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CORPORATE LEADERSHIP COUNCIL ®

JANUARY 2006 www.clc.executiveboard.com

LITERATURE K EY FINDINGS

Alternatives to Formal Performance Management Finding 1: Performance management systems may incorporate both performance appraisals and continuous performance feedback or only one of these components. Research indicates that companies generally design a performance management system comprised of both components but primarily stress the formal performance appraisal. Some employers and employees express dissatisfaction with the formal performance management process and do not view it as an effective tool to improve and differentiate employee performance. The majority of organizations maintain formal performance management systems. That said, some HR personnel, senior executives, and employees do not consider this process effective, and employees indicate they would like more frequent and informal feedback. §

Components of Performance Management Systems—Depending on business goals and culture, organizations implement a performance management system, consisting of one or both of the following forms:1 •

Performance Appraisal System—A performance appraisal system includes a formal performance evaluation, usually conducted once or twice a year. Organizations implement this process primarily to document unsatisfactory performance in the case of arbitration proceedings and to determine compensation changes. Continuous Feedback System—A continuous feedback system, or an informal performance management system, focuses on providing performance feedback and improvement on an ongoing basis. Supervisors and managers are responsible for identifying and reinforcing desired behaviour among their employees, as well as periodically conducting performance review discussions.

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Organizations Emphasize the Performance Appraisal Process—Research indicates that organizations generally focus on the performance appraisal process rather than providing continuous performance feedback, as detailed below:2,3 •

A 2005 Watson Wyatt and WorldatWork survey of 265 leading U.S. companies reveals that 98% of employers conduct a yearly formal performance appraisal. According to a Mercer’s 2002 Effective Performance Management Survey, 78% of employees undergo annual performance reviews, while 26% have managers who consistently provide ongoing performance feedback and coaching. The Mercer survey also finds that employees would like to receiv e more consistent feedback and development. When asked which component of performance management they would like to improve, 25% cited performance planning and 14% cited ongoing feedback.

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Problems with a Formal Performance Management Process “For many managers, appraisals are not a popular task. Organizations groan when the time comes for the annual Mount Everest exercise. It is still seen by many to be a real pain— in effect, a massive paper chase for the benefit of the personnel department which seems to do nothing with it except file it.” Andrew Forrest, Learning and Development Director, Industrial Society

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Employee and Employer Dissatisfaction with the Formal Performance Management Process—Although the majority of organizations conduct formal performance appraisals, research reveals that some employees and employers are displeased with the process, as detailed below:4,5,6,7,8 • • • • •

A 2005 study by People IQ found that only 13% of employees and managers consider their performance appraisal system useful. According to a 2004 Watson Wyatt survey, only 30% of employees believe that their companies’ performance management systems help improve their performance. The 2004 Performanc e Management Practices Survey conducted by Workspace reveals that 25% of senior executives are dissatisfied with their performance management systems, while 60% deem them ‘adequate.’ The 2005 Office of Personnel Management’s Federal Human Capital Survey reveals that the main grievance of U.S. federal employees is strategic management, which includes employee evaluations and human resource management. A Society for Human Resource Management survey found that 90% of HR managers express dissatisfaction with their performance appraisal process.

 2006 Corporate Executive Board. All Rights Reserved. Catalog Number: CLC1503509


CORPORATE LEADERSHIP COUNCIL ®

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Finding 1: (Continued) Primary Reasons for Eliminating a Performance Appraisal Process

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According to a 2001 WorldatWork survey of HR professionals, the main reasons organizations have eliminated their performance appraisal process include:11

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Deficiencies in leadership development, coaching, multi-rater assessments, and development planning Lack of support from management Lack of support from executives

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Formal Performance Management Process may not Achieve Desired Results— Some companies view their formal performance management process as ineffective because the process does not provide employees with clear and effective performance feedback and does not clearly link business objectives and employee expectations, as detailed below:9,1011

Performance Goals and Company Goals are Not Aligned—According to the 2004 Performance Management Practices Survey by Workscape, the performance management process at 14% of companies do not effectively align company goals and corporate goals. In 30% of the companies, employees only have a ‘general understanding’ of high-level business goals. Employee Performance Differentiation is Unclear —The Workscape survey also indicates that 45% of employees do not have confidence in their performance evaluations. The performance appraisals often do not clearly delineate high, average, and marginal performers.

Finding 2: Rather than conducting a formal performance management process, organizations may create a performance culture by promoting continuous feedback and manager-employee dialogue. In an informal performance management process, managers and employees assume joint-responsibility for performance management, employee development, and goal-setting. An informal performance management process shifts the focus to ongoing feedback and performance improvement rather than ratings and past shortcomings. To stress performance management on an ongoing basis, managers provide informal feedback and coaching, as well as conduct formal review discussions and recognition programs. Impact of Informal Feedback on Employee Performance On average, informal feedback boosts employee performance by 39.1%. Informal feedback that improves performance demonstrates the following three characteristics:14

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Informal Frequent Feedback—Of all the interactions managers can have with their employees, informal feedback has the greatest impact on employee performance. Manager responsibilities include identifying and reinforcing desirable performance, as well as identifying undesirable performance. Employees should also seek feedback and change their behaviours accordingly. 12,13,14

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Coaching—Adopting coaching as a key management style across the organization provides on-the-job development opportunities and improves employee performance. Managers as coaches help ensure continuous feedback and promote a high-performing culture. According to a 2005 Corporate Leadership Council study, coaching that enables performance involves the following five core activities:15,16

It is fair and accurate It comes from a source knowledgeable of the employee’s performance It contains feedback that helps employees do their jobs better

• • • • •

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Helping to find solutions to problems at work Helping to attain needed information, resources , and technology Breaking down projects into manageable components Translating long-term goals into step-by-step plans Clearly communicating expectations

Periodic Performance Discussions—In addition to providing continuous feedback, managers should conduct formal performance review discussions two to four times a year. In contrast to formal performance reviews, these discussions should focus on present performance, employee development, and self-appraisal, as demonstrated by the following sample ques tions managers may ask employees:17 • • • •

How is your job going? What can be done to make the job better for you? How can you improve your performance and the overall business-unit performance? Would you like to pursue any developmental or career opportunities?

 2006 Corporate Executive Board. All Rights Reserved.


CORPORATE LEADERSHIP COUNCIL ®

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Finding 2: (Continued)

SAS Shifts to an Informal Performance Management Process SAS, an 8,000-employee software company, eliminated its formal performance review process in favour of an informal process that encourages employee-manager dialogue and continuous feedback. The company believes that the informal approach best suits the corporate culture, but HR personnel did face a major challenge in changing the employee mindset of an annual performance review to that of a continual process.23

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Written Record of Formal Discussion—Managers should provide employees with a written record of topics discussed during the formal discussion. Employees can also assist in the writing and editing of the document because it should reflect a mutual effort. 18

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Reward and Recognition Programs—Organizations can use reward and recognition programs as a form of feedback and to reinforce desired behaviours on a continual basis .19

The main characteristics of an informal performance management process include a daily emphasis on performance feedback and improvement, as well as a future-oriented focus. §

Daily Emphasis on Performance Management and Improvement—An informal performance management system encourages employees to focus on perform ance improvement on a daily basis. In contrast, employees often view a formal performance appraisal as a yearly procedure mandated by the HR department and do not consider performance management an ongoing process.20

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Focus on Feedback Rather than Ratings—An informal performance management process encourages employees to value and respond to feedback rather than focusing on ratings or rankings. During a formal review process, employees generally remember their performance rating and compensation changes instead of the feedback.21,22

23

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Focus on Performance Improvement rather than Shortcomings—An informal performance management process recognizes employee strengths and focuses on present performance and future development. Formal performance reviews tend to emphasize performance weaknesses without providing detailed feedback for improvement and thereby, reduce employee performance and lower overall retention.24

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Reduction in HR Administrative Burden—Continuous feedback systems do not require HR to administer and conduct organization-wide performance appraisals on an annual or semi-annual basis. In conducting a formal performance management process, HR personnel devote substantial time to getting supervisors to submit their performance appraisals.25

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Case Study: Bristol-Myers Squibb Transitions to an Informal Performance Management System—Bristol-Myers Squibb eliminated annual performance appraisals in favour of a continuous feedback system, as detailed below:26 Case Study 1: Bristol-Myers Squibb’s Informal Performance Management System

Bristol -Myers Squibb

Industry: Pharmaceuticals 2004 Sales: $19 billion 2004 Employees: 43,000

Situation: Bristol-Myers Squibb was dissatisfied with its formal performance management process, in which employees received performance feedback once a year. The company realized that the process focused on past shortcomings and did not encourage employees to play an active role in their development. Action: Bristol-Myers Squibb’s leadership development staff eliminated the annual performance appraisals and implemented an informal performance management process. Employees and managers meet regularly to discuss employee performance and review their development plans. In addition, each employee receives a coach. Result: The company’s informal performance management system brought about a cultural change, in which employees play a proactive role in their performance improvement and development.

 2006 Corporate Executive Board. All Rights Reserved.


CORPORATE LEADERSHIP COUNCIL ®

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Finding 2: (Continued) §

Case Study: PPG Industries Adopts an Informal Performance Management System—PPG Industries implemented an informal performance management process that encourages employees to assume res ponsibility for their development, as detailed below:27 Case Study 2: PPG Industries’ Informal Performance Management System PPG Industries Industry: Paint manufacturer 2004 Sales: $9.5 billion 2004 Employees: 31,000 Situation: PPG Industries sought a performance management system that translated corporate strategy into specific actions and encouraged employee involvement in their performance improvement. Action: The company launched an informal performance management system based on manager-employee dialogue and continual feedback. Managers share the overall business strategies with their direct reports, and employees then set personal goals, aligned with the departmental and business objectives. Throughout the year, employees meet with managers to discuss their progress in reaching their goals, as well as to receive performance feedback. Result: Both employees and managers at PPG Industries consider the informal performance management process a success because it promotes manager-employee dialogue regarding corporate, departmental, and personal goals, as well as feedback on performance improvement.

Finding 3: In eliminating a formal performance management system, organizations may encounter challenges involving legal documentation, organization-wide consistency, and manager support. That said, with proper planning, training, and communication, organizations can overcome these challenges and effectively transition to an informal performance management process. Informal Employee Performance Records are a Necessity “With or without appraisal, supervisors should continually try to keep some informal documentation of noted significant deficiencies, critical incidents, or other notes on what is going well or not.” Tom Coens and Mary Jenkins, Organizational trainers, Authors of Abolishing Performance Appraisals

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Challenge: Informal Performance Management Systems Do Not Provide Legal Defense for Personnel Decisions—Organizations conduct performance appraisals primarily to document unsatisfactory performance in the case of legal proceedings. Implementation of an informal performance management process no longer provides employers with legal documentation of poor performance. 28 Strategy: Maintain employee performance records, detailing counselling, development plans, and consequences of continual poor performance.29

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Challenge: Informal Performance Management Systems Do Not Directly Link Employee Performance and Business Strategy—Because em ployee-manager partnerships form the basis of an informal performance management system, employees may not be aware of business strategic goals. In contrast, formal performance appraisals allow for the cascade of business strategic goals from senior executives to individual contributors and directly convey this linkage to employees.30 Strategy: Ensure that managers align strategic business objectives with employee expectations and communicate to employees the relevance between their performance and organizational goals .31

 2006 Corporate Executive Board. All Rights Reserved.


CORPORATE LEADERSHIP COUNCIL ®

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Finding 3: (Continued) §

Challenge: Informal Performance Management Systems Do Not Clearly Describe Employee Expectations and Goals—A formal performance appraisal provides employees with a clear description of their expectations and goals , whereas an informal performance management system does not explicitly outline these objectives .32 Strategy: Require managers and employees to discuss together job responsibilities and goals, as well as create an individual development plan, as detailed below:33 •

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At Bristol-Myers Squibb, employees and managers form a ‘performance partnership,’ in which they work together to define, set, and achieve employee goals. Managers have the responsibility to set employee expectations, depending on corporate goals.

Challenge: Informal Performance Management Systems Do Not Ensure Consistent Performance Management and Employee Development Across the Organization—Because of its focus on manager-employee dialogue, an informal process may result in dis crepancies in employee development and performance management across the organization.34 Strategy: Conduct calibration meetings among managers to discuss and compare their role in the performance management process of their direct reports.35

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Challenge: Informal Performance Management Systems Do Not Identify or Counsel Poor Performers—Continuous feedback systems focus on recognizing and reinforcing desired behaviours, while often not acknowledging undesired behaviours.36 Strategy: Develop a strategy to recognize and handle poor performance—The following example indicates how a university handles poor performers when using an informal performance management system:37 •

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At Michigan State University, supervisors fill out a form for each employee recording whether they have met expectations or not. If employees do not satisfy expectations, supervisors should conduct extensive coaching to determine if their performance can be improved or if their employment should be terminated.

Challenge: Managers Do Not Have the Skills Set to Conduct Informal Performance Management—A performance management system based on continual feedback and dialogue requires major manager commitment and specific coaching skills. 38 Strategy: Train managers on the overall performance management process, including the skills necessary to provide continuous feedback, performance support, and coaching opportunities . 39

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Challenge: Managers Do Not Have the Time to Conduct an Informal Performance Management Process on a Daily Basis—HR personnel administer a formal performance appraisal, whereas managers, in cooperation with their employees, conduct an informal performance management process through daily interactions and activities. 40 Strategy: Hold managers accountable for the informal performance management process and communicate manager expectations regarding the process. 41

 2006 Corporate Executive Board. All Rights Reserved.


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PROFESSIONAL SERVICES NOTE The Corporate Leadership Council (CLC™) has worked to ensure the accuracy of the information it provides to its members. This project relies upon data obtained from many sources, however, and the CLC cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, the CLC is not engaged in rendering legal, accounting, or other professional services. Its projects should not be construed as professional advice on any particular set of facts or circumstances. Members requiring such services are advised to consult an appropriate professional. Neither Corporate Executive Board nor its programs are responsible for any claims or losses that may arise from any errors or omissions in their reports, whether caused by Corporate Executive Board or its sources.

1

Society for Human Resource Management, "Performance Management Systems: What Do We Want to Accomplish?," SHRM White Paper (September 2002). (Obtained through www.shrm.org). [Accessed 18 January 2006]. (Due to copyright restrictions, a copy of this article cannot be provided.) 2 Author Unknown, "Performance Management Programs Need Improvement," Watson Wyatt (28 November 2005). (Obtained through www.worldatwork.org). [Accessed 19 January 2006]. 3 O'Neill, Colleen and Lori Holsinger, "Effective Performance Management Systems," WorldatWork Journal (2003). (Obtained through www.worldatwork.org). [Accessed 18 January 2006]. 4 Tyler, Kathryn, "Performance Art," HR Magazine (August 2005). (Obtained through Lexis-Nexis). 5 Author Unknown, "Strategic HR: Making Performance Management Work," HRfocus (May 2005). (Obtained through Lexis-Nexis). 6 Author Unknown, "Getting to the Most Productive Results," HRfocus (January 2005). (Obtained through Lexis-Nexis). 7 Author Unknown, "Workforce Study Shows Managers' Strengths and Weaknesses," Managing Today's Federal Employees (November 1, 2005). (Obtained through Lexis -Nexis). 8 Murphy, Dave, "Are Performance Appraisals Worse than a Waste of Time?," The San Francisco Chronicle (9 September 2001). (Obtained through Lexis-Nexis). 9 Author Unknown, "Getting to the Most Productive Results." 10 Author Unknown, "Getting to the Most Productive Results." 11 Fandray, Dayton, "The New Thinking in Performance Appraisals," Workforce Management (May 2001). (Obtained through www.workforce.com). [Accessed 20 January 2006]. 12 Society for Human Resource Management, "Performance Management Systems: What Do We Want to Accomplish?" 13 Corporate Leadership Council, Managing for High Performance and Retention, Washington: Corporate Executive Board (2005). 14 Corporate Leadership Council, Managing for High Performance and Retention. 15 Redford, Kirstie, "Going the Distance," Personnel Today (6 September 2005). (Obtained through Lexis-Nexis). 16 Corporate Leadership Council, Managing for High Performance and Retention. 17 Society for Human Resource Management, "Performance Management Systems: What Do We Want to Accomplish?" 18 Society for Human Resource Management, "Performance Management Systems: What Do We Want to Accomplish?" 19 Satterfield, Terry, "From Performance Management to Performance Leadership," WorldatWork Journal (January 2003). (Obtained through www.worldatwork.org). [Accessed 19 January 2006]. 20 Author Unknown, "Strategic HR: Making HR Performance Management Work." 21 Banka, Carri and Ryan Johnson, "Lessons in Best Practices: The Evolution of Performance Management," Workspan (July 2002). (Obtained through www.worldatwork.com). [Accessed 18 January 2006]. 22 Murphy, Dave, "Are Performance Appraisals Worse than a Waste of Time?" 23 Joinson, Carla, "Making Sure Employees Measure Up," HR Magazine (March 2001). (Obtained through ProQuest). 24 Corporate Leadership Council, Managing High Performance and Retention. 25 Author Unknown, "Link Performance to Strategic Plan to Boost Work Quality," HR On Campus (November 1, 2005). (Obtained through Lexis-Nexis). 26 Author Unknown, "Kinder, Gentler Reviews: A Forced Ranking Backlash?," HRfocus (April 2002). (Obtained through Lexis-Nexis). 27 Gagne, Kathy, "One Day at a Time: Using Performance Management to Translate Strateghy into Results," Workspan (February 2002). (Obtained through www.worldatwork.org). [Accessed 19 January 2006]. 28 Author Unknown, "Kinder, Gentler Reviews: A Forced Ranking Backlash?" 29 Author Unknown, "Kinder, Gentler Reviews: A Forced Ranking Backlash?" 30 Author Unknown, "Link Performance to Strategic Plan to Boost Work Quality." 31 Author Unknown, "Kinder, Gentler Reviews: A Forced Ranking Backlash?" 32 Author Unknown, "Strategic HR: Making Performance Management Work.”

 2006 Corporate Executive Board. All Rights Reserved.


CORPORATE LEADERSHIP COUNCIL ® ALTERNATIVES TO FORMAL PERFORMANCE MANAGEMENT

33

Author Unknown, "Kinder, Gentler Reviews: A Forced Ranking Backlash?" Anonymous, "Getting to the Most Productive Results," HR Focus (January 2005). (Obtained through ProQuest). 35 Anonymous, "Getting to the Most Productive Results," HR Focus (January 2005). (Obtained through ProQuest). 36 Murphy, Dave, "Are Performance Appraisals Worse Than a Waste of Time?" 37 Murphy, Dave, "Are Performance Appraisals Worse Than a Waste of Time?" 38 Author Unknown, "Kinder, Gentler Reviews: A Forced Ranking Backlash?" 39 Author Unknown, "Kinder, Gentler Reviews: A Forced Ranking Backlash?" 40 Author Unknown, "Link Performance to Strategic Plan to Boost Work Quality." 41 Author Unknown, "Link Performance to Strategic Plan to Boost Work Quality." 34

 2006 Corporate Executive Board. All Rights Reserved.

PAGE 7 K EY FINDINGS


Performance Management Alternatives