8
Creating an Effective Appraisal System
Edward E. Lawler III
The existence of an effective performance management system is often the major differentiator between organizations that produce adequate results and those that excel. Without a focus on performance management at all levels of an organization, it is hard to see how an organization can find a talent-based competitive advantage.
It is far from easy to get performance management right in an organization. The corporate world is littered with companies whose employees never receive an effective performance appraisal. People at all organizational levels go through the motions of formulaic performance appraisals with astonishing insincerity and have little to show for it. There also are numerous examples of situations where individuals thought they were doing the right thing and performing well only to find out they were mistaken when they had their annual appraisals. Finally, in many organizations, performance appraisals simply aren’t done, either because of employee resistance or because managers “dry lab” (fake) them.
This chapter is based on Management Reset: Organizing for Sustainable Effectiveness, by Edward E. Lawler III and Christopher G. Worley (San Francisco: Jossey-Bass, 2011). Copyright 2011 by John Wiley & Sons. Reprinted with the permission of John Wiley & Sons.
Performance Management Objectives
An effective performance management system needs to accomplish four things (Lawler, 2008). First, it needs to define and produce agreement on what performance is needed. The bedrock of any performance management system should be agreement on what needs to be done and how it should be done. Without a clear definition of what kind of performance is desired, it is impossible to develop and motivate individuals who can meet or exceed performance standards. It also is key to guiding the performance of individuals so that it supports the organization’s strategy and plans.
Second, it needs to guide the development of individuals so that they have the skills and knowledge needed to perform effectively. It also needs to motivate employees to gain the skills and knowledge they need to perform effectively.
Third, it needs to motivate individuals to perform effectively. Even the best talent will perform at a high level only if motivated to do so. When it comes to performance, high levels of both talent and motivation are needed.
Finally, it needs to provide data to the organization’s human capital information system. It needs to be the primary source of information about how individuals are performing and what skills and knowledge exist in the workforce. This information is a critical input to talent management as well as to strategic planning.
The research evidence shows that the performance appraisals that are done as part of a performance management system are usually poorly done and, in most organizations, are dreaded both by the individuals doing them and the individuals being appraised. As a result, the failure rate of performance management systems is high. It is tempting to say that the appraisal part of the performance management process wastes more time than it is worth. Indeed, an increasing number of books and articles argue that there is no use even trying to do appraisals right because the appraisal piece of performance reviews simply cannot be done well (Culbert, 2010). It is a kind of “unnatural act”!
The argument against doing performance appraisals usually includes the point that regular feedback is much more effective than is a once-a-year appraisal. If ongoing feedback is provided—and this is a big if—there is no doubt that it is a very important part of a performance management system and can partially substitute for a formal performance appraisal. But it does not provide valid data about the performance of individuals that can be used to determine rewards and support talent management decisions; only an appraisal can provide that.
The message of inevitable failure undoubtedly gives some comfort to those who have failed performance appraisal systems, but it doesn’t seem to be leading many organizations to not do appraisals. Indeed, my data show that the recession led to most companies putting more focus on doing appraisals. I think this is the right response; organizations need to do appraisals the right way, not abandon them. So let’s look at 10 key principles that need to be built into a performance management system for it to produce high-quality appraisals.
Principle 1: Start at the Top
Principle 1 is to start at the top. The performance management system must start with, be led by, and be committed to by senior management and the board. The board needs to appraise itself and appraise the CEO. The CEO needs to appraise those who report directly to him or her, and the appraisal process must cascade down the organization so that every level experiences it.
In the best of all possible worlds, goals are first set at the top and then cascaded down so that individuals at each level have goals that are tied to the overall strategic direction of the organization. This ensures that there will be alignment in terms of what is done at different levels in the organization and that the strategic direction of the organization will be implemented.
It is not an overstatement to say that if the senior management of an organization is not fully committed to the performance management process, it is simply better not to have a performance management system at all (Lawler, 2003). In this case, “committed” means that executives do not just give lip service to having an effective process. They are willing to be part of the performance management system themselves and to be role models to the individuals who report to them. This is why the appraisal system needs to begin at the board level and cascade down the organization. All too often in traditional organizations, performance appraisal is something “the top tells the middle to do to the bottom.”
Principle 2: HR Should Support, Not Own, the System
Principle 2 is that HR should support, not own, the system. In all too many organizations, the human resource function is the owner of, and the implementer of, the performance management system. For a number of reasons, this is the wrong way to position and manage the system. There is nothing wrong with the HR function handling the logistics, but it should not own the system. HR managers should not act as the conscience of the organization or drive and sell performance management. These should be the responsibilities of the top managers.
Principle 3: Cascade Strategy and Goals to All Levels
Principle 3 is to cascade strategy and goals to all levels. The starting point for an effective performance management process should be the business strategy of the organization. It should guide a goal-setting process that leads to individuals, teams, and business units having transparent goals and objectives that are directly tied to the strategy of the business. For this to be effective, the goal-setting process needs to begin at the top of the organization and cascade down. There should be agreement on what will be accomplished, how it will be accomplished, and the measurement processes that will be used to assess whether the goals were accomplished in the correct manner.
Principle 4: Set Measurable Goals
Principle 4 is to set measurable goals. The appraisal system needs to be based on goals whose achievement is measurable (Locke and Latham, 1990). All too often, appraisals are based on personality traits (such as being reliable and trustworthy), vague and immeasurable goals, and a host of poorly defined attributes and outcomes. Measurable goals need to be set, and individuals should be assessed in relation to them. This applies to both the skills and competencies that individuals need to develop and also, of course, their performance deliverables—the how and the outcomes of their performance.
A word of caution is in order here about the mistakes that organizations often make in using goal-driven performance management systems. The most serious mistake involves goal difficulty. The effectiveness of goals as motivators is very much influenced by their difficulty, particularly how difficult they are seen to be by the individuals who have the goals. Easy-to-achieve goals are poor motivators because there is a tendency for individuals to work at a level that will lead them to reach the goal, not at their maximum performance level. Yet very difficult goals—or, as they are sometimes called, extreme stretch goals—are much more dysfunctional.
When individuals feel that they cannot reach a very difficult goal, there are essentially two things they can do, neither of which is a positive. They can simply give up and decide it is not worth trying because the goal and the reward that is attached to it are not reachable. Or they can try to figure out how to “beat the system” to reach the goal. This can lead to unethical behavior, illegal behavior, and excessive risk taking. So goals should be realistic—neither too easy nor too hard.
Principle 5: Set Talent Development Objectives
Principle 5 is to set talent development objectives. The performance management process should not just establish what performance goals are to be accomplished; it should also deal with the skills and competencies that individuals and teams need to accomplish them. It should assess their development needs, plan for their development, and support their acquiring the needed skills.
Individuals should be assessed vis-à-vis their skills and competencies. This is critical, because their skills and competencies determine their value in the marketplace and therefore their compensation level. It also is a key input to the talent management system. Finally, information about them should be a critical input to the organization’s strategic planning because it indicates the competencies and capabilities that the organization has and can develop.
Principle 6: Rate Outcomes and Performance, but Don’t Rank People
Principle 6 is to rate outcomes and performance, but not to rank people. Setting performance and development goals is the first critical step in establishing an effective performance appraisal process, but it is only the beginning. An effective assessment and scoring of how well the goals are accomplished is the next step. The assessment process should be relatively easy if there are good goals, good agreement on how goal accomplishment will be measured, and the right measurement approach.
Some organizations (for example, ExxonMobil) rank-order hundreds, or in some cases thousands, of people from first to last, numbering them from one to whatever the total number of individuals is in the part of the organization that is being appraised. This effort is like trying to measure the length of an object to the closest thousandth of an inch using an ordinary straight ruler; the information needed to measure performance so precisely just isn’t available. Not only does ranking create bad data, it sends the wrong message about how the organization values its talent. Instead of showing a concern for individuals and fairness in assessing them, it sends the message that the organization values structure and rules.
Another seriously flawed rating practice is forced distributions (Lawler, 2002). Some organizations (for example, GE, EDS, and Accenture) require their managers to identify a certain proportion of their reports who are failing, often 5 to 10 percent, and a certain proportion who are doing particularly well, often 15 to 20 percent.
The forced-distribution approach ignores the reality that some work groups have no poor performers and others have no good performers. It causes managers to disown the appraisal outcome and say things like “I was just following the rules; I had to give someone a low rating” when they deal with a “poorly” performing employee.
Forced distributions are particularly dysfunctional when there are automatic reward system consequences attached to individuals falling in different areas of the distribution. A clear example is a program that states that the bottom 10 percent or so of the distribution will be fired each year. Numerous studies show that this produces a great deal of “gaming” behavior on the part of the individuals making the ratings (Lawler, 2008). They do everything they can to be sure they are not faced with having to fire individuals who simply should not be fired. For example, they sometimes transfer them to other functional areas to protect them. Another even more dysfunctional thing some do is to hire individuals whom they think will be poor performers so they will have them available to fire when it comes time for forced-distribution appraisals to be done.
Principle 7: Train Managers and Employees
Principle 7 is to train managers and employees. It is critical that organizations train everyone on how their performance management system works. But it is surprising how many organizations do not do this, given the importance of the system and the fact that it is a relatively complex process that involves behaviors (goal setting and feedback) at which many people are not skilled. The training needed is not just a matter of explaining how the system works and understanding its purpose. Individuals need to develop the interpersonal and feedback skills that lead to effective review sessions. All too often, organizations fail to provide any training to the managers who are expected to execute a performance management system. This is true despite the fact that one of the hardest things for many individuals to do is to give negative feedback to others and to handle difficult interpersonal interactions in a constructive way.
While we are on the topic of training appraisers, it is important to point out that training is also needed for the individuals being appraised. Getting feedback about their performance and reviewing their development is not a comfortable situation for most people and not something that they have the skills to handle well. Thus, the most effective performance management training systems train both the appraiser and the appraisee. A good way to do this is to have the appraiser and the appraisee role-play an actual feedback situation before they go “live” with the appraisal. This is clearly an area where individual coaching can help and is often needed.
Principle 8: Link Rewards to Performance, but Discuss Development Separately
Principle 8 is to link rewards to performance, but to discuss development separately. An important feature of an effective performance management system is the degree to which it affects the reward system; in other words, the degree to which it leads to pay increases, bonuses, stock options, and promotions. Over the years, articles and books have claimed that performance management processes should separate the appraisal of performance from discussions about salary increases and promotions (for example, Meyer, Kay, and French, 1965; Kohn, 1993). This may indeed make some of the discussions easier, but it is not the way to make money and other tangible rewards effective motivators (Lawler, 2000).
Given the importance of goals and money as motivators, it is definitely not appropriate to have a review process that separates the discussion of performance accomplishment and financial rewards (Latham, 2006). They need to be discussed together and tied together so that individuals see a clear connection between how well they perform and how well they are rewarded. Yes, it’s true that some individuals work simply for the feeling of accomplishing a goal and, of course, for the mission of the organization. But for others, the relationship between pay and performance is critical to their motivation. The research on this clearly shows that motivation is only likely to exist when there is a direct and immediate tie between the results of a performance appraisal and rewards (Lawler, 2000).
What should be separated from the discussion of financial rewards are the development needs of individuals. Research shows that it doesn’t work to discuss training and development at the same time as past performance and rewards (Lawler, 2000). In such a discussion, performance and rewards typically dominate the meeting and prevent meaningful discussions about development activities. Development activities need to be paired with the discussion of future goals and goal accomplishment, not with a backward look at past performance. The key here is combining two future events—performance objectives and what it will take to reach those objectives—rather than combining retrospective events with future events.
Principle 9: Appraise the Appraisers
Principle 9 is to appraise the appraisers. Given the importance of performance management, appraising how well managers perform this task is a logical and important part of the entire performance management process. A good manager simply needs to do good appraisals. Goals need to be set, progress needs to be checked, feedback needs to be given, competencies need to be developed, and, of course, performance needs to be assessed well and rewards need to be distributed. To motivate managers to do these activities well, it is important that they be appraised and rewarded according to how well they do them. The failure to appraise and reward managers for the appraisals they do speaks volumes about the low priority given to this activity.
Principle 10: Consider Having Review Discussions Online
Principle 10 is to consider having review discussions online. The traditional approach to appraisals calls for face-to-face discussions between the appraiser and the appraisee. There are a number of reasons why it is said to be important to have a face-to-face discussion, including the perception that it is likely to lead to better feedback and more meaningful discussions about how performance can improve. That said, there are a number of problems with face-to-face discussions.
Research shows that individuals are very anxious before and during performance reviews (Culbert, 2010; Meyer, Kay, and French 1965). They often don’t hear all of what is said to them during appraisals because their mind either shuts down or they are still thinking about something that was said at the beginning of the discussion that they are trying to evaluate and decide how to react to. In short, face-to-face meetings often do not produce good communication between an appraiser and the individual being appraised.
One certain way to improve face-to-face appraisals is to give individuals a draft version of the appraisal before it is discussed, and then have the discussion. This allows the individual to get over what may be the shock that occurs when they first see the appraisal and for them to decide what questions and issues they want to raise. It also allows them to correct any problems in the ratings. It is not uncommon when performance is being measured for bad data to creep in and for an individual being appraised to correctly point out that there has been a mistake. Obviously, it leads to a better discussion if data validity and credibility issues can be resolved before a discussion of the consequences of the appraisal take place.
Organizations should also ask the people who are being appraised to respond and provide input at the end of the performance appraisal period. They should be able to present their version of how well they have performed their work assignments against their preset goals. My research supports the value of giving people this opportunity before their appraiser reaches a performance judgment. It leads to more accurate appraisals and to individuals’ believing that they have been fairly appraised (Lawler, 2003).
Let’s move to another question: Does there really need to be a faceto-face discussion at all? In today’s world, where we interact so comfortably and frequently on the Internet (at least some of us do), it seems quite reasonable and, in fact, potentially more functional to do performance appraisals online. It gives individuals a chance to think a bit before they make their responses and provides an opportunity to check issues for accuracy and meaningfulness. Overall, it may be time to rethink how information technology should be used in performance management systems.
Conclusion
Perhaps the best way to summarize and conclude this discussion of performance management is to say that those who argue for abandoning performance appraisals may well be right when it comes to organizations that are not willing or able to follow the 10 principles presented here. However, by abandoning them, they are giving up on a potentially valuable tool that, when used properly, can make a significant contribution to their organization’s effectiveness.
References
Culbert, S.A. 2010. Get Rid of the Performance Review: How Companies Can Stop Intimidating, Start Managing—and Focus on What Really Matters. New York: Business Plus.
Kohn, A. 1993. Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes. Boston: Houghton Mifflin.
Latham, G.P. 2006. Work Motivation: History, Theory, Research and Practice. Thousand Oaks, CA: SAGE.
Lawler, E.E. 2000. Rewarding Excellence: Pay Strategies for the New Economy. San Francisco: Jossey-Bass.
——2002. “The Folly of Forced Ranking.” Strategy + Business 28: 28–32.
—— 2003. “Reward Practices and Performance Management System Effectiveness.” Organizational Dynamics 32, no 4: 396–404.
——. 2008. Talent: Making People Your Competitive Advantage. San Francisco: Jossey-Bass.
Locke, E.A., and G.P. Latham. 1990. A Theory of Goal-Setting and Performance. Englewood Cliffs, NJ: Prentice Hal.
Meyer, H.H., E. Kay, and J.R.P. French. 1965. “Split Roles in Performance Appraisal.” Harvard Business Review 43: 123–29.
About the Author
Edward E. Lawler III is Distinguished Professor of Business and director of the Center for Effective Organizations at the Marshall School of Business at the University of Southern California. He has consulted with more than 100 organizations on employee involvement, organizational change, and compensation and has been honored as a top contributor to the fields of organizational development, organizational behavior, corporate governance, and human resource management.
He is the author of more than 350 articles and 43 books. His articles have appeared in leading academic journals as well as Fortune, Harvard Business Review, and leading newspapers. His most recent books are Talent: Making People Your Competitive Advantage (Jossey-Bass, 2008); Achieving Excellence in HR Management: An Assessment of Human Resource Organizations (with John W. Boudreau; Stanford University Press, 2009); and Management Reset: Organizing for Sustainable Effectiveness (with Christopher G. Worley; Jossey-Bass, 2011).