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July 21 — More frequent feedback is a growing trend in performance management, consultants agree, though they differ sharply on whether the annual performance review is on the way out.
In the camp of those who think annual reviews aren't going away is Annette Wellinghoff, vice president, human capital management, transformation and thought leadership at software giant Oracle.
Wellinghoff said July 20 that “very few organizations are doing away” with the ritual of annual performance ratings. She also expressed skepticism about the idea of eliminating ratings, because employee performance still has to be measured.
Wellinghoff said executives she has spoken with believe that the current performance management system “is crucial for improving execution of business strategy, which leads to revenue and profitability outcomes.”
The executives, along with chief HR officers, also believe that processes to manage talent, performance and rewards should be better aligned, Wellinghoff said.
She was speaking during a webinar sponsored by the Human Capital Institute.
But Rusty Lindquist, vice president at HR software firm BambooHR of Lindon, Utah, would disagree. “The reality is it’s broken—we’re not measuring performance” and may actually be making employees’ performance worse, he said of the current performance management system July 21.
Lindquist and Mykkah Herner, a “modern compensation evangelist” at PayScale Inc., a Seattle-based provider of on-demand compensation data and software, said they think annual reviews are on the way out as a performance management tool.
“There’s this major exodus going on” of companies abandoning annual performance reviews, Herner said July 21. Almost half (44 percent) of companies surveyed by Payscale this year said they're dropping annual reviews in favor of real-time feedback, he said.
When Adobe eliminated annual reviews starting in 2012, the result was 30 percent fewer employees quitting but a 50 percent increase in employees being fired—the latter, presumably poor performers who are now being discovered and let go, Herner said.
Lindquist and Herner spoke during a webinar sponsored by BambooHR.
Herner argued that “the pace of business” is too fast for annual reviews. Doing reviews more frequently is helpful in appealing to younger workers entering the workforce from school, he said, because they're used to getting graded on at least a quarterly basis, or even more frequently when there are tests. Such young employees are disconcerted to start working “and not hear anything for a year,” he said.
Ultimate Software and the Center for Generational Kinetics found 42 percent of millennials want feedback every week—not five-page reports from managers, but “tweet-length,” Herner said, adding that annual reviews are “demotivating” and lead to a “fight-or-flight” reaction.
Lindquist said an advantage of “increasing the cycle time” of performance reviews to make them more frequent is that if the employee has begun deviating from the track set at her last evaluation, she can be put back on track sooner. More frequent reviews also “increase the signal-to-noise” ratio, he said. That means more useful information can be gleaned from more frequent reviews.
Wellinghoff said major changes are under way in performance management. Citing a study done earlier this year by the University of Southern California's Center for Effective Organizations, she said three “cutting edge” performance management practices are ongoing feedback, reviews without ratings, and crowd-based performance feedback.
Of the 244 organizations that participated in the study, more than one in three (37 percent) used only ongoing feedback of these three practices, while the other two were used in isolation by only 3 percent and less than 1 percent, respectively.
“Strategic combinations” were achieved by combining the three cutting-edge practices with something else, Wellinghoff said. The best such magic formula involved “delivering useful feedback to employees,” which, when combined with those three cutting-edge practices, resulted in a rating of 5.74 on a seven-point effectiveness scale.
Another concept in circulation, she said, is changing the way rewards for employee performance are distributed.
Herner offered several ideas along these lines. First, he differentiated bonuses from incentives. A bonus is what employers pay out for something an employee did in the past, he said, while “an incentive would be more of a forward-looking measure,” something the employee will get if he achieves a certain result.
Herner suggested matching the incentive cycle to the work cycle; aligning individual, team and organizational incentives; not paying out more in incentives than the program is bringing in; and keeping incentives simple. Citing a study by the Society for Human Resource Management, he said 7 percent is a “magic number” where employees feel that if they receive that amount in merit pay, it means they're really being rewarded for their performance.
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