Let’s be clear about employee appraisals and performance management
The following post is from the McKinsey website. In this episode of the McKinsey Podcast, Lucia Rahilly of McKinsey Publishing speaks with McKinsey Partner Bryan Hancock and Senior Partner Bill Schaninger about the role managers can and should play in regularly training their employees, designing fair compensation systems, and managing positive and challenging conversations.
Managing employee performance successfully requires real support for managers and a recognized fair process.
Lucia Rahilly: Welcome to the McKinsey Podcast. I’m Lucia Rahilly, replacing regular podcast host Simon London. Today, we discuss new research on a highly controversial topic that affects us all, from leaders to managers: performance management, or how we define, evaluate, and reward success at work, including the much-dreaded, often-ridiculed, and, in recent years, sometimes dismissed annual performance review. Today I’m joined by Bryan Hancock and Bill Schaninger, both leaders of McKinsey’s Organizational Practice and co-authors of a recent McKinsey Quarterly article on equity in performance management. Bryan, Bill, welcome to the podcast.
Bryan Hancock: Thanks for the invitation.
Bill Schaninger: Good afternoon.
Lucia Rahilly: Let’s start with a straight face. We all know plenty of people for whom at least some aspects of the performance management process are quite painful. Many of us have colleagues who suffer from a variant of seasonal affective disorder that begins to manifest in the fall and magically disappears at the end of the ratings season. In what ways do you think companies are failing in fundamental processes like feedback and evaluation? Bill, let’s start with you.
Bill Schaninger: One of the most interesting things we discovered when analyzing various clients was that many of them said they were quitting their jobs. And we said, «Well, come on. We’ve got to have some way of keeping track.» But when we looked at it in depth, we found a couple of basic things.
For the last decade and a half, companies have become obsessed with tools and processes: the magic nine-box grid, the magic rating scale, the magic form, or, in terms of processes, the fixation with the annual process. What was always missing was the role of the individual manager. The humorous title of one of our articles was: «Putting the Manager Back in Performance Management.»
You’ll see a trend in many of the topics we cover: there’s still no substitute for direct feedback and coaching delivered daily, not just annually. We’re sure to have plenty of horror stories. But where we see it working well is because you work for someone who takes the time to ask, «How’s it going? Have you thought about this? I saw that.» It’s about that crucial relationship between employee and manager.
Bryan Hancock: Our research shows that the vast majority of CEOs don’t find the performance management process that useful in identifying top performers. More than half of those surveyed believe their managers didn’t conduct the performance appraisal properly.
So, we have a process where those receiving the appraisal believe they didn’t conduct it properly, and CEOs don’t find it useful. Yet we’re stuck in this annual feedback loop because in some companies, it’s the only time they can force managers to give feedback. That’s why they say it’s worth having at least an annual conversation.
Why Regular Employee Feedback Is More Important Than Ever
Lucia Rahilly: This has been going on for decades. Performance management isn’t a new concept. Why now? Why are companies reprioritizing core processes now? And why do we think we can fix it now?
Bill Schaninger: It’s probably two things at once. First, when a number of clients eliminated ratings, they ran into the real problem that, at least in North America and Western Europe, you really need some kind of documented administrative evaluation of the year to make hiring decisions, or you treat everyone exactly the same. There’s just a basic legal version of «you need something.»
When we looked at those who made the big deal of «Oh, we’re getting rid of that,» if you asked them even a little, they would resort to «ghost» ratings. They engaged in conversations that were a calibration that was really a rating; at its core, that was the administrative function.
They recognized that they needed something. But everyone said, «We can’t do what we were doing before.» That started to become a purely administrative outcome. If you go back 25 years, that takes us back to the mid-90s, we had reengineering. It was a lean process orientation. There were massive budget cuts and real headcount reductions during the 90s. Then came the era of electronic HR in the late 90s, early 2000s. That was the rise of self-service. After that, we saw another round of massive cuts and, increasingly, a transition to centers of excellence and distributed systems.
So, by and large, the people who used to «feed the beast» or who had a span of control, like the HR partner, who were small enough to offer coaching, weren’t there. Whose turn was it? The manager. Then, managers became overwhelmed by the growing bureaucracy of the process. And they started writing everything down. That’s the reality.
No one was getting what they wanted. Most people like to know how they’re doing. Can you imagine playing an entire season of soccer, football, or baseball without ever knowing the score? I was recently at an eight-year-old boys’ lacrosse game where, in theory, they didn’t keep score. You know who was keeping score? The parents and the kids. Everyone else was keeping score, except for them, because we like to know how it’s going.
There’s been a wave of people saying, «Don’t make this painful. But if I get something useful out of it, I’m willing to invest in it.» This starts more with the day-to-day and less with the annual (Chart 1).
Bryan Hancock: There’s a structural factor driving the changing nature of work that, in part, explains why performance management has become such a hot topic. As more knowledge-based and interdependent jobs become available, there are fewer jobs where you get feedback on whether you’ve done a good job.
If you’re a salesperson, not in solution selling but in traditional door-to-door sales, the fact that you’ve sold a product is itself a form of feedback. At the end of the day, you can reflect and ask yourself, «Am I succeeding as a salesperson?» Because you have the objective feedback. The same is true if I operate in a factory and there are multiple factories in the network producing the same product, and my productivity is the lowest. I can look back and say, «I understand that, objectively, we’re making fewer products, we have a higher defect rate, or it’s more expensive to operate my factory.»
But when it comes to the head of strategy or the head of digital design, these are inherently more interdependent roles. These are roles where feedback may not come naturally. In the end, you may feel like you’re doing great, and your boss isn’t.
Lucia Rahilly: To compound this, I imagine the labor market has been extremely tight in knowledge sectors. It seems there might be a correlation between supply and demand in the labor market and the need to provide developmental feedback, at least, to employees to improve their performance, because you have to compete.
Bryan Hancock: There’s a reason: the staff shortage in the labor market makes people afraid to give negative feedback, especially during the year. They don’t want to lose their people. They don’t want to lose this valuable resource. In some cases, it’s not that they’re worried about losing them outside their companies, but about losing them from the team. Someone might think, «That person is very difficult. I’m going to transfer.» As a manager, you know you can’t replace that person, so you minimize feedback during the year. For you, removing ratings means, «Ha! Another reason for someone not to be angry with me, to not leave.»
But at the same time, you’re not developing that person. You’re not advancing them. You’re protecting them from the downside, but you never really see the upside of a good ongoing conversation about performance management.
Bill Schaninger: And you’re still missing the opportunity. A lot of the conversations we have are organized around an annual process. Most of the annual processes we have in companies are driven by the financial system, driven by accounting standards. They force you to close the books annually. The talent budget is literally an artifact of just plugging it into the financial system. If this was 1950 or 1960, and the annual plan still mattered a lot, and you knew exactly what your job would be, and you’d do the same thing every day—because it was «planned,» and you thought, «Well, let’s cap it off»—then perhaps a static job description and annual review would be fine, although it’s not likely.
But in an environment where work is increasingly fragmented into a week, a couple of days, a month, and is much more dynamic, with much faster cycles, with project-based work, different people, different clients, it’s unacceptable. Because it’s, again, like going to a game and thinking, «I don’t know how good it is.» You show up the next day, you’re playing a different game, and you still don’t get a score.
That’s the challenge: as much as we hear about everything digital and agility, the common denominators are pace and the implementation and redeployment of staff in different combinations. If you want employees to feel good about their work, they need mutual reinforcement. Most people don’t wake up and think, «Yeah, I’m going to assume I’m doing great.»
How to Integrate Equity into Performance Management
Lucia Rahilly: Bryan, you mentioned equity. Equity is a really controversial concept. How do you optimize a metric so rooted in subjective experience? In other words, what can companies do to make their processes fairer?
Bryan Hancock: Part of what we discovered in our research is what drives perceived fairness in the performance management process (Exhibit 2). One of the factors that drives fairness is understanding how what you’re doing fits into the bigger picture: «I understand how this links to the department or the overall strategy.»
The second equity factor is its ongoing component. «My manager has an ongoing conversation with me about my performance, so I’m not surprised. I know what I’m working on and how it fits in. My manager has the conversation with me.»
The third equity component refers to differentiated compensation, and in particular, two types of differentiation. One type of differentiated compensation is ensuring that those who slack off don’t earn the same as others. Because that’s not fair.
They’re not contributing their fair share. And the other is that we recognize, and fairly, those who are performing disproportionately well, recognizing Steph Curry and Klay Thompson on the team. Yes, they should be earning a little more, and recognizing that increases the perception of equity for everyone.
For companies, when they get these three elements right, the perception of equity of the overall performance management process increases (Exhibit 3).
Lucia Rahilly: Could you give me an example of a company that’s doing these things well, or at least a couple of them? Take, for example, people feeling that their work and contributions are important and that they align with business objectives. How is this reflected in practice?
Bill Schaninger: We spend a lot of time studying organizational health. Some of its components relate to things like strategic clarity and role clarity. But if you think about that chain, it almost always starts with questions like, «What is the long-term future of this company? Do I consider it meaningful?» Basically, «Are we doing something that I consider important?» You think, «Okay, that’s a great idea. What’s our plan?» And the plan should be quite detailed: Here are the milestones. Here are the objectives. Here are the goals. I just said «goals» and «objectives,» which are part of the annual goal-setting exercise.
To have even the slightest hint of fairness, you need to start with these two things: «I like our long-term plan. I understand our plan. I know how success will be evaluated,» and then, «and I know what my part is.» It’s obvious, classic role clarity, which means: «I know what you’re asking me to do. I know what the good stuff means, when it needs to be done, who I have to work with, and what I can decide for myself.» When you have that, they at least feel like they have a fighting chance. It’s almost like the hygiene factor.
And then you get to the other thing Bryan was talking about, which is that good traditional managers show up and advise: «Hey, try this. Have you thought about it? Oh, that didn’t turn out well. What do you think?» You know you have a fighting chance, because this doesn’t have to be easy. With the increasing pressure to perform, you might expect the goal-setting part to feel pretty flexible. We’ve seen organizations do a much better job, especially in professional services, where you see project-based work, IT departments that have adopted agile working methods, anywhere they’ve been allowed to break it down. It’s much easier to make an immediate connection between what’s being done today and its impact on the business. It’s also an attack, again, on the long, static job description. It’s very difficult to connect with it. You’ll see things fluctuate, flow, and change. That’s an important part: the sense of meaning. It’s been linked to millennials.
Millennials are labeled with a lot of things, like, «I want my work to be meaningful. I expect someone to care about my development.» If you were to translate those statements, and what Bryan was mentioning as equity issues, into plain language: «I’d like to know that someone cares about me. I’d like to know that the things I’m working on are important. And I’d like to know how they’re going, so I have a chance to succeed.» Well, who wouldn’t want that? It’s no wonder the data was so clearly biased, indicating that if this doesn’t seem fair, it won’t translate into any improvement in individual or organizational performance.
Lucia Rahilly: You’re relating this to millennials. But, in fact, it seems like what you’re clarifying applies to all demographic groups.
Bill Schaninger: Everyone wants it.
Lucia Rahilly: So what’s different now? Is it the cadence and complexity of working in teams, the shifting of priorities, agile decision-making, rapid prototyping, and those kinds of environments?
Bill Schaninger: Millennials have been given a voice because they’re an easy group to talk about. But I think work has been broken down into smaller chunks. And there’s so much noise out there that I think it’s hard to ignore it now. Employees have almost been given a voice to say, «This needs to improve for us, too.»
Bryan Hancock: As we see roles changing—and there are more knowledge-based roles, more interdependent roles—it’s becoming increasingly important for us to define what we’re working on and why it’s important. It’s even more important to have an ongoing conversation that explains the difference in compensation.
I really think it’s about greater interdependence. If we go back to Glengarry Glen Ross, we have the phrase, «Coffee is for closers.» It’s not like the person turned around and said, «But I’m a closer.» No, he knew where he was on the sales list. He knew to send that coffee back. He got it. There are so many people today who don’t get it. They hear, «Hey, dude, coffee is for closers.» And they think, «Yeah, that’s me! I get it!» That’s where the disconnect lies, because we’ve become more interdependent. Natural sources of feedback don’t exist. Other things I would say have advanced a bit are data and analytics, which allow you to more objectively determine whether you’re doing a good job or not. The best example of this is in sports. If you look at advanced baseball statistics that can help with analytics, they can indicate where you are in wins above replacement. Now, it’s really understood in an advanced way: «Okay, what am I supposed to do? Well, I’m not supposed to steal bases, because stolen bases are, in fact, a negative thing.» I know where I’m supposed to be on the field because the analytics tell me. Now, I understand, in a different way, what I’m supposed to do and how it relates to the main mission of getting more players on base, avoiding unforced outs.
So, you know what the manager is supposed to do. If you’re a role player on an NBA team, they tell you what role you’re supposed to play. And then, compensation actually depends on this. There are players now being paid much better and much differently than they were paid before, because people understand thei
