Over the past few years, many companies have eliminated or overhauled the annual performance review. These decisions have often been categorically celebrated — there is no large constituency arguing for more annual performance reviews. The research firm CEB found that “95 percent of managers are dissatisfied with the way their companies conduct performance reviews.”[1] However, I remain a bit skeptical.

What were these companies going to do instead? Are they addressing a symptom or the root cause?

The elimination of performance review is a reaction to the “measure it and control it” attitude that has proliferated in the past twenty years.

Many organizations understand that we need a new way — but by eliminating the performance review companies are plunging themselves into a period of uncertainty and chaos.


Complexity & Control

Over the last twenty years, the business world has seen an unprecedented increase in information and a simultaneous increase in complexity and confusion. In reaction, many well trained MBA’s and other business types (count me as one!) have taught ourselves many different methods for planning, controlling and optimizing. This has driven an unprecedented rise in complexity.

BCG has done research to show how dramatic this shift has been:

 

The performance review has similarly become more and more complicated over the years. How many categories were you assessed on last year? I would bet most of you can not name the exhaustive list of criteria you were evaluated on. Nor could your manager — that’s why your performance still comes down to a few simple things:

  • do people like working with you?
  • does the person evaluating you have a favorable impression of your work?
  • do you have a strong reputation for what you are expected to do?

Almost everything in the business world has been reduced to a performance metric than can be measured and controlled. Yet, assessing talent remains largely an elusive mystery. Even identifying performance of a CEO is close to impossible. Only 21% — at most — of a companies performance can be directly linked to a CEO. Even then, some researchers believe it is luck still — because a CEO’s job is predicting the future and deciding whether to pursue strategy A or B. If assessing even the performance of the CEO is hard — how can a company truly assess performance at all levels?

Some of you may stop me here and say “my company is the exception — we have the best people!” You may be right — but this is almost impossible to test. There is no alternative scenario to test your organization with different people. This leads to a well-documented phenomenon called the halo effect — which in the business world — ascribes positive traits to people who happen to be in successful organizations.


Ditching the Performance Review

By re-thinking the performance review, companies are rebelling against the analyzing, controlling and measuring tendencies of the last twenty years — and a long-term trend since Taylor. These companies have taken the bold step to acknowledge that the business world has changed and they had to adapt. Whether they know it or not, these companies have taken the plunge into figuring out what the future looks like.

These companies may not fully know what that end state looks like, but I believe it will be harder than they realize. Take GE’s CHRO Susan Peters who said: “The world isn’t really on an annual cycle any more for anything.”[2] This seems to indicate that the reason for removing the performance review has more to do with the increased pace and exchange of information than trying to move towards a healthier and more successful reality. GE’s solution is to implement an app-based model where you can constantly get feedback from your co-workers. As Pascal-Emmanuel Gobry, a writer and fellow at the Ethics & Public Policy remarks, Constant feedback also means constant pressure.” [3] How companies manage the unintended consequences of these decisions remains to be seen.

Google’s former Chief People Office Laszlo Bock offers a different perspective:

Performance management as practiced by most organizations has become a rule-based, bureaucratic process, existing as an end in itself rather than actually shaping performance. Employees hate it. Managers hate it. Even HR departments hate it. [2]

Eliminating the performance review may be a leading indicator of the exhaustion from more rules, more analysis, more spreadsheets, more data and the illusion of control. However, the move to eliminate the performance review is a net positive for the business world and not for the reason you expect.

I don’t believe companies will figure out a magic formula for assessing talent in a better way (at least not in the near term future). However, the real benefit for these companies is the fact that they are accepting that the working world has changed and they need to figure out how to operate in that new world.


What Could the Future Look Like?

As complexity continues to increase, controlling and measuring will no longer suffice. The companies that succeed will be the ones that master the core principle that will be the driver for 21st-century governance:

TRUST.

Warren Buffet is one of the few Fortune 500 CEO’s that have fully embraced this. Compared to most companies, some would say his system is radical. His right-hand man Charlie Munger puts it best:

A lot of people think if you just had more process and more compliance — checks and double- checks and so forth — you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust

Consider the following:

  • Over 50+ CEO’s report to Buffett and they only have to submit monthly financial statements and the free cash flow generated by operations
  • The CEO’s of individual businesses do NOT have to meet with anyone from HQ, ever. They don’t need to submit strategic plans.
  • The global HQ does not have HR, a general counsel, PR, Investor Relations or corporate strategy

He prides himself on his bare bones operations. Here is his modest corporate staff in 2016:


Change is Hard.

Unfortunately, you cannot appoint Warren Buffett and Charlie Munger to be co-CEOs of your organization. Nor can you manufacture trust and magically transform your culture by eliminating performance reviews. Building a strong culture around a set of values that reinforces behavior is hard work — and may even be harder if people have become accustomed to yearly cycles and clear expectations of how they are assessed.

The language many companies are using around eliminating performance reviews signals that leaders are still re-imagining a future state based on the current system. Most of today’s business leaders were promoted through this system — one that was built on structures, processes, and hierarchies — and are assuming that changing a few of the policies will position the company for long-term success. They are likely not anticipating the state of increased uncertainty and confusion

CEB has done some analysis on the companies that have eliminated rating and found less than positive results:

  • Less than 5% of managers are able to effectively manage employees without ratings
  • Managers have more time, but time spent on informal conversations decreases by 10 hours
  • Employee engagement drops by 6%

This has not stopped companies. Eliminating the performance review has shifted from a bold move to conventional mainstream practice. The increasing popularity of eliminating performance reviews with the proliferation of low-cost HR technology ensure that this trend will not slow. Not to mention the ability to placate an increasingly restless millennial workforce.


What does the future look like?

Companies are being forced to give up more control to employees, whether they want to or not. The performance review is the start of a broader trend. To cope with increased complexity, companies that succeed will need to be self-governing, focused on trust, values, and behavior.

The inevitable failure of the elimination of performance reviews will force companies to re-think the types of people they hire, re-define how they approach culture and even re-think the way people are organized and deployed to solve problems across their organizations. These are big questions that some organizations are likely dealing with, but have not fully tackled.

I expect three kinds of companies to emerge over the next several years:

 

Many companies shifting to “Company 2.0” are eliminating performance reviews but they are layering new systems and behaviors on a foundation that prioritizes policies, processes, and controls.

The companies that react quickly and continue to make bold moves — beyond eliminating the performance review — will create the future. The journey will be hard — but it will be one that ultimately determines which companies survive in today’s economy.

As Warren Buffett says about his business strategy, “find good people and trust them.” Trust is going to be the competitive advantage of the 21st century and if leaders are not willing to find good people and trust them, they will struggle to build a scalable, sustainable modern organization. Getting rid of the performance review is a necessary first step, but companies have a long way to go.

[1] “In a big move, Accenture will get rid of annual performance reviews and rankings” Washington Post, 21 July 2015

[2]Why The Annual Performance Review Is Going Extinct” Fast Company, 20 October 2015

[3] “Why eliminating annual performance reviews will make your job worse” The Week, 20 August 2015



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