There's a major problem with the global trend of companies ditching performance reviews

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Getting rid of the much-loathed annual performance review has become something of a global trend. But there’s a problem.

Those working at companies where the performance rating has been eliminated are overjoyed. Everyone disliked the reviews: staff, managers, leadership and human resources experts.

The process had turned into more a tick-the-box exercise than a critical assessment. What usually happened was that supervisors were concerned about demotivating staff by providing appraisal ratings that were accurate, yet low. So they tended to give high ratings, regardless of performance.

However, the latest research shows that the initial positive relief and happiness about the end of annual reviews tends to fade and the key benefits expected actually don’t surface.

It appears that most people dislike the review process but like a rating. It gives them validation, a bit like a gold star at school: something by which to measure their success, and be reassured of their contribution.

A survey by technology company CEB of 9500 employees and 300 heads of human resources shows that having no rating system is actually detrimental to both managers and employees, especially high performers.

Recognition and feedback provides essential reinforcement to high performers of the contribution they’re making to the organisation.

Companies removing performance ratings had a 28% fall in the productivity of their high performers.

And while the lack of performance ratings may take the pressure off managers in terms of time, they too also suffer as they are no longer as closely connected to their teams.

The movement to get rid of performance reviews, and replace them with something shorter but more frequent, has been gaining momentum in Australia.

Deloitte Australia is at the centre of a global program to get rid of the annual meetings between managers and employees.

Adobe and Accenture have also killed off the performance review. And at IBM, an app is now used to give and receive real-time feedback.

But the initial euphoria about the end to formal reviews doesn’t last, according to the CEB research. This chart illustrates what happens to satisfaction with performance management and pay when removing ratings:

The destruction of the performance review may have gone too far.

Aaron McEwan, HR advisory leader at CEB, says critics tend to believe removing performance ratings will improve manager conversations, give them more time for informal feedback, help them differentiate pay more accurately, and improve employee engagement.

“These expectations about removing ratings make sense, and companies have received some positive feedback from employees after eliminating performance ratings,” McEwan told Business Insider.

“However, the initial positive reaction tends to fade after the first performance review cycle. The improvements in measures of employee performance fail because managers struggle to make and communicate performance and pay decisions without ratings.”

McEwan says employees want feedback and managers often judge value and contribution by comparing employees to those around them.

“So, a rating provides employees with a sense of how they are progressing versus their peers,” he says.

“Done well, a good performance review provides both context and direction for an employee. It allows them to course correct and focus their attention on what is most important.

“Most people want to do a good job and are happy to make changes if they are not delivering on what’s expected.”

Assessing performance is often a hard difficult task and is sometimes seen as a dark art because it is so hard to define.

“Often direct observation of behaviours and performance is difficult or impossible and secondary sources of information, such as 360s and others’ feedback is incomplete,” says Natalie Ferres, author of the globally adopted Workplace Trust Scale and a director of Bendelta, a strategic leadership firm.

“There are also different interpretations of what constitutes good behaviour and performance, even if you’ve got clear behavioural examples as a guide.

“But mostly what makes assessing performance a dark art is our human fallibility: we are at times prisoners to our subjective biases. For example, we know that we tend to assess people and information to fit in with our existing views,” stated Ferres.

Accepting mediocrity

Anthony Mitchell, co-founder and chairman of Bendelta, says what the research reveals more than anything else is that companies are accepting mediocrity by failing to review employees effectively.

“If you were focused on excellence, would you wait six months before letting people know how close they are to excellence and what they’d need to do differently to get closer?” he told Business Insider.

“Would you choose a path simply because it makes life easier for managers and is preferred by your most average employees?”

Improvement requires regular feedback. That means timely, objective and well-intentioned feedback on how closely their actions and results resemble the ideal.

“At Bendelta, we have been conducting quarterly reviews for every team member since the business was founded,” he says.

“We do this because we know how important feedback is for development. Waiting a year, or even six months, is too long.”

Mitchell says the best organisations look much more like a professional sports team.

“They will describe excellence, they will know how their people are travelling, and they will give continuous, high-quality feedback,” he says.

“Their high performers will love it and their worst employees possibly won’t. But in ten years’ time, the competitive landscape will have no place for the mediocre people practices that are accepted today.”

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