array of abilities required in different departments of a large firm, while preserving company-wide consistency. 

 

A study in the Psychological Bulletin in 1996 found that, while evaluations improved staff performance on average, output actually decreased in more than a third of cases. It reported that feedback resonated less effectively when the recipient felt that their role in a task was being scrutinised, rather than the outcome of the task as a whole. Semantic performance indicators might solve the problem – combining a framework for remuneration and providing feedback which doesn’t discourage or disengage staff. 

 

A big advantage of performance evaluations is that they foster internal competition. Executives at Intel decided not to roll out a feedback-only scheme after a two year trial because of worries about complacency. 

 

But a number of companies still model employees’ performances on a bell curve, which articially forces a certain number of employees into high or low-performing categories. But when a company has taken on top performers, or invested in extra training for employees, the bell curve simply suggests that performance across the company has flatlined between one review and the next, which is more likely to make valued workers despondent than to redouble their efforts. Recognising the benefit in rewarding top talent, KPMG India is introducing a steeper bonus curve for high performing staff, as part of a scheme which will provide regular feedback and debrief team members after every major assignment.

 

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