Death to performance appraisals!

It is that time of year again.  We are hustling to and fro and feeling like we are running in place.  You may think that I am talking about the holiday season, but in reality, it is a more grim corporate ritual.  It is the return of performance appraisal season.  I wouldn't say I like performance appraisal season.  I hate it like a young child hates liver or a dog owner despises animal cruelty.  I do not see any benefit to having them in a business environment and I certainly do not see them doing any good in an entrepreneurial environment.  This week on the blog, I would like you to indulge me as I explain why I wouldn't say I like performance appraisals.

At an early age we come in contact with the performance appraisal, called a report card.  These pieces of paper and notes home to our parents were necessary to let them know how we were doing in school.  If you were lucky, you had parents like mine who were involved in your education and had a pretty good relationship with my teachers.  If you were like other students, I knew your parents would be surprised each time you returned your quarterly report card.  As you grew older, report cards became a means to perform educational triage.  Hardworking and gifted students were moved to the front of the line for college preparation and scholarships, while those who didn't measure up were cast aside like trash.  Grades determine your official status in school and your possible desirability to go to college.

Flash forward four years of high school and another four years of college, and when we get into the job world, we expect to be free from the tyranny of report cards.  Instead, report cards are replaced by performance appraisals.  Unlike report cards, performance appraisals are not based on objective standards of excellence.  They are based on the economic needs of the company.  So you could have perfect attendance, not miss a deadline, and generate millions of dollars of sales and still receive a “meets expectations” on your appraisal.  For a classic example of this kind of insanity, just take a look at Microsoft and its old stack ranking appraisal process.  I feel very strongly that Microsoft hurt its ability to retain good employees and innovate because of this system; if everyone “meets expectations,” then the company really can’t meet the customer's expectations.  So good employees leave, and mediocre and poor ones stay.

There is another reason I hate performance appraisal, and that is because it resembles management by fear.  According to W. Edwards Deming, the godfather of lean manufacturing, one of the seven deadly diseases of management is the use of Evaluation of performance, merit rating, or annual reviews to control employees.  People are not dumb, and if they know the metrics you are using to evaluate them, they will game the system to get the best rating possible at the expense of the business and customer.  For instance, if you reward a bus driver for on-time drop-offs, they will avoid picking up more riders during high-traffic periods because that will affect their drop-off times.  This creates perverse situations where people are rewarded for poor customer service.  People are afraid to do what is right for the customer; instead, they do what will be appraised in a positive fashion.

I am not against rating people and their performance, but the way we do it now reeks of mental illness.  Managers should be in contact with their line employees daily providing coaching and encouragement.  When a performance issue comes up, it needs to be addressed immediately instead of during the appraisal process.  Immediate feedback when you screw up is much more helpful than trying to recall what you did during the middle of the fiscal year.  Agile teams need to know how much velocity they can perform and if they are improving it.  Salespeople and marketing professionals need to understand what is going on in the top line of sales and how much margin you make on the bottom line.  All of this data is important and necessary. However, you cannot squash it together into a gooey ball of muck and use it to objectively rate an employee. I would much prefer a manager telling me that the firm could only afford a two percent raise than telling me I met expectations, which is worth two percent.  The honesty would be bracing.

So, what do I propose as an alternative?  I am a big fan of development plans.  Every 90 days, a manager should tell a person what they can do to improve and what they need to do if they would like to advance to a higher position.  This information should be written down in six-month intervals and then saved for HR purposes.  This way, over the lifetime of the employee, there should be a record of the growth and development of the employee without the capricious rating system that most companies use.  This forces managers to manage their employees instead of kissing up to their superiors.

A business must satisfy the needs of its customers.  I firmly believe that the performance appraisal process, as it exists in contemporary companies, satisfies neither the employees' nor customers' needs.  Something must change, and I hope that as my business grows, I will be one of the people leading this change.

Until next time.