Performance Appraisal: What’s Wrong and How To Fix It

So, it’s that time of the year again, isn’t it? You’ve been given a set of performance appraisal methods and tasked with conducting (or receiving) these employee reviews. And the concept sure does sound nice. As Edward Deming, pioneer in the field of quality control, puts it in “Out of the Crisis”:

“The idea of merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good.”

Unfortunately reality doesn’t always reflect theory, and that couldn’t be more true with performance appraisals. Again, Deming sums up the negative effects of performance reviews and merit ratings best by noting that:

“It nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, nourishes rivalry and politics.”

Performance appraisals are intended to inform exactly how pay and promotions will be doled out. And, in the best of cases, they really are meant to give managers a fair way to assess and equitably reward individual contributions.

But in reality, the effect is exactly the opposite. Performance appraisals incentivize elevating individual gain over the collective gain. And in a working environment built on the deep need for collaboration, a need that has only increased over the years, it’s the organization that is the loser.

It’s no secret that I’m not a fan of modern performance appraisal methods. Perhaps you’ve been following along over the years and have seen what I have to say on annual performance appraisals. Perhaps you’ve seen me at talk or saw a Tweet. My experience with pay-for-performance and annual performance appraisals corroborates with what Deming and others have seen. Contrary to popular belief, performance reviews actually hurt performance and results, rather than driving higher performance.

Where does that leave us?

In the past, I’ve suggested that managers, coaches, and the rest of us should steer clear of performance reviews altogether.

My suggestion does run counter to widespread practice. But I’m not alone in questioning performance evaluations and rankings.

Years after W. Edwards Deming identified performance appraisal as one of the Seven Deadly Diseases of Management, Stanford University professors Robert Sutton and Jeffrey Pfeffer combed through data and studies related to widespread management practices. They reference a survey of 200 human resource professionals which reports that forced ranking—a common component of performance appraisal programs—results in “lower productivity, inequity and skepticism, negative effects on employee engagement, reduced collaboration, and damage to morale and mistrust of leadership.” They go on to describe the damage done by merit pay plans.

Other studies point to the same conclusion. In a famous Leadership IQ study, 48,012 CEOs, Managers & Employees were surveyed about performance appraisals. Here are the shocking results:

“Only 13% of Managers & Employees thought their performance appraisals were effective. And only 6% of CEOs thought their appraisals were effective. We also discovered that only 14% of employees say their performance appraisal conversation offered meaningful and relevant feedback.”

In short, the evidence supporting the benefits of rating, ranking, and then tying pay to the rating—the stuff of performance evaluations—is thin to none.

Actually, I’m not shocked by these results. Not even surprised.

What is shocking is that many organization continue to add layers of process, systems, and training, in an effort to make a fundamentally broken concept work.

I’m not saying we don’t need feedback. We do need information about results and behavior. That information needs to be relevant, timely, and actionable.

I’m not saying that we don’t need to have conversations about performance.

I’m not saying managers don’t need to make decisions about whether a person’s performance matches the needs of the job.

But the typical performance appraisal methods fail to give useful feedback, fail to promote meaningful conversation, and seldom lead to decisions about fit for job.

It doesn’t have to be this way.

What happens without traditional performance appraisals?

If the senior managers at a company really want to improve performance, tinkering with the pay system isn’t the way to go about it. Addressing all the elements of individual performance in relation to their environment, and any systems that stand in the way of success, is.

Pfeffer sums it up best:

“Effective management is a system, not a pay plan. The mistake is that companies try to solve all their problems with pay.”

If we want to see improvements both in individuals and in our organization’s results as a whole, then we need to make sure our individual evaluation of and rewards for our people support the team-based work we’re set up for. We need to incentivize and reinforce team-based work.

Yet, there are legitimate concerns about what to do instead.

Without performance appraisals, people wonder:

    • How do we determine how much to pay people?
    • How do we know who to promote or fire?
    • How do people know they need to improve?

Mangers and organizations do need answers to these questions.

But performance appraisals and pay-for-performance (PFP) aren’t the only way, or even the best way, to answer those questions. Below, I’ll walk through some of the objections that I often receive, and their remedies, and present some alternative methods of performance appraisal.

How do we determine how much to pay people?

Let’s start by circling back to why pay for performance doesn’t work.

In all the conversations I’ve had with people over the years and in all the research I’ve seen, the conclusion is that–for most people–money becomes the primary motivator at work when there are no other salient motivators.

But many managers assume that money is what motivates people (though they themselves are motivated by more lofty goals). Not so.

Most studies show that money is not at the top of the list for most people (unless everything else sucks, then it pops up to the top). Oddly enough, many people assume that others are motivated by money, even when they themselves are not. But why should other people be different?

Most people start new jobs highly motivated. They want to do well. But the organizational roadblocks (some of which are thrown up by well-intentioned managers) sap that motivation.

As managers, we need to let go of motivation myths, understand what really motivates people, and then stop doing things that demotivate them. And our performance appraisal methods need to reflect that.

So what is it that really motivates people, then? Sense of purpose, pride in work, belief in the mission of the company, to name a few. The research on motivation is expansive, and I can recommend Dan Pink’s book Drive (or this brief YouTube summary) as a great starting point (Hard Facts by Pfeffer and Sutton is another great read on the topic (and one of my favorites)). But more on that later.

Be Careful What You’re Incentivizing

If our current performance appraisal methods aren’t effectively motivating our people to do their best work, what are they incentivizing instead?

Pay for performance approaches not only fail to motivate people in general, but they also incentivize behavior that runs completely counter to behavior we need to make collaborative, self-organizing, team-based work work.

For starters, pay for performance assumes independent effort and clear outcomes. That doesn’t sound like our modern workplaces, and certainly not the software business.

“Pay for performance” performance appraisal methods rely on ranking or rating people and create stratification between “winners”, “nothing specials,” and “losers.” The result is predictable. People resent each other and become less trusting and less collaborative.

In most companies, the differences in pay are actually pretty insignificant. Think about it: Assume that a person makes $100,000 (for the sake of easy arithmetic). A 5% raise is $5,000. A 1% raise is $1,000. That’s really not huge difference in actual dollars (considering the salary). But the perceived difference between 1% and 5% is huge, because it communicates how people are valued within the organization.

In most companies, the real differences in raises are likely to be fractions of a percent, yet managers spend days and weeks on ranking/rating–not to mention all the time then spent dealing with employees’ resentment at feeling subjected to an unfair system.

This again is especially true at technology companies that rely more so than ever on teamwork, interconnected systems, and collaborative interactions. Pfeffer and Sutton refer to a study by Siegel and Hambrick published in Organization Science:

“…the negative effect of pay disparity was especially pronounced for high-technology firms, because these firms had the greatest need for collaboration and teamwork to cope with complex and rapidly changing competitive conditions.”

Is the supposed performance gain really worth the fallout?

Here’s What I’m Not Saying

Now, whenever I bring up these points, I’m usually met with some common objections. So, here’s what I’m not saying:

    • I am not suggesting that everyone be paid the same salary. Skills, experience, domain knowledge and the current market are all considerations in setting salary. The key is to pay people equitably (which is very different from “pay equally”).
    • I am not suggesting that everyone’s skills and performance are equal. Of course people have different skill levels and perform differently. Most companies recognize this with salary bands.
    • I am not saying that teams should have a team salary. Salaries are paid to individuals… though I suppose an independent team could contract jointly, and then decide how to allocate pay within their group. But that’s a different topic.
    • I am not saying people don’t need feedback on their performance at work. People need feedback–which is information about, not an evaluation of, performance–on a frequent basis. The more we can design systems where the feedback comes from the work, the better (e.g., build lights, green bar/red bar test frames). Peer feedback and feedback from managers are crucial for improving performance. So crucial, in fact, that they should be done on a much more frequent, if not ongoing, basis than once per year. (Side note: Want to have effective one-on-ones? Here are my thoughts on, and concrete tips for, one-on-one meetings).
    • I am not saying that people who aren’t actually working should continue on the payroll. But any manager who needs a pay-for-performance system with ratings and rankings to figure this out is in big trouble.

These are some of the things people fear when they think about removing the merit pay component of the performance appraisal process. But tying annual salary actions to ratings and rankings is just one way to determine what those actions should be. There are other rational pay systems, but they aren’t as widespread, so few people know about them.

Alternative to Pay-For-Performance Methods

What are some alternative performance appraisal methods, then?

Well, there are several other rational and non-capricious ways to adjust individual salaries. Those include:

    • Adjust salaries based on the current market rate for skills and roles. Recognize and reward someone who is contributing at an organization-wide or team-wide level, above and beyond their role as an individual contributor.
    • Adjust based on the cost of living so that the buying power of salaries keeps pace with economic conditions.
    • Allow all employees to share in the company’s success through profit sharing.

When I mention these alternatives, I’m sometimes met with even more resistance. One reader posed the rhetorical question on my post, “So all people earn the same amount?”

People—and their jobs—evolve over time. A Scrum Master, for example, may start off coaching a team on the basics of Scrum, and over time, take a bigger role working on systemic issues that hinder the team. Or they may develop exceptional coaching skills. If someone is truly performing above others within the same job it may be time to promote them or reclassify their job so that it’s at a higher pay level.

How do we know who to promote or fire?

In a collaborative work environment, performance appraisal methods that assess employee promotion in isolation are also not the best approach.

A participant in one of my workshops declared that in every team there is pecking order….and everyone knows what the order is from one to n. Since this is the case, he reasoned, it follows that ranking people in organizations is a reasonable management practice and should be incorporated into modern methods of performance appraisal.

This is not the first time I have heard this assertion.

It often comes up when I talk about performance reviews, annual performance appraisals, and the harm done by stack ranking.

This assertion rests on tired analogies from sports or the animal kingdom.

I’m not buying it.

Software development teams are not “just like” sports teams. Software development teams aren’t packs, pods, herds, flocks or clutches. Groups of people developing software are people in goal oriented social units–often in teams.

Sometimes, on some teams, it appears that there is one person who is obviously the star. Maybe.

In some companies, smart talk substitutes for action. So is the smartest talker the best on a team?

Sometimes there is a self-proclaimed genius who writes code that is so brilliantly complex that other people struggle to understand it. How does that make him the star? He is making it harder for everyone else to do work.

Then there are the people whose managers declare are top performers (although the basis of their assessment isn’t clear) even though colleagues and peers view them no more than average, brown-nosers or a hindrance.

I observed a team in which one person was viewed as the star by many managers. To those managers, Joan (not her real name) looked like the one who generated ideas and figured out problems. From inside the team, Joan suppressed contributions from other people through aggressive interruption, belittling others’ ideas, and arguing  until people caved in because it wasn’t worth the fight.

Rarely, there are people who are real standouts. But not on every team.

What about the people at the bottom? What is the basis of the assessment?  Does the assessment include all of the dimensions of performance? In most cases it does not– it might include one dimension, perhaps coding. But in collaborative work, that is not the only thing that matters. Sometimes a person with relatively weaker coding skills contributes in other important ways. He or she may excel at  synthesizing information, seeing the software from a customer’s perspective, creating an environment where everyone on the team can be more effective.

And the people in the middle? People who ascribe to the pecking order view believe that all of the members of a team could be lined up in rank order. But what is the earthly good of that? What is the basis of the comparison? Does it included the breadth of contribution or just one aspect of performance?

What if people are measurably different on some dimension? Software is a collaborative endeavor. What matters is how well the team is doing. But most performance appraisal methods don’t incentivize this behavior. Spending time teasing out relative contribution or trying to discern the pecking order does not aid in team performance and can cause real harm. 

Let’s take a look at an exchange I had with an Agile Coach who was beginning to doubt he was in the right role. “I just can’t get this group moving in the right direction,” he said. “Maybe I should go back to being a developer.”

When he described the situation to me in detail, I began to wonder if any new coach could move this group in the right direction. The project has several stakeholders who disagree about the direction of product. The team is split into three factions, which swirl around a long standing conflict between two team members. One member of the team is skeptical of agile methods and baits the coach at every opportunity. When he’s not baiting the coach, he’s working to bring other team members to his point of view. The new coach is struggling in his job. The person who is supposed to mentor him is missing in action. I don’t think firing him—or giving him a low rating—is the answer.

It would be more fruitful (and more difficult) to look at the system that assigned a brand new coach to this project and failed to provide support.

What’s a manager to do?

Still, there are people who are clearly outstanding performers (both outstandingly good and outstandingly poor) who outperform the limits of the system. Once again, pay increases based on performance appraisal is only one way to accomplish the goal of recognizing outstanding individuals.

As a manager, you have your responsibilities cut out for you (and lots of them, in fact). Don’t waste your time trying to figure out the pecking order. Do everything you can to help the team, as a goal oriented social unit, perform to its full capability.  How?

    • Treat the true standouts as exceptions. Promote them, or find other ways to reward them (don’t limit your thinking about rewards to money).  
    • Treat the people whose performance is obviously below par as exceptions, too.  Either get them them help so they can contribute, or get them to a place where they can contribute, which may not be your company. (See my post on managing a struggling employee for concrete tips on how to work through this).

But the questions still remain: who do we promote? And who do we fire?

Who to promote

Other readers asked, “Without annual performance appraisals, how will we know who to promote?” Looking at how a person has evolved in their job and the level of responsibilities is one way. Another option is to treat promotions as seriously as hiring: create a rigorous internal application process that involves interviews and auditions.

The truth is that, as discussed above, many outstanding performers aren’t doing it for the money. They stay for love of their work and are most rewarded by new and challenging assignments. Performance appraisal methods often fail to grasp, and reward, that.

Who to fire

The reverse question came up, too: “How will we know who to fire?”

It doesn’t take a performance review to fire someone. If someone isn’t doing their job, there’s no reason to keep them on the payroll until the annual performance appraisal cycle comes around.

If someone is perceived as not doing their job or making it harder for other people to do their jobs, try coaching the person. If coaching is not or is no longer an option, work with a functional manager to move the person off the team. (Some teams manage their own team membership, and people who need to go move off the team, without a manager’s involvement.) And, poor performers will hang onto a job even if they aren’t receiving raises. They won’t be improving, though. They’ll be harboring resentment and telling themselves that they really are above average.

As with identifying outstanding good performers, consider the environment, as well as individual skills, in your performance appraisals. Ask whether someone is truly underperforming or whether the system is limiting their performance.

It is extremely difficult to assess relative contribution to collaborative work. The effort is not worth the benefit, and the downsides are significant. So skip relying on the performance appraisal process as the only tool that can help. And get on with helping the team.

How do people know they need to improve?

Feedback, whether aimed at reinforcing desirable behavior or improving less desirable behavior, shouldn’t come once per year. Improvement should be continuous. If we want continuous improvement, we must have continuous feedback. But modern performance appraisal methods don’t give us that.

How will people know they need to improve if they don’t have an annual review? The answer to this question is simple (though not easy): their teammates, manager, and Agile Coach should be giving them feedback continuously. Managers in particular should be having one-on-one meetings on a much more frequent basis than once per year.

A letter or number rating or ranking is an evaluation. It may tell someone they need to improve, but it doesn’t tell them what specifically they need to do differently. In order to improve, people need clear behavioral descriptions and they need to understand the impact of behavior or results. Some managers provide specific examples along with the letter or number evaluation grade (or often the pay raise itself). However, most humans resist labels, so they may be busy with the emotional response to the rating and not ready to fully listen as the manager gives examples.

Scrum runs on frequent feedback loops. That includes feedback to people on their work interactions and work results. Feedback on an annual cycle is worse than useless and is totally out of congruence with agile methods.

Alternative Performance Appraisal Methods

When organizations adopt Agile or other collaborative ways of working, sooner or later they bump up against the problems caused by asking people to work collaboratively and then measuring and rewarding them for individual effort.

But Agile is all about making issues visible so we can inspect and adapt. The time has come look at the evidence about pay and performance appraisal systems. We may want to succumb to the allure of the “merit pay” words, but modern performance appraisal methods are a barrier to delivering valuable software.

It’s time for them to go.

What next?

How can you update your performance appraisal methods to reflect a collaborative working environment? And how do you get a more comprehensive look at an individual’s contribution in a team-first, collaborative environment?

Well, it isn’t so straightforward. Start by updating your performance appraisal process with some of the ideas and suggestions I’ve given above. Then turn your attention to the team. Help create an environment that is conducive to team collaboration (it starts with building trust).

Keeping track of all that can be hard. That’s why I’ve put together a Team Improvement Checklist which I’m giving away for free. In it, I walk you through different systems and how to implement them. So you’re able to create working environments that bring out the best in your people, in your teams, and in your organizations. (And you can start to leave ineffective performance appraisal methods behind).