Performance management The secret ingredient

• As companies struggle with leadership, engagement, and capability challenges, they are realizing that the performance management process affects all of these challenges.
• Change is underway: 89 percent of respondents recently changed their performance management process or plan to change it within 18 months.
• Innovative new performance management models are now becoming an imperative as businesses modernize and improve their talent solutions. Companies leading this transformation are redefining the way they set goals and evaluate performance, focusing heavily on coaching and feedback and looking for new technologies to make performance management easier.

View the complete Global Human Capital Trends 2015 series

The secret is out. Many organizations used to think of performance management as a backward-looking assessment program owned by HR. No longer. Performance management is being reinvented for a new, forward-looking purpose: to serve as an efficient, focused business process that improves employee engagement and drives business results.

Redesigned performance management processes may or may not include year-end ratings, but across the board, they tend to focus less on evaluation and more on agile goal setting, regular feedback, coaching, and development. They shift the focus away from forced-distribution rankings and much more toward helping managers coach people to succeed. By changing this one HR “ingredient,” it is possible to affect many others.

Our research indicates that the transformation of the aging performance management process is long overdue. Last year, only 8 percent of the HR respondents in our survey believed that their performance management process drove business value.¹ This year, the importance of performance management rose significantly, with 75 percent of respondents rating it an “important” or “very important” issue, up from 68 percent last year.

So far, however, the rising importance of revamping performance management is just beginning to translate into a positive view of the process. Just 10 percent of survey respondents believe that performance management is a good use of time (slightly more than the 6 percent from last year), and just over half (56 percent) believe that it positively affects employee engagement and performance (figure 1). Moreover, the overall capability gap in performance management grew by almost one-third. (See figure 2 for capability gaps across regions and selected countries.)

Our survey results present a clear signal that the pressure to change is acute and that companies are finally taking steps to address the problem (figure 3).

What is driving the urgency around performance management? One factor could be that today’s biggest challenges include engagement, retention, and capability development. Most companies tell us that an “up or out” performance management process alone simply does not help address these challenges, and in many cases makes them worse. A large life sciences company, for example, discovered through research that its performance discussions were focused primarily on an employee’s level of pay rather than on useful feedback, coaching, and performance improvement.

A well-functioning performance management process should facilitate good management by good managers who are trained as coaches and mentors rather than as evaluators and graders. Today’s job market is highly dynamic and transparent. High-potential young employees want regular feedback and career progression advice, not just “once and done” reviews. And companies are finding significant gaps in leadership and capabilities that need to be addressed.

As companies reengineer performance management, many changes have occurred over the past year.

• The agile movement has permeated business, changing how companies set goals and manage people. Intel, for instance, uses a transparent, agile goal management process known as OKR (Objectives and Key Results) that focuses on giving people stretch goals and helping them to establish regular, achievable results that others can support.² This approach, which is currently sweeping across technology companies, illustrates how dynamic the process should be.
• A number of companies, including Adobe, Juniper, and Microsoft, have revamped the process to reduce the impact of ratings.³ This reflects a recognition that ratings-based performance management negatively impacts culture and engagement, which ranks as the most important issue in our survey. Research has shown that giving numeric ratings undermines engagement and self-confidence.⁴
• A new focus on managing to strengths, not weaknesses, is emerging. Research shows that a person’s best performance comes when they are given meaningful work that leverages their personal strengths and aspirations. Rather than simply evaluate people against goals, new performance models help create jobs or move people into roles where they can succeed.⁵
• Technology now makes transparent goal-setting and agile performance management easier than ever. A host of new tools permits employees to share their goals, provide feedback and recognition to others online, and even “gamify” the performance management process to make it more productive and useful.
• The link between performance management and compensation is weakening. Traditionally, organizations directly linked raises to performance ratings, making these ratings even more threatening and disruptive to employees. Today, the compensation process is being broadened.⁶ Companies are starting to base compensation decisions on the competitive value of an employee and real-world market conditions.

With the advent of more tools for real-time, pulse-based monitoring of feedback and engagement, the performance management process is becoming more integrated with strategies for employee engagement. For example, a large insurance company, which is going through a major restructuring to build global business units in Asia, is using the redesign of its performance management process to drive change and bring its new management philosophy to its people. Already, the process of discussing, redesigning, and training people on the process is re-energizing the entire organization.

Bottom-up feedback from employees, often gathered through the engagement process, helps managers see their own weaknesses and improve their own performance.

Feedback and team management are also integral to performance management redesign. New models focus on team-centric goal-setting and tools to help teams improve collaboration and performance. Bottom-up feedback from employees, often gathered through the engagement process, helps managers see their own weaknesses and improve their own performance. This, in turn, makes the performance management process more developmental for both leaders and their teams.

Finally and unsurprisingly, data is becoming an even more important part of the performance management process, and new tools are accelerating this ongoing development. For example, today, many companies model their performance process around the normal distribution or bell curve. Yet this distribution does not accurately model business performance.⁷ When companies hire top people and coach them to succeed, the performance curve often shifts to reflect many high performers and a small number of “hyper-performers.” By looking more carefully at the real distribution of performance, companies can accurately reward those who contribute the most.

Lessons from the front lines

Last year, we examined Adobe, which abolished performance scores in 2012. In their place, Adobe instituted “check-ins”—ongoing discussions between managers and employees to set expectations, offer feedback on performance, and recognize strong work. The initial impact was profound: Adobe benefited from a 30 percent reduction in voluntary turnover in a highly competitive talent environment.

Last fall, we checked in on the company’s “Check-in” program and found that Adobe’s leaders were focusing on three major areas: increasing the organization’s comfort with the program, reinforcing the need for check-ins, and integrating the approach into other areas of talent management. Adobe found that managers had difficulty with growth discussions, as they felt they did not have all the answers for staff in guiding them around promotional opportunities. In response, Adobe developed a series of resources focusing on coaching and growth to equip managers to be better coaches and to ask powerful questions. Importantly, the curriculum focused not just on training managers, but also on training employees to coach themselves and drive their own growth. The organization also reframed the concept of growth to focus on growing one’s own skills to continue to remain relevant in a rapidly changing environment.

Adobe has also reinforced the need for check-ins by having senior manager role models share their Check-in experiences with employees throughout the organization. The company has also put a large emphasis on ensuring that managers of managers are checking in on the Check-in experience. In addition, managers who receive low scores on the employee engagement survey receive feedback on how to improve their Check-in practices. Finally, Adobe has worked to integrate Check-in into other areas of talent management. New employees receive training on Check-in during the onboarding process. “Role-modeling Check-in” is now one of the five leadership competencies that all leaders at Adobe must demonstrate.

Nearly three years into the process, Adobe’s HR leaders believe that people find it much easier to start a conversation regarding performance. Further, engagement surveys show that employees have higher expectations of performance conversations and receive better feedback than ever before. Turnover levels remain very low, with voluntary attrition continuing to decline, despite the exceptionally competitive talent market in which Adobe operates.

Where companies can start

• Simplify: Get rid of unnecessary, time-consuming, paper-filled steps.
• Align philosophy with strategy: Explicitly define the company’s performance management philosophy and be sure that this philosophy is aligned with the organization’s strategy and culture. Clarify the behaviors expected of managers and senior business leaders as a part of this process. Determine the firm’s philosophy and strategy before choosing software to implement it.
• Separate performance from compensation: Take a step back and think about the entire structure before moving ahead with process reform. Disconnect performance management conversations from compensation conversations. Discussions about compensation often block an employee’s ability to hear and adopt the feedback that can lead to improved performance.⁸
• Build a new performance management culture: Encourage ongoing feedback, enable effective coaching through training, and use change management and communications teams to shift the performance management culture from an emphasis on top-down evaluation to continuous development.
• Empower local managers: Give managers the authority to recognize and reward employee performance throughout the year. Invest in leadership development that helps managers learn how to coach and develop their teams.
• Ditch the curve: Tying employees to a normalized curve can inhibit performance. Relax the curve and let local management decide where to spend incremental dollars.

Bottom line

Done poorly, performance management can not only waste valuable time, but also have a negative effect on engagement and retention. Done well, it can be one of the most inspiring and developmental events in an employee’s career, as well as drive performance improvements and organization-wide results.

Look hard at your performance process and push toward simplification and strengths-based assessment and coaching. Train managers on how to give feedback. Goals should be agile and updated regularly, and software should be simple and easy to use. The days of traditional appraisals and forced ranking are coming to an end; performance management is now a tool for greater employee engagement.