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Performance Management

Published December 2007

Taking Aim at Performance Appraisals

Josh Bersin

Spurred by changing workforce demographics and emerging technologies, talent managers are re-examining performance management processes. Some organizations are ditching the competitive performance appraisal and targeting coaching and development in order to hit the high-performance bulls-eye.

In most organizations, the primary focus of performance management is to fairly rate employees based on their performance and potential, and then to use this information to implement consistent and equitable compensation. This assessment is done through the performance appraisal process. Based on a documented ratings system, the performance appraisal, usually conducted once or twice a year, is designed to differentiate people in a fair, justifiable and defensible way based on factors such as delivery on goals, overall work output and work behaviors. This is often done through a standardized ranking system.

Over the last few decades, due largely to influence from companies such as GE, organizations have added a competitive approach to performance appraisals. For instance, employees are placed into categories such as the top 20 percent or the bottom 10 percent in order to force differentiation. Employees in the bottom category must improve or leave the organization. On the other hand, high performers and high potentials receive higher compensation and promotion opportunities. Theoretically, such differentiation instills a competitive environment and motivates employees to work harder and to consciously focus on improving their skills.

But there is also a second important goal for performance management: to create business alignment, develop people and promote strong working relationships between managers and employees. These goals are based on the assumption that each employee has the potential to improve and that it is the manager's job to identify and develop this potential.

In theory, both goals should coexist in a performance management model. But, in most company cultures, those processes related to the performance appraisal receive higher priority and emphasis those related to coaching and employee development.

Sales organizations thrive in environments based on competitive evaluations. Boomer employees are characteristically self-motivated and have learned to tolerate a competitive approach. Retailers regularly find that sales increase when high-volume performers are promoted.

However, research points to growing evidence that a competitive approach to performance management will not work in years to come. The different work values of young employees, critical talent shortages and geographically dispersed workforces are just a few of the factors causing forward-thinking organizations to change their thinking about performance management and the role of the performance appraisal.

Highest-Impact Performance Management Processes

Through our talent management research, we identified seven interlocking processes that comprise today's performance management. While few organizations use all seven, most do incorporate several of these processes into the performance management function.