Jack Welch is widely remembered as the dynamic CEO who transformed the financial performance of General Electric during a decade-long reign in charge of the world’s most iconic industrial conglomerate. Today, however, most people have forgotten the specifics of Welch’s deal-making and the zeal he brought to the firm’s marketing initiatives. Welch’s real legacy is in performance management.
Each year, the notoriously ruthless leader would fire the bottom 10 per cent of his managers, regardless of how poorly they had actually managed over the previous 12 months. Building an evidence base for such a widespread cull meant a huge, data-driven performance management machine comprising appraisals, objective measures of success and managers’ observation. It came to be known as the ‘rank and yank’ system, and it was certainly successful at reducing headcount and controlling costs.
Those who have studied Welch’s reign at GE, however, are less convinced it was in the company’s long-term interests. They believe managers were incentivised to cut corners to get results, and that teamwork took a back seat in an environment where the person you were collaborating with could be in direct competition with you tomorrow.
For his part, Welch continues to defend his system. He hates the ‘rank and yank’ term and claims GE enjoyed a high-performance culture, not a climate of fear. “I’ve spoken to more than 500,000 people around the world and I always ask audiences: ‘How many of you know where you stand in your organisation?’” he has said. “Typically, no more than 10 per cent raise their hands. That’s criminal.”
But over the past few years, plenty of companies have decided that forced ranking – whether it’s of the Welch variety, the ‘stacked ranking’ system once employed by Microsoft or ideas that rely on distribution curves – is not conducive to the sort of environment they want to create. In many cases, the entire formalised appraisal system has been questioned or even discarded. For HR professionals, who must administrate, design and arbitrate on performance, it is an exciting but often confused conversation. And it leads us back to one central question: do we even know what performance management is supposed to measure any more?
It would, of course, be easy to overstate the scale of the revolt. Most organisations still have formal performance management systems in place to at least some degree, and many – particularly in the public sector, or in areas such as financial services where a culture of reporting permeates front-line activities – use it as the basis for all business-critical decisions. But inspired by Silicon Valley firms such as Netflix, which have rethought the employee relationship, there has been a groundswell of businesses announcing that traditional performance management no longer works for them.
Accenture and Deloitte have been followed by most management consultancies in ending the appraisal system. Adobe and Google have dropped them, as has Microsoft, whose actions were considered particularly significant. Its UK HR director, Theresa McHenry, said: “[The appraisal system] was having a negative impact on collaboration, risk-taking and innovation… It wasn’t particularly motivating, reward options were too rigid and it didn’t feel great because people heard a rating and were labelled.”
David Jones, founder of consultancy The Talent Enterprise and author of Game Changers, which considers the rise of female talent in the Arab workplace, adds: “The well-worn phrase ‘best practice’ is definitely something that needs to be questioned, because the old system – call it performance management 1.0 – was sold as a best practice approach where you cascade objectives and have a development plan, quarterly reviews and an end-of-year performance rating, calibrated in some way.
“That has been best practice for decades. It’s only recently that it has it been questioned and performance management 2.0 proposed. It’s about being more confident as an organisation, asking what it is we want performance management to do and not do, and making sure it’s not just a way to annoy people once a year. That way, we actually get some value out of it.”
Ramakrishna Movva, head of strategic HR and organisational capabilities at Emirates NBD, goes further, suggesting that much of traditional performance management is entirely counter-productive: “Lots of these historically unquestioned practices… what are we trying to achieve by rating an employee’s performance with a statistical system, trying to distil a year’s performance into one number so you can be done with the discussion in half an hour? What kind of motivation and empowerment does that give the employee?”
HR professionals see to know better than anyone that performance management is often ineffective. One of the largest studies on the topic, carried out by the Brandon Hall Group in 2014, found that most of those charged with implementing performance management systems believed they were average at best (only 26 per cent placed them ‘above average’), and a majority felt practices such as forced distribution and annual performance discussions were ineffective.
A study of more than 150 GCC HR professionals, carried out by the CIPD and The Talent Enterprise in April 2016, reached similar conclusions. Almost a quarter (23 per cent) were planning ‘significant shifts’ in the way they manage performance over the next couple of years, and 21 per cent said they had already started the process of change. When it comes to delivering value, enhancing fairness or meeting organisational goals, there was only lukewarm enthusiasm – only half actively agreed that their current performance management process was effective at differentiating high performers, for example.
What’s replacing appraisals, ratings and tick-box exercises varies by organisation. Some favour regular ‘check ins’ where managers speak to employees about their progress and report back in a less formal way. This might be supplemented by 360-degree feedback, itself a popular mechanism offering a more holistic view of performance. Others are initiating ‘continuous conversations’, while Google empowers its employees to monitor their own ‘objectives and key results (OKRs)’.
For Peter Cheese, chief executive of the CIPD, this taps into wider shifts in the way we engage employees. He points out that many staff today may work remotely, be managed by different people at different times, or not have a formal ‘manager’ at all. It is increasingly difficult to judge them in a linear way using a scorecard or system.
Jones says the education system is leading a shift in attitudes. Many classrooms are now ‘flipped’ so that children are encouraged to lead the conversation and the teacher is more of a facilitator. Younger recruits carry such expectations into the workplace. Technology has had an effect too, he adds: “It used to be that as a manager I would decide when information was released. I had time to set the agenda and present it. Now, my team comes to me with a device in their hands saying: ‘Have you seen what’s happened? What are you going to do about this?’” In such a situation, he says, a directive leadership style isn’t that helpful.
The Masdar City organisation, which is building and operating emerging renewable energy infrastructure and education projects in Abu Dhabi, is indicative of such shifts. Around 60 per cent of the business has management responsibilities, says Maha Al Mansouri, director of Emiratisation and human capital. While the organisation has a “performance culture”, she says, it can’t be delivered through a single appraisal at the end of the year.
“We don’t do individual performance management in isolation from the business,” says Al Mansouri. “It all starts from the top. We have a strong leadership team that understands people, and it is important to us to have strong people managers too.” KPIs exist at a business level and team level, as well as for individuals, and managers are specifically coached on how to have constant, supportive conversations about performance rather than rely on appraisals. The key, she adds, is that managers are aware they can only achieve their own objectives if they are also developing and encouraging those who report to them – and vice versa.
Whichever form of performance management you want to shift toward, says Jones, there is an element of collaboration and education that needs to take place at all levels of the organisation. Leaders must discuss what performance really means to them, what they hope to achieve and what fairness will look like. Employees must understand the ground that will and won’t be covered – for example, reward structures – as part of a new system.
Through it all, as in so many areas of organisational life, managers are crucial. When the CIPD held a roundtable on performance management in Dubai in March, attended by HR directors from a range of leading businesses, the managerial role formed a large strand of the conversation.
Managers, the assembled experts and practitioners concluded, must be encouraged to have day-to-day discussions with their staff as part of a broader emphasis on the ‘people’ aspects of performance, and a recognition that the needs of individuals at varying stages of their careers will be very different. And if organisations are serious about reinventing performance management, the shift to a people-first, rather than a metrics-first, focus must be reflected in managers’ KPIs. The CIPD’s subsequent survey found that 71 per cent of respondents were focusing on upskilling and engaging managers.
This is often easier said than done, of course. Managers are among the busiest people in a company, with pressure arriving from all directions, and the fear of additional bureaucracy or time away from the front line causing them to fear and dread performance management processes.
But does ‘better’ performance management have to add to anyone’s workload? The crux of most new models is more frequent and varied conversations about performance, reflecting the reality that feedback is best given (and received) in the moment – at work, as in life. A football coach tells his players to change tactics while the game is going on in the hope of influencing the result. A teacher marks a student’s work when it is handed in so they have an immediate idea of where they can improve, rather than saving the feedback for the end of the year.
More than two-thirds (67 per cent) of those surveyed by the CIPD said they were “fostering more frequent performance management discussions”. These could be weekly or monthly ‘check ins’, a variety of 360-degree mechanisms, a culture of instant feedback and coaching – or a combination of all three.
The aim is to avoid ‘storing up’ feedback so it becomes a surprise to the recipient, or the temptation arises for a leader to simply avoid a tough conversation. “If you have the conversation in the moment, it’s easier to be honest,” says Cheese. “You can say: ‘Why did you just say that?’ You’ve got all the context there.”
By contrast, formal situations raise the stress levels, he adds. “Everyone thinks: ‘I don’t know what to expect because the manager has said nothing to me. Maybe we’ll have a big argument.’ It’s stressful. And guess what neuroscience tells us? In that context, you’re unable to learn.”
Movva admits the idea that more frequent feedback should be supplemented by an end-of-year session “is probably simplifying the solution. It’s not about having more frequent meetings, it’s about the philosophy behind those meetings.”
At Emirates NBD, there has been a desire – driven by the most senior ranks of the organisation – to explore how performance management might shift away from a tick-box process to something more transformational. That has begun with a new ‘user friendly’ brand for the process that enables it to accommodate feedback from a broader range of stakeholders and might encompass new technology.
But Movva says the next part of this shift will be to create an “emotional experience” that will force managers in particular to confront what performance management really means to them, and what it could look like in future. This could be enabled by a certified programmed that explores more empowering styles of leadership. And it will be accompanied by a broader shift to a more democratic style of decision-making, says Movva: “At the moment, lots of decisions have been centralised – they are taken by leaders very high up in the hierarchy, who are making decisions on bonuses and promotions of people whose names they might not even know… We will need to trust the judgement of people down the line, and learn to delegate.”
He is confident the change will gain traction. But he is realistic about how far things can shift in a banking environment where regulation is hard-wired into day-to-day operations. There’s also the issue of how reward relates to performance. In an ideal world, it would be possible to entirely decouple the two, not least because decades of studies tell us pay rises offer only a short-term, illusory kick-start to our motivation.
But we react poorly to being paid less than others, or to being paid less than we were before. The fairest answer is to see financial reward as a ‘hygiene factor’ and to seek more holistic and non-monetary ways to recognise good performance. But whole industries, including banking, are structured to support performance-related pay systems.
“Performance management is synonymous with bonuses,” says Movva. “The moment you say ‘performance’ they’re thinking about how that will translate into money. But what people get at the end of the year is not going to drive what they do the rest of the year. We need a different philosophy on motivating people.”
For many businesses, this will require baby steps. To an extent, any shift towards a more conversational performance culture is a positive. And there is a danger in moving too far, too fast away from traditional measures of performance. For individuals who have little contact with a manager (perhaps because they work remotely), the annual appraisal may be the only time they feel truly listened to. And if we remove the theoretically objective practice of ratings from reward and progression decisions, we could allow cronyism or favouritism to flourish in their place.
“Organisations are falling into a trap of saying: ‘Let’s change this, let’s strip that out,’” says Movva. “But what you need is a culture change rather than a process change. If you really look at it from a business point of view, performance management is a vehicle to manage the business and manage performance.
“The biggest benefit of a focus on performance management is bringing into question how we manage people inside organisations, rather than simply looking at the processes.” Jones agrees, and urges companies to focus on ensuring “people know what they’re supposed to achieve – what their priorities are”. Altering performance management is in itself a journey of continuous improvement rather than a means to end, he says. But at its best, it is a chance to reframe the workplace as somewhere people feel truly empowered.
And that might begin not with a profound shift but with something as simple as the language we use, says Jones: “‘Appraise’ sounds like something you do to an antique. ‘Compensation’ sounds like something we’re giving you because of your suffering. Change those things and maybe you start to make that old cliché about people being your greatest asset more of a reality.”
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