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Why big business is falling out of love with the annual performance review


Lately a small but growing number of major U.S. companies, including Accenture, Adobe and Gap, have been saying goodbye to an annual rite of corporate life that both employees and managers love to hate: the traditional performance review.

Now General Electric, long seen as Corporate America's bellwether for management practices, is joining their ranks by piloting a big shift in the way it handles reviews at the industrial giant.

GE's overhaul, which the company recently began sharing publicly, is likely to be viewed as a tipping point in the rush to remake a process that both workers and their bosses have increasingly felt needs repair. It is experimenting with replacing a once-a-year formal review with more frequent conversations, introducing an app to help employees' managers and teammates share feedback and testing the idea of using no performance ratings at all.

Though the company has not decided whether it will do away with ratings, its testing of the concept is seen as a milestone — not just given GE's size, but given its historic association with the idea of rating and ranking employees. Its new changes are something of a corporate confession that the process, championed in its most aggressive form under former CEO Jack Welch in the 1980s and '90s, may be out of step with the modern-day workforce.

"Even more powerful than Deloitte or Accenture saying it's getting rid of scores," said Brian Kropp, the HR practice leader for the Corporate Executive Board, "is when you see companies that are known for developing great talent [do the same]. If a company like GE were to make the transition, that would really be powerful."

To date nearly 10 percent of Fortune 500 companies have done away with annual ratings, according to Cliff Stevenson, a senior research analyst for the Institute for Corporate Productivity, a research network that studies management practices. Adobe and Medtronic were some of the earliest large companies to do so several years ago, followed by places like Microsoft and Gap. That number is likely to rapidly grow.

[In big move, Accenture gets rid of annual performance reviews and rankings]

"The snowball has started rolling," Stevenson said. "I would not be surprised to see next year when we do the large survey again that it may jump into the twenties." 

Others have a sense of deja vu, recalling the rush by companies to copy the "forced ranking" system Welch promoted. That system — since abandoned by GE — required supervisors to assign a certain percentage of employees to high, medium and low rankings, and then to cut the low ones. "We had countless chief human resources officers beating on our door, going: 'Look what that did for GE, we need one of those too,’ " said Ravin Jesuthasan, a consultant with Towers Watson. Now, he says, "we're at a similar rush to people going 'we need approaches like this.' It has a feeling of being the issue du jour."

Jesuthasan and others say the clamor to overhaul performance reviews is being driven by several factors. Technology is one: The amount of data available to companies to track worker performance on a real-time basis, as well as the ability to create apps and tools managers and workers can use to monitor performance, has grown exponentially.

In addition, over the past decade, the average manager's responsibilities have nearly doubled from four to seven direct reports, according to the CEB. This has led to a decrease in the amount of time that many managers spend informally coaching and mentoring any given employee. 

This downward trend in managerial feedback in the workplace has been taking place at the same time as there has been an upward trend in feedback elsewhere in peoples' lives, whether from friends liking photos on social media or consumers giving product reviews. That tension has made standard corporate culture feel particularly discordant for younger generations.

"If you put this new generation in the box of the performance management we've used the last 30 years, you lose them,” said Accenture chief executive Pierre Nanterme. "People want to know on an ongoing basis, am I doing right? Am I moving in the right direction? Do you think I'm progressing? Nobody's going to wait for an annual cycle to get that feedback."

Pierre Nanterme says Accenture will get rid of rankings for all 330,000 employees. (Video: The Washington Post)

This, all while corporate leaders, it seems, haven't actually saved time or money by relegating feedback to a once-a-year cycle. Given the increased number of direct reports, the average manager now spends 210 hours a year on performance review-related activities, like filling out forms and delivering evaluations. Once those hours are added to the cost of the system itself, the CEB estimates that a company of 10,000 employees spends about $35 million per year to do its annual reviews. Deloitte, which has also said it's transforming its system, says it was spending 2 million hours a year on evaluations.

Finally, the accelerating pace of change has caused many companies to realize the goals set at the beginning of the year may be completely out of date by the end of it. More and more companies are paying out quarterly bonuses. Unless managers check in with employees more often, a single conversation at the end of the year can be pointless.

That increasing pace of change is the biggest reason GE is trying to evolve its program, said Athena Kaviris, a senior HR executive for GE Transportation. "Anything you wait a year to give meaningful feedback on is already old news," she said.

Most of the new performance management systems rolling out there and elsewhere are designed to gather more information, not less. Several of these companies, including Accenture and GE, are building proprietary apps that will more easily chart the ongoing performance discussions between employees and their supervisors, in some cases auto-flagging trouble areas if concerns show up repeatedly over the course of the year. 

"The HR function is becoming much more data and analytics driven," Kropp said.

The power of such technology means not only that employers can better target development programs, but it also potentially gives them even more legal defensibility around personnel decisions like raises or firings, since they have a greater frequency of conversations on record, and all collected in one digital hub.

Some think technology has another use: correcting for any biases managers have. The real problem, says Marcus Buckingham, a management consultant who works with companies on employee performance, isn't ratings themselves — indeed, big companies with hundreds of thousands of employees might need them to help differentiate the best performers from everyone else. It’s the sense that ratings are unfair and plagued with bias, with some managers rating people more harshly than others. Using data to test for biases could help mitigate that.

Technology could also help cut down on that end-of-the-year paperwork pileup. GE will still have a summary conversation at the end of the year, but the new program is designed to let that final conversation happen more naturally, without employees and managers having to recall a year's worth of accomplishments and setbacks. Some 80,000 GE workers are expected to pilot the program this year, with plans to roll it out company wide by the end of 2016.

A much smaller group — roughly 8,000 workers this year — is piloting the "no-ratings" concept. While Kaviris says the company is undecided about whether it will proceed with the idea, she says it's "likely we'll end up still having ratings."

At Accenture, the change away from both ratings and a single annual discussion will begin this September. The concept has been in the works for about a year, after the firm crowdsourced feedback from its workforce about what it could do to boost employees' desire to work at Accenture, and thus their productivity.

"The most important thing was improving employees' performance," said Accenture's HR chief Ellyn Shook. "What we realized was, there was nothing about what we were doing that helped us achieve that. Our managers were unhappy, our employees were unhappy."

While Shook says she's not sure yet whether the new system will save the firm money, she says she is confident that it will give Accenture a better return on its investment. Last year, it spent $787 million on training for its staff.

Read also:

In big move, Accenture gets rid of annual performance reviews and rankings

Myers-Briggs: Does it pay to know your type?

The corporate kabuki of performance reviews

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