First, companies were getting rid of performance reviews left and right. Now, research shows that not having ratings can damage employee performance. Where is the middle ground? Two experts discuss the process and how to set performance KPIs that get you from Point A to Point B in a straight line.

Companies big and small are dropping performance ratings like they’re hot, but recent research shows they might want to think twice before completely doing away with the process.

Following on from the ratings debate, CEB surveyed 9500 employees and 300 heads of HR from companies that have and don’t have ratings. What it found was that having no ratings system is detrimental to both managers and employees, particularly high performers.

Many organisations receive positive feedback after eliminating performance ratings, but those initial good feelings tend to fade, says Aaron McEwan, HR advisory leader, CEB.

“Engagement scores and performance scores drop across the board, and high-performers are impacted the most,” he says. “Rankings help them gauge where they are compared to their peers, so removing that means they can no longer see their direct contribution.”

The prognosis is particularly bad for high-performers: while respondents reported a 10 per cent drop in productivity across the organisation, that number rises to 28 per cent for high-performers.

“A lot of companies focus on getting rid of the number as a way to solve their performance management issues, but that didn’t bear out in the research,” McEwan says. “Instead, it introduced ambiguity because there was nothing to base the conversation around.”

In organisations without ratings, managers spend 16 per cent less time on informal conversations with employees about their performance. This is detrimental for both managers and employees, say McEwan.

Not only did the research show that a lack of informal conversations means managers aren’t as closely connected to their teams, but internal and external perceptions about their ability to effectively manage dropped as well. Only 4 per cent of human resources managers surveyed felt they are effective at accurately assessing employee performance, which corresponds with a 14 per cent drop in employee confidence.

“People need feedback; we are social creatures and we often determine value through comparison,” McEwan says. “Employers need to focus on improving manager capabilities to provide feedback, improve coaching skills and place employee performance within the context of organisational priorities.”

How to put the ‘performance’ back in performance ratings

According to the CEB research, the top five reasons given for why performance management underperforms are:

1. It’s annual;
2. It’s backward looking;
3. It’s complex;
4. It’s time consuming; and
5. It’s inconsistent.

However, there are ways to make the process easier without sacrificing return, says Stacey Barr, a performance measurement specialist and author of Practical Performance Measurement.

Performance ratings shouldn’t be cut throat like the ‘rank and yank’ systems some companies have become famous for. What it really boils down to are some consistently bad performance management habits that result from default thinking, says Barr.

Here are the top mistakes people make when it comes to performance ratings, plus her tips for breaking these habits:

1. Convoluted goal writing: These are often written in legal terms and can be confusing. Make sure goals are clear, concise and have context so employees know exactly how their work relates back to the business.
2. Measures are chosen poorly: “Employees need tools in hand, not rods to the back,” says Barr. How success is measured should give clear indications of progress, and she suggests working in processes, rather than on them. That way, you don’t get bogged down in trivial details that – in the end – are more vanity metrics than anything else.
3. Not involving people: As with anything, buy-in is crucial. If employees don’t understand what you are trying to achieve, or what tools are at their disposal, they won’t follow along. “Involve teams in setting goals so they can really own it,” says Barr.
4. Lack of due diligence: Another major issue is the lack of due diligence. “Don’t just jump onto a dashboard for the sake of having one,” Barr says. Do your research, find a system that you can integrate with your goals and build on it from there. 
5. Assess performance with only two points of reference: Everything has a pattern of variability, says Barr, which means performance will have peaks and troughs that don’t necessarily indicate overall capability. You have to look at things over time, rather than just focusing on what has happened in the immediate past or the present. This prevents any knee-jerk reactions, she says. Which brings us to the next one…
6. Jumping on symptoms without looking at the root cause: Look below the surface to see why an employee’s performance is lagging, rather than just trying to treat the immediate side effects. Are they not feeling challenged? Are there personal issues at play? Have a conversation to see where the kink is and come up with solutions to smooth things out for the future.
7. Not making progress visible: Once the goals have been set, create a ‘roadmap’ of how you are going to get there. A clear sense of progress is the number one motivator for performance and productivity. Make sure people know when they are on the right track.