Are performance ratings heading towards extinction?

24 July 2014

There’s a growing school of thought that our traditional tools for managing employee performance are outdated and in need of a radical reboot.  Some of heaviest criticism has been aimed at performance ratings and forced rankings - those bastions of the annual appraisal process. At the heart of this is the argument that a final ratings number, and performance assessments that differentiate us from our peers, distract from our goals as employees and what organisations would really like us to achieve. 

We recently ran a survey which pointed to two interesting statistics which help sound the death knell for ratings: 

  • 91% of respondents believed that the inability of management to hold difficult conversations was preventing performance management from achieving its aims, and 
  • performance management is seen as relatively effective at the various processes (reward allocation, identifying weaker and stronger performers) but only 15% of organisations believed that helped employee engagement.  

So what’s behind this?

  • Where the appraisal process informs a year-end rating, it often results in a more negative conversation which managers are reluctant to have and employees, in general don’t enjoy.
  • The formal structure provokes a flurry of activity at year-end, in the desire to get noticed.  For many organisations it’s the visible rather than the actual that gets results.
  • These difficult conversations absolutely need to happen, particularly when they concern behaviours. But the trend is moving towards having these conversations in the moment, not in a year-end assessment, providing real time feedback and focusing on the future – not the past. 
  • Differentiation between employees is increasingly challenging in a knowledge economy with increasing use of specialists working on multiple projects with lots of line managers. 
  • Fairness and trust are fundamental to employee loyalty and engagement. The governance and rules around ratings and particularly forced distribution can erode this trust.  
  • Millennials will represent over half the workforce by 2020.  And according to our research, are rejecting formal corporate structures and favouring career development, and work-life balance over money

The problem is that, as individuals, we still like to know how well we’re performing. We may dread the conversation but understanding our worth to the organisation is helpful. A transparent conversation done well can help with career planning. And, despite Millennials or Generation Y being very group orientated, placing less importance on financial reward, younger generations also want to know how they’re performing as individuals, and be recognised for their contribution. We all have mortgages to pay, or deposits to save for after all. 

So what is the alternative?

It is early days but there does seem to be a shift towards new models.  Most organisations in our survey still operate individual ratings and use these to allocate reward.  But there’s a growing number moving away from these traditional practices. They tend to be smaller, high growth organisations from the tech sector with high emphasis on talent and headquartered on the West Coast of the US. And our research into the planned changes to performance management over the next few years indicates a shift towards career development and embedding behaviours – which don’t require a year-end rating.

I can see a number of models emerging.  If I make some generalisations, I can place them in four different groups:

New models of perf man

Please do share your views about whether performance ratings are still working for your organisation by commenting in the box below. And if you’d like to find out more about our survey, please do get in touch. 

Alastair Woods | Director
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More articles by Alastair Woods



Some of the emergent performance management models will be easier to implement in those high tech, innovative firms where the value people add is achieved by being divergent, and thinking outside the box. Where innovation is the raison d'etre of the organisation it is right to recognise and reward it. Generation Y and Millennial employees apparently have a high need for 'purpose' in their work and don't necessarily value an individual performance rating - but there is still a need for the leaders of organisations to articulate and communicate that purpose - whether it is optimising profit, inventing the next social media tool or saving the planet. Used well, a performance management framework can be a great way to do that...

Really enjoyed reading your blog. Performance ratings in the past have resulted in individual winners and losers. Finding a solution that results in win/win and promotes innovation and collaboration as well as the fair distribution of reward will be the key.

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