Performance appraisals are ubiquitous. Many people recognize they don’t work very well. However, people have legitimate concerns about maintaining performance without appraisal. A first step is to separate out the many purposes evaluations served in organizations.
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.
The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser.
Merit rating rewards people who do well within the system. It does not reward attempts to improve the system.
W. Edwards Deming in Out of the Crisis
In an earlier column, I suggested that ScrumMasters steer clear of annual performance reviews. Rating and ranking individuals interferes with a ScrumMaster’s responsibilities as a coach in service to the team. In fact, I went further than that. I suggested that managers and the rest of us steer clear of performance reviews, as well.
My suggestion does run counter to widespread practice. But I’m not alone in questioning performance evaluations and rankings.
Negative Effects of Performance Appraisals
W. Edwards Deming identified performance appraisal as one of the Seven Deadly Diseases of Management. Deming is clear and concise in stating the negative effects of performance appraisals and merit ratings: “It nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, nourishes rivalry and politics.” [Deming p. 102]
More recently, 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.” [Pfeffer and Sutton, p. 107] They go on to describe the damage done by merit pay plans.
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. Deming had it right.
But What About….
My readers raised legitimate concerns. They asked:
Without performance appraisals, how do we determine how much to pay people?
Or who to promote and who to fire?
How will people know they need to improve?
Organizations do need answers to these questions. Performance appraisals and pay-for-performance (PFP) aren’t the only way to answer those questions, or even the best way. In this column, I’ll walk through some alternatives to the prevailing practice.
One reader pointed out, “people get their salaries on an individual basis.” True. Tying annual salary actions to ratings and rankings is just one way to determine what those actions should be. There are other rational and non-capricious ways to adjust individual salaries:
- 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.
- Adjust salaries based on the current market rate for skills and roles.
Another reader posed the rhetorical question, “So all certified scrum masters earn the same amount?”
Performance is a function of the person and the environment. Systems thinking and lean production at Toyota tell us that gains in productivity come from inspecting and adapting the system, not from focusing on individual performance. An improvement mindset, thinking for the long term, eliminating waste, respect for people, and removing impediments bring high performance.
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 ratings is only one way to accomplish the goal of recognizing outstanding individuals.
People—and their jobs—evolve over time. A ScrumMaster 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 he may develop exceptional coaching skills. If someone is truly performing above others within the same job it may be time to promote him or reclassify his job so that it’s at a higher pay level.
Who to Promote?
Other readers asked, Without yearly ratings, how will we know who to promote? Looking at how a person has evolved in his 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.
Many outstanding employees aren’t doing it for the money. They stay for love of their work. New challenges may be the best reward for them.
Who to Fire?
The reverse question came up, too. How will we know who to fire?
A coach or ScrumMaster may observe when someone isn’t doing his job. Or when someone makes it harder for other people to do their jobs. They can coach the person. When coaching has no impact, involve the manager.
If someone isn’t doing his job, start with curiosity. Find out what’s going on. However, if someone truly cannot or will not do their job, there’s no reason to keep them on the payroll. And there’s no reason to wait until the annual review cycle comes around. It doesn’t take a rating to fire someone (in the US).
Often, people who aren’t able to do the job hang on 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.
Look at the System
As with identifying outstanding good performers, consider the environment, as well as individual skills. Assess whether someone is truly unable to do the work. Examine whether the system limits their performance.
I spoke with a new agile coach recently 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 had several stakeholders who disagree about the direction of product. The team had split into three factions, Those factions swirled around a long standing conflict between two team members. One member of the team was skeptical of agile methods. He baited the coach at every opportunity. In addition, he tried to bring other team members to his point of view.
The new coach was, indeed, struggling. His mentor him was missing in action.
However, firing him—or giving him a low rating—is not the answer. This is a problem with matching skills and experience to the task at hand. What was the rationale for assigning a brand new coach to a difficult situation? Where was the support to help him succeed? That’s the issue that needs fixing.
How Do People Recognize They Need to Improve?
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. Build feedback into the work, and encourage direct conversations about how things are going.
A letter or number rating or ranking is an evaluation. A number may signal the need to improve. However, it provides little information on what or how 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. However, most humans resist labels. They get caught up in the emotional response to the rating. In that state, they’re not fully ready to fully to absorb examples.
Agile methods rely 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, it is not congruent with agile methods.
Sooner or later organizations bump up against the conflict between existing policies and practices and agile methods. One of those is the mismatch between collaborative work and individual rating. 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 appraisal systems. We may want to succumb to the allure of the “merit pay.” But performance appraisals are a barrier to delivering valuable software. It is time for them to go.
Out of the Crisis. W. Edwards Deming
Hard Facts, Dangerous Half-truths and Total Nonsense: Profiting from Evidence-based Management. Jeffrey Pfeffer & Robert