Are employee ratings a relic of a bygone age or an essential part of performance management?

Only one thing is certain: change is coming because companies "can't tolerate crappy management anymore," Steve Hunt, senior vice president of customer value at Walldorf, Germany-based international software company SAP, told Bloomberg BNA Sept. 27.

"There is not one best way" to do performance management, because organizations vary fundamentally in their cultures and resources, Hunt said. However, "if you pretend you are not categorizing people, bad things happen."

At companies that have actually tried to do away with employee ratings, "everyone feels good for a year" as the stress of ratings seemingly vanishes, "but then 18 months out they ask why they're not getting the results they expected, and the whole thing blows up in their faces," Hunt, an industrial organizational psychologist, said.

In his view, performance management can be divided into two main aspects: ongoing employee coaching that is not tied to any rating system, and "total workforce performance management." In addition to identifying "the best people we can't afford to lose," the performance management piece pinpoints the struggling employees who need help, both for their own benefit and so they don't discourage the high performers, Hunt said.

Despite shortcomings in performance management, the process "doesn’t seem to change like other aspects of HR do," said Rob Schmitter, solutions architect at social recognition provider Globoforce, which is based in Dublin, Ireland, and Southborough, Mass. "It appears as though our performance management process is stuck in time," he said during a Sept. 22 webinar sponsored by Workforce magazine.

Schmitter called the current process a "reckless waste of time and money." For a 10,000-employee company, he said, traditional annual reviews cost an average of $3 million a year.

There’s also a psychological cost, according to Schmitter. Research shows half of employees are surprised at their performance rating, and not in a good way. For most of the employees who are surprised, the rating is lower than expected, and engagement drops among those employees, he said.

Another problem with traditional performance management, Schmitter said, is that the discussions are backward looking rather than "developmental."

According to Hunt, various companies are aware of that problem and are trying to make performance management more future-oriented. Annual reviews were never designed to make managers coach subordinates only once a year, he said. Rather, they were a "pencil-and-paper-based" system that made ratings possible when computers weren't yet available. Cloud-based systems have led to "an explosion of creativity" in this area, he said, adding that "what works at one company can fail miserably for another."

When it comes to rating people, the key is for the process to be transparent, Hunt said. Don’t pretend it isn't being done at all, he advised. Some might argue that anxiousness about ratings can cause employees to have a "fight-or-flight, reptile-brain" response, but people "get more nervous if they're being rated and they don't know how they're being rated," Hunt said.

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