Evaluating Performance Evaluations

Employee evaluations that extend beyond the end-of-year ''to-do'' list improve performance.

“It’s the most wonderful time of the year.” Right?

Both lovers and haters of that ubiquitous holiday carol will agree on one thing: the song’s title is definitely not referring to performance-review time. But while the process isn’t a typical perennial favorite of employees, an upcoming study from Mercer Human Resource Consulting suggests that many employers are equally frustrated with the task.

In the consultancy’s Effective Performance Management Practices Survey, in which more than 300 large North American companies assess their performance-measurement systems, one-third of the participants say their system is either completely (one percent), or to a great extent (33 percent), effective in achieving the company’s desired results. About half (48 percent) claim their system is effective to some extent.

The rest—almost a fifth of those surveyed— assert that their system is only a bit effective (15 percent) or not effective at all (three percent).

What exactly is the problem? According to the study’s findings, while company management is great at critiquing employees’ performance, they are not as adept at improving the evaluation system.

Based on the survey results, it appears many managers merely go through the performance management motions as a routine—an annual event. Consider that more than three-quarters (78 percent) of workers surveyed attest that their managers routinely conduct annual performance reviews and communicate performance feedback and ratings. Yet only one-quarter (26 percent) say managers provide ongoing and constructive feedback and coaching.

That’s not good enough according to employees want to know how to do better. Asked which single part of the performance-management system they would most like to improve, 25 percent cited performance planning. Another 14 percent cited ongoing feedback and development. Other priorities for change include leadership commitment and management accountability (11 percent), consistency between raters (11 percent), training and communication (9 percent), and automation (8 percent).

“Performance management should be an ongoing process, not a one-time event,” says Colleen O’Neill, who leads Mercer’s U.S. talent-management practice. “Companies are missing a tremendous opportunity to enhance both their employees’ performance and their business results if they view performance management only as the annual performance review.”

Of the companies in the survey that appeared to have the most successful review programs, two things stand out. One: engaged executives. “Performance management is often viewed as something ‘the top tells the middle to do to the bottom,’” says O’Neill. In fact, direct engagement by top brass is critical to success, say Mercer officials.

The other key factor in polishing performance management is the ability to differentiate performance among workers. Sound obvious? Careful: Before depositing that recommendation in the circular file, ask yourself how many employees came out with low ratings during the last round of reviews. “Good performance management systems equip managers to differentiate reliably between strong, average, and weak performers,” O’Neill notes. “Unless your business results are simply off the charts, the majority of your people should not be rated ’4′ or ’5′ on a scale of 1 to 5.”

It seems the key to devising an effective performance management program is serious thought about a company’s specific needs. Translation: don’t run to the nearest “best practice” report and implement whatever plan your model company uses.

“Many organizations go about [improving their performance-management systems] the wrong way,” explains O’Neill. “They focus only on revising the appraisal form or copying the rating scheme used by a ‘best practice’ company. In truth, the system that works for one organization may not produce the same value in another.” After all, she says the goal is to “produce an edge that competitors will find difficult to replicate.”

Another new survey, from PricewaterhouseCoopers LLP, reports that aligning human-resources strategies with business strategies ends up in higher profits.

Specifically, the study found that companies with a documented HR strategy squeeze out 35 percent more revenue per employee than in companies without a similar HR strategy spelled out. Plus, say PwC officials, documented HR strategies are linked to more effective reward systems, better performance management systems, and reduced absenteeism.

It’s clear that more companies are finding the link between people management and the bottom line. One sure sign: In this year’s PwC study, 43 percent of employers said they track employee satisfaction—up from 37 percent in 2000 survey.

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