3 Reasons Why Performance Management Is Broken

This post was updated on June 24, 2016.

Disengaged workers, high turnover, low performance — these are all organizational problems managers face on a daily basis. These challenges are what current performance management systems are designed to address, except for one major issue: research shows that current performance management systems are making these problems worse. In order to improve current performance management systems, it’s important to first understand why they just aren’t working.

1. Performance Reviews Actually Decrease Employee Performance

At least 30% of the performance reviews studied resulted in decreased employee performance as opposed to increasing performance according to research published in The Psychological Bulletin. Another study by the Society for Human Resource Management found 90% of performance appraisalsproduce only a very low percentage of top performers and create far more pain than they do productivity.

Read: GE re-engineers performance reviews and pay

Performance reviews not only fail to move the needle, they result in serious detrimental effects on company culture. Rating employee contributions the same way you would a restaurant actually triggers the “fear or flight” mode in people, tapping into the limbic brain and sparking defensiveness, according to David Rock’s research. “Ratings detract from the conversation. If an employee is sitting there waiting for the number to drop, they’re not engaged in the conversation, at best. At worst, it can actually make them angry and disaffected for a period of up to a year,” says former chief talent officer Caroline Stockdale.

The information given to employees during the appraisal often can spark the psychological phenomenon present in rebellious teens: a psychological reactance that has a direct impact on the correlation between how often someone is told to do something and their productivity. Simply having performance appraisals can reduce performance. If performance review systems are actually causing harm or increasing costs with little return, losses can actually damage the morale within an organization — something that cannot be quickly fixed with time or money.

2. Current Systems Are Ineffective

58% of organizations rated their current performance management systems as “C Grade or below” and only 28 percent believed their organizations were actually effective at performance management itself. While the normal distribution is popularly used in many settings and is easy to understand, research has shown it simply does not accurately reflect the way people perform. Even more concerning is that using the bell curve as a framework incentivizes the “middle 80%” of performers to remain in the “average” section because they may feel unable to become a top performer. Furthermore, research conducted by O’Boyle and Aguinis revealed that performance in 94 percent of groups studied exhibited a pattern closer to the “Power Law” distribution.

In order to effectively manage and motivate employees, abolishing the bell curve framework and embracing models that closer represent performance is important in rewarding top talent while developing systems for those who show potential for top performance to improve. In fact, companies that invest in providing development planning and coaching to employees have shown to have a 33% less voluntary turnover and generate double the revenue per employee.

Current systems also fail to treat employees as individuals and take a one-size-fits-all approach to evaluating, rewarding, or penalizing employees. In a knowledge economy, an individual’s contribution can have a greater impact and personalized experiences are the norm. Failing to provide more custom, tailored methods of measuring individual contributions leads to decreased performance and disengagement. 

3. Subjectivity Results In Unfair Performance Ratings

In a study about the structure of job performance ratings, researchers found that 62% of the variance in performance reviews ratings are a result of individual raters’ peculiarities of perception–not actual performance by the employee. There are three human errors that performance reviewers are prone to: halo, leniency, and recency.

The halo error refers to the tendency to generalize about the performance of an employee across independent dimensions of work without compartmentalizing strengths and weaknesses. For example, if an employee is consistantly late for work, the reviewer may develop a general impressionthat the employee is lazy without objectively taking into account different areas of performance–for example, achieving higher customer satisfaction ratings among customers.

The leniency error refers to the reviewer’s tendency to lean towards assigning either disproportionately higher or lower ratings to an employee. Similar to the halo effect, the leniency error exposes a reviewer’s biases about that employee: good or bad impressions generalize across areas of performance. In other words, reviewers can unconsciously end up playing favorites. Furthermore, studies show that reviewers are also biased based on their perceived role within the organization: peers review very differently than managers and current systems that combine those ratings without taking these biases into account lead to very skewed results.

The recency error refers to a manager’s tendency to base an employees’ overall review off of the most recent impressions and occurrences over previous work. Since all people are prone to being influenced by their current emotions, designing processes to help reduce the likelihood of this error are crucial to avoid skewed performance reviews.

By first understanding the different ways current performance management systems are failing to lead to results, companies can begin implementing more customized evaluations that resonate with employees. By designing programs and using new tools to help reduce subjectivity, create more opportunities for growth, and eliminate homogenous ratings, companies can dramatically improve culture and performance of their workforces.