The following is an excerpt from Bob Herbold’s latest book, “What’s Holding You Back? 10 Bold Steps that Define Gutsy Leaders.” 3
Staff for Success
PERFORM RIGOROUS PERFORMANCE ASSESSMENTS
Nothing hurts morale and an organisation’s bottom line as much as weak talent and underutilization of exceptional performers. Yet many organisations fail to make this issue a priority. Here I will highlight why this topic is so important and describe h ow a first-rate performance appraisal system can help. We will then discuss the basic—and essential—components of your appraisal system.
No matter whether you are a company, a nonproﬁt, a governmental organisation, or an educational institution, allowing poor performers to continue to struggle and failing to aggressively identify and stretch your very strong performers generate two very signiﬁcant problems:
1.) Endorsing mediocrity. When you allow weak performers to continue to plod along, your organisation is not performi ng as it should. Even worse, often you reach a point where you know that the individual can’t be productive, but you avoid confronting the issue, giving him meaningless activities and simply ignoring him. You are wasting money, you are wasting that individual’s time, and the organisation is not facing the reality of the situation. You are also irritating a number of other employees in the organisation who have to work with this individual. Most important, you are discouraging the strong performers who see this kind of thing going on and often conclude that endorsing mediocrity is not for them and that they don’t want to be part of the organisation.
2.) Underutilizing talent. Failing to identify your strong performers and stretch them by putting them in key assignments deprives you of the opportunity to beneﬁt from their good ideas, their drive for progress, and the results they can achieve for the organisation. Equally unfortunate, they may become bored and leave. Strong performers need to be told they are strong, and they need to be further developed. Your organisation will then have a growing pool of high-potential personnel to tackle your toughest challenges—and yield better results.
A good performance appraisal system prevents both of these problems. By focusing on improving the performance of every employee, an effective system enables you to directly confront the problems some individuals may be having and to develop your very best people very quickly.
Incredible things can happen when you put your strong performers against speciﬁc and stretching goals. Steve Jobs of Apple knows this. Back in 2000, he spotted the unique skills of Tony Fadell, a very experienced and talented hardware designer. Jobs hired Fadell and had him lead a very small and secret team with the objective of coming up with a device that would take advantage of digital media and provide individual consumers with a revolutionary portable music device. Fadell and his small team developed the iPod, launched in fall 2001, which has both invigorated and revolutionised Apple as a company and turned the music industry on its head.
Back in 1993, the chairman of Toyota selected Yoshiro Kimbara, a very talented executive with years of exceptional results at Toyota, and asked him to think about what car Toyota should be designing for a world in which oil prices would be a lot higher and the environment more of a concern. Kimbara came back suggesting they build a hybrid car as an experiment and see whether or not it made sense. The resulting Prius was launched in 1997 and has been an incredible leadership product for Toyota and for the entire automobile business.
You need to stretch your strong performers and create an environment where they love to work. Typically, they don’t like an environment loaded up with mediocre and poorly performing individuals who drag down the quality of their own work, nor one in which they are not challenged. This is yet another argument for an effective performance appraisal system that allows you to regularly evaluate the performance of all employees and focus on improving their contribution.
Over my 40 years of business experience, I’ve seen a couple of really good performance appraisal systems, and I’ve seen a whole lot more that are below average to poor. The one with which I was most impressed was the appraisal system in use at Microsoft from 1994 to 2001 during my years as COO. Bill Gates designed this system when the company was very small, and he was a very strong proponent of it year after year. It was clear to me that it paid big dividends for Microsoft.
How did the Microsoft system work? It was a ﬁve-point system; let’s call the scores one to ﬁve, although that is not exactly what was used. If you were a manager who had over a hundred or so employees under your supervision, the annual performance ratings you gave to each of your employees every August had to ﬁt into the following ﬁve-point distribution:
The ﬁve rating. These were the genuine stars, and across your population of personnel, 10 per cent of your employees had to be given this rating. You could make an exception and award the rating to 11 per cent or 9 per cent, but the goal was 10 per cent. (Clearly the 10 per cent was a bit arbitrary, as were the percentages for the other ratings explained here, but there had to be a target so that the managers were required to carefully sort out the relative performance of their employees.)
The four rating. These individuals were above-average performers who were not quite as good as your ”ﬁves,” but they were very talented. Across your population, you had to award this rating to very close to 20 per cent of your employees.
The three rating. Although these employees were average, they were quite valuable to the company. You gave this rating to 50 per cent of your employees; you could vary that number by 1 or 2 percentage points, but that’s all.
The two rating. These individuals had clear areas of improvement that needed to be tackled. Their performance would be classiﬁed as below average, and if they deteriorated further, there would be big problems. You had to give this rating to 15 per cent of your employees.
The one rating. These individuals were seriously lagging behind their peers in performance. For each of them, a three-to six-month program was put in place to achieve very signiﬁcant improvement. If they did not improve, they would be given three to six months to ﬁnd employment outside the company that would ﬁt them better. You had to give this rating to 5 per cent of your employees.
During the performance review, the manager discussed the employee’s rating, his or her strengths and weaknesses, and why the employee received the particular rating. Managers wrote up thorough analyses of performance, and in each case, both the supervisor and the subordinate were required to sign that write-up. It was then submitted to HR. For a particular department, if HR did not have all the completed and signed performance appraisals in hand by the target date, none of the individuals in that department would receive their salary increases. As you would expect, this meant that 100 per cent of the performance appraisals would be completed on time!
The salary increases that went along with the performance reviews varied quite signiﬁcantly in size. For example, if the overall salary increase that year was 5 per cent, the ﬁves might receive an 11 to 12 per cent increase; the fours might get a 8 or 9 per cent increase, the threes a 4 per cent increase, and the twos a 1 or 2 per cent increase. Those with a rating of one wouldn’t get any salary increase. In far too many organisations, the strong and the weak performers all receive salary increases of about the same size. That sends a terrible message to strong performers.
The Microsoft system did an excellent job of making sure that individuals knew where they stood, which beneﬁted both the employees and the company. The employees rated ﬁve were typically selected for the most important assignments in order to develop them further and to achieve great performance against the key tasks within the company. The one-and two-rated employees were dealt with appropriately.
The key point here is not that you need to duplicate the Microsoft system but that you do need a disciplined, standardized system in which everyone is reviewed, the top 10 to 15 per cent are identiﬁed and stretched, and the bottom 5 to 7 per cent are required to improve or be ﬁred or moved to a more suitable job within the company. If you don’t at least capture these two ends of the bell-shaped curve and instead allow managers to rate employees at their discretion, I can guarantee you that all ratings will be inﬂated, and rarely will poor performers be dealt with properly.
The kind of system I am recommending yields huge beneﬁts for the company. Individuals are dealt with honestly, progress on key projects improves, and overall organizational performance is enhanced.
Bob Herbold is the former Chief Operating Officer of Microsoft Corporation and the author of three books on leadership. His latest, “What’s Holding You Back? 10 Bold Steps that Define Gutsy Leaders” was released February, 2011 by Wiley/Jossey-Bass. Bob’s blog on leadership can be found at www.bobherbold.com. You’ll find Bob on Facebook by clicking here.
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