A couple years ago, The Washington Post ran a headline, “Study finds that basically every single person hates performance reviews” (2014). It’s funny because it’s true, but also because we don’t need research by a team of university psychologists to tell us that; we already know everyone hates performance reviews. What many people in business don’t understand is that the annual performance review and merit increase actually has a massive negative impact on employee engagement.
There is opportunity for improvement, and companies like GE, Deloitte, Cargill, Eli Lilly, Adobe, Lear, and others have already transitioned to a new method. However, it would be a mistake to simply jump into offering solutions and alternatives without first discovering the root of the problem and the ideal target state. We have identified a problem and the need to change, so this is a perfect opportunity to show how lean principles can help with HR and people issues. To do that, I’ll walk you through the first six steps of Strategic Problem Solving (the Lean Support Solutions version of A3 problem solving). We are also putting together a short video to help you better understand Strategic Problem Solving that will be available as a free downloadable tool on LeanSupportSolutions.com.
Step 1. Reasons for Action:
In this step, we take a close look at WHY we need to change.
- Annual performance feedback is insufficient and ineffective (CNN Money, Sahadi, 2015)
- Monetary incentives (merit increases) fail to improve performance (Dan Pink, 2009/Harvard Business Review, Kohn, 1993)
- Inefficient use of manager’s and employee’s time (Deloitte, 2015)
- Ratings can be highly subjective, biased, and perceived by employees as preferential (The New Yorker, Vara, 2015)
Step 2. Current State:
Current State is a clear definition of how things are now.
- Employees feel penalized for past mistakes, most of which were addressed and corrected at the time the mistake was made
- Managers feel pressured to provide a uniform rating at the direction of upper management, and to avoid the appearance of favoritism
- Employees believe managers “play favorites” and are biased in their ratings
- Writing and delivering an annual review consumes about 28 hours per employee (Deloitte estimated it used an average of 2 million hours per year on annual reviews!)
- The average merit increase (2.3%-3%) is in essence just a cost of living adjustment (Ere Media, Irvine, 2013)
- Most leaders already provide ongoing feedback, causing redundancy for the annual review
Step 3. Problem Statement:
Now that we have identified why change is needed, and defined how things are now, we are able to zero in on the root of the problem.
- Annual performance reviews are an ineffective use of time and resources, causing anxiety for both employees and managers, and failing to achieve the goal of improved performance
Step 4. Target State:
This is where you brainstorm how things would go in an ideal situation.
- Leaders provide regular feedback in structured, one-on-one coaching sessions with employees (business.com, Hearn, 2016)
- Managers and employees set goals, monitor progress, and make adjustments together during coaching sessions
- Employees feel empowered and accountable to achieve goals, propose solutions, and self-correct
- Open, continuous communication builds trust, promotes engagement, and motivates staff to improve performance
- Employees receive fair and competitive wages and compensation in accordance with market and cost of living adjustments (instead of increases linked with job performance)
Step 5. Gap Analysis:
State the difference between your current state and your target state.
- Annual performance reviews are ineffective due to lack of lasting motivation for performance improvement, time lost in preparing and delivering reviews once per year, and the perception of favoritism due to the subjective nature of ratings
Step 6. Experiments/Action Plans/Ideas:
This is where you brainstorm solutions and look at all the possible courses of action that can help you bridge the gap between the current state and the target state.
- Replace annual reviews with regularly scheduled coaching sessions (monthly, quarterly…) that use a structured approach
- Replace “rating” performance with a discussion on past and future work. Emphasize strengths and mitigate weaknesses while focusing on gaining new skills
- Ask open ended questions like “How did you stretch your limits this month?” or “What do you feel was your best accomplishment this month?”
- Replace annual merit increases with annual COLA, and semi-annual market research adjustments; if you can afford to, set your market adjustment higher than mid-range
Deloitte, an international firm of over 200,000 employees, eliminated a counterproductive employee evaluation system and replaced it with an effective management tool. This tool incorporates focused communication on a regular basis, and the result is improved performance and employee engagement, which is nearly identical to Adobe’s success. I’d love to have a discussion about this with you in the comments section below. If your company needs help with this, or other change management initiatives, Lean Support Solutions is here to help.