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In Defense of the Performance Review July 31, 2009

Posted by Tim Rodgers in Management & leadership.
Tags: , , ,

This one is inspired by a column from Stanford University’s Graduate School of Business Professor Jeffrey Pfeffer in the August 3 issue of Business Week, “Low Grades for Performance Reviews.” See: http://www.businessweek.com/magazine/content/09_31/b4141080608077.htm

Prof. Pfeffer describes the widespread dissatisfaction and cynicism associated with the annual performance review, and provides several reasons why that bad reputation is deserved. These include hiring manager bias (managers don’t want to admit they made a hiring mistake), demographic bias (preference for same gender, race or social group), and the difficulty (impossibility?) of objectively and unambiguously measuring any person’s performance in a typical collaborative workplace. Regarding the last point, I agree that it’s becoming far less common to find two people in a work group with the same job description whose performance can be objectively compared.

I admit the process has structural flaws, but I wouldn’t recommend eliminating the practice, and, to be fair, I don’t believe Prof. Pfeffer is suggesting that either. He actually provides some great recommendations about how to optimize the effectiveness of performance reviews for those “locked into” the system.

At a basic level, I believe it’s essential for managers to assign objectives to their subordinates, and provide regular, informal feedback regarding progress toward those objectives. I believe those objectives should be measurable with no mystery about whether they were achieved or not. I also believe that the “how” is as important as the “what,” in other words the ends do not justify the means. Effective collaboration and efficient use of technology and organizational knowledge can and should be recognized. Finally, I believe that biases can be minimized by seeking “360 degree feedback” from multiple sources.

I don’t see any danger in this kind of performance review system. Managers are ultimately responsible for the performance of their teams, and that means communicating expectations, providing feedback, and working to close the gaps. I think the trouble comes when performance reviews are distilled to a single rating, and then linked to compensation through a forced ranking methodology.

I’ve yet to figure out a better alternative. It seems to me that each year a company sets aside a certain amount of money for compensation, specifically individual pay increases. For this discussion I’ll ignore sales commissions and company-wide bonuses. Managers need some way to allocate this fixed amount of money, and it seems to me that “performance” has to be a major consideration. I think “team performance” should be more important than “individual performance” in that equation, meaning that teams that meet or exceed their goals should be allocated a larger share. At that point you can either give all members of the team the same increase (more likely, percentage increase), or, once again, allocate a greater share to higher-performing individuals.

I know the alternative would be giving everyone in the company the same increase, with no differentiation based on team or individual performance. “We’re all in this together, and we share the pain and rewards equally.” It sounds good, and it would certainly make life easier to work in that kind of utopia. Obviously that won’t work for those people, often the majority, who need a direct link between their achievement and personal reward, in whatever form is meaningful for them.

Performance reviews can be objective, but when performance is used to distribute a fixed pool of rewards, the process must become subjective. It’s just another challenge for the management team.



1. Performance Objectives and the Annual Review « Managing in the 2000s - January 29, 2012

[…] I like the idea of a contract-style performance review (See In Defense of the Performance Review.) In theory it ensures that if employees meet their objectives, and those objectives are aligned […]

2. Four Reasons for a Performance Review | Managing in the 2000s - February 27, 2014

[…] with the process, and whether it can be improved. I’ve written about this topic before (see In Defense of the Performance Review), but at the risk of repeating myself, I’m going to briefly re-visit this […]

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