| Introduction | | | | process performance. This means that people are |
| If you're a change-minded senior executive looking | | | | praised and rewarded or cursed and punished for |
| for ways to improve performance, cut costs, or | | | | factors beyond their power to influence let alone |
| free up resources that can be redirected against | | | | control. |
| important issues waiting in the wings, you might | | | | Emphasizing Individual vs. Team and Task vs. |
| give serious thought to scrapping your company's | | | | Process |
| performance appraisal system. It devours | | | | One factor the author was sure would be cited, |
| staggering amounts of time and energy, it | | | | but wasn't, is that the classic performance |
| depresses and demotivates people, it destroys | | | | appraisal system emphasizes individual or |
| trust and teamwork and, adding insult to injury, it | | | | task-level performance instead of team or |
| delivers little demonstrable value at great cost. | | | | process performance. Appraising individual |
| Here's a quick and easy performance appraisal | | | | performance can be a divisive factor in an |
| cost-estimating exercise you can apply to your | | | | environment where genuine teamwork is required. |
| own company: double the number of employees | | | | Consequently, in times of change, retaining an |
| who receive appraisals, add three zeroes, and | | | | appraisal system that focuses on individual task |
| place a dollar sign in front of the resultant number. | | | | performance sends at best a mixed message |
| That's the cost of the performance appraisal | | | | when management calls for teams or wants to |
| system at your company. If you think $2,000 per | | | | focus on business process performance instead |
| employee is too high, don't double the number of | | | | of individual task performance. |
| employees, just add three zeroes. [ Lest you | | | | Fostering A Short-term View |
| think this estimating methodology too cavalier, | | | | Another factor the author thought would be cited |
| please know that two very thorough cost | | | | and wasn't is the short-term view that is inherent |
| estimates were submitted by respondents to the | | | | in annual performance appraisal systems. |
| e-mail survey that gave rise to this paper. One | | | | Essentially, annual performance appraisal systems |
| came in at $1,945 per employee and the other at | | | | ask of employees, "What have you done for us |
| $2,200. The latter included the costs of union | | | | this year?" Employee contributions over time — |
| participation so it was rounded down to $2,000.] | | | | past or future — do not enter into the |
| But you probably won't like that result either. | | | | equation. Little wonder, then, that Mike Hammer, |
| If you do scrap your company's performance | | | | the famed reengineering guru, could be heard |
| appraisal system you will accomplish more than | | | | lamenting the lack of a long-term view in one of |
| realize a sizable cost savings; you will also, in one | | | | his recent seminars. [ Mike could be heard uttering |
| bold move, unfreeze your organization's culture | | | | this lament in Boston, on December 4, 1995, |
| and eliminate one of the chief structural obstacles | | | | during the first offering of his new seminar, "The |
| to any changes you and your management team | | | | Process-Centered Organization." Mike was |
| might be contemplating. | | | | lambasting the media and the educational |
| The one thing you should not do is listen to those | | | | establishment for churning out young people with |
| who will implore you to let them redesign the | | | | a short-term, self-interested view.] |
| performance appraisal system to make it more | | | | Institutionalizing Existing Values & Biases |
| supportive of the changes you have in mind. | | | | A military officer with a Ph.D., who is stationed at |
| Some reading these words will consider the | | | | the Pentagon and who wishes to remain |
| previous comments outrageous and unfounded. | | | | anonymous, observed that performance appraisal |
| But, as Craig Brooks, the director of a Winona, | | | | systems serve to institutionalize the values and |
| Minnesota human services organization and a | | | | prejudices of those in power — and to protect |
| 26-year veteran of performance appraisal | | | | these values and prejudices from challenge. |
| sessions claims, "I could retire on the salary I | | | | Consultant Charles Ladd made this same |
| earned during those meetings." An exaggeration? | | | | observation independently of the officer. Both |
| Perhaps, but the point is clear enough: | | | | argued that this aspect of performance appraisal |
| performance appraisals chew up a lot of time and | | | | systems forms a structural impediment to cultural |
| money. On the other hand, they supposedly | | | | change, that it acts to maintain the status quo. |
| provide benefits that offset these costs. But do | | | | Fostering Fear and Lack of Trust |
| they? The Internet offered an unprecedented | | | | Directly related to the factors cited above is the |
| means of finding out and so, during the last two | | | | degree of fear associated with the appraisal |
| months of 1995, three e-mail messages were | | | | system. This ties to a lack of trust in one's boss, |
| posted in quick succession to several discussion | | | | and management in general, and leads to a |
| lists on the Internet (see the list at the end of | | | | phenomenon known as "malicious compliance," |
| this paper). The first message dealt with the form | | | | that is, a passive-aggressive stance of "tell me |
| and function of the "classic" performance appraisal | | | | what you want me to do and I'll do it" on the part |
| system — one where a manager appraises the | | | | of an employee. As one might expect, Deming's |
| performance of a subordinate or "direct report." | | | | dictum to drive fear out of the workplace was |
| The second proposed an informal cost-benefit | | | | frequently cited in this context. |
| analysis of such appraisal systems. It included a | | | | A Carrot-and-Stick Management System |
| starter list of costs and benefits as well as a call | | | | The source of the fear cited above owes to the |
| for additional costs and benefits from anyone | | | | fact that the carrot-and-stick nature of appraisal |
| interested in participating. The third presented a | | | | systems is mostly stick. Performance appraisals |
| summary and synthesis of all responses and | | | | become a permanent part of the employees' |
| some rather obvious conclusions. The bottom line? | | | | personnel folders. There, many people have |
| Performance appraisal systems provide | | | | access to them including prospective employers |
| questionable benefits at amazingly high costs. In | | | | elsewhere within the company, the human |
| one company alone, the costs were | | | | resources department (HR), and other executives |
| conservatively estimated at almost $100 million. | | | | and senior managers. Past appraisals exert a |
| The Benefits | | | | significant influence over status and standing, |
| The Accepted Mythology of Performance | | | | future assignments, and promotions. Thus, |
| Appraisal Systems | | | | although performance appraisal systems do not |
| From the viewpoint of senior executives, | | | | distribute much in the way of rewards, they can |
| performance appraisal systems are generally | | | | inflict great damage. Control of appraisals is largely |
| regarded as a necessary part of the organization's | | | | in the hands of the employee's supervisor. Savvy |
| management system. This condition seems to | | | | employees know that success hinges in large part |
| exist because of the widely accepted, generally | | | | on "psyching out the boss." They also know that |
| unquestioned benefits of performance appraisal | | | | when senior executives call for change, the |
| systems. If asked, a typical executive might | | | | marching orders, if any, will come from their |
| indicate the following benefits: | | | | supervisors. |
| 1. The system provides employees with an | | | | Redesigning Performance Appraisal Systems Is A |
| opportunity to receive feedback regarding their | | | | Sisyphean Task |
| performance, usually at least once a year and | | | | In short, for political, structural, and systemic |
| often on an interim basis during the year. This | | | | reasons, performance appraisal systems cannot |
| leads to reduced error and waste, increased | | | | function as intended. Worse, they seem to have |
| productivity, improved quality and service for | | | | an almost exclusively negative impact on the very |
| customers, as well as enhanced employee | | | | employees they are meant to help. This view of |
| motivation, commitment, and a sense of | | | | performance appraisals squarely contradicts the |
| ownership. | | | | mythology of performance appraisal systems. |
| 2. The system provides an opportunity for | | | | Further, the reasons performance appraisal |
| performance related discussions that include the | | | | systems fail to provide the benefits claimed for |
| following aims: setting work objectives for the | | | | them seem firmly rooted in the nature of |
| employee, aligning individual and organizational | | | | organizations and the behavior of people. Trying |
| goals, identifying training and development needs, | | | | to change these factors so that performance |
| and discussing career progression opportunities. | | | | appraisal systems will work the way they are |
| 3. The system standardizes performance | | | | intended is truly a modern-day version of |
| appraisals and makes them objective by providing | | | | Sisyphus's legendary task. |
| uniform processes and criteria. This further results | | | | All things considered, one would hope that |
| in a fair, valid, and legally defensible basis for | | | | performance appraisal systems are relatively |
| rewarding and recognizing individual performance. | | | | inexpensive. This is not the case. |
| 4. The system affords the corporation legal | | | | The Costs |
| protection against employee lawsuits for | | | | The costs cited by the Internet respondents run |
| discrimination and wrongful termination. | | | | the gamut from obviously quantifiable or hard |
| A perhaps less typical but more candid executive | | | | costs to soft costs or costs that are much more |
| might add a final benefit: the formal performance | | | | difficult to quantify. The preceding discussion can |
| appraisal system shores up an organization's | | | | be viewed in large measure as a discussion of the |
| hierarchical authority system. It gives the | | | | soft costs. The following discussion focuses on |
| supervising manager control over the carrots and | | | | the hard costs. These consist chiefly of the direct |
| sticks in what is essentially a carrot-and-stick | | | | and indirect expenses associated with the |
| management system. | | | | following activities: |
| The list of benefits above, with the exception of | | | | - preparing appraisals |
| the last one, represents an idealized view of | | | | - setting goals and objectives |
| performance appraisal systems, a view that is | | | | - conducting interim and annual performance |
| espoused by many but achieved by few, if any. | | | | reviews |
| Why? What is it about organizations that causes | | | | - reviewing at higher levels appraisals written at |
| performance appraisal systems to fall short of | | | | lower levels |
| this ideal? Can we or should we try to change | | | | - designing, printing, copying, filing, and distributing |
| things so that performance appraisal systems | | | | appraisal forms |
| work the way we want? Or is there a better | | | | - designing and communicating the appraisal |
| course of action? Answering these questions | | | | process |
| requires taking a rational look at the form and | | | | - training supervisors, managers, and executives in |
| function of performance appraisal systems, and | | | | the appraisal process |
| the effects such systems have on the very | | | | - handling post-appraisal appeals, grievances, and |
| people they are intended to help. | | | | lawsuits |
| The Reality | | | | A manager who works as a reengineering |
| | | | | specialist for a large overseas retailing operation |
| | | | used only the first three cost categories above to |
| | | | | derive an annual per-employee cost of $1,945. He |
| Figure 1 - A Basic Performance Appraisal System | | | | then reduced his company's 130,000 employee |
| | | | | count to 85,000 full-time equivalents (FTEs). He |
| The general form of a basic performance | | | | further assumed that only 60 percent of those |
| appraisal system is depicted in Figure 1. A | | | | FTEs actually receive a performance appraisal. |
| discussion follows. | | | | Even so, his calculations place the cost of his |
| Based on his or her perceptions, a manager | | | | company's performance appraisals at a staggering |
| prepares an appraisal of another employee. | | | | $100 million. As he pointed out, these are not |
| Appraisals typically have two components: text, | | | | out-of-pocket costs, but they do represent the |
| and a number. The number is usually the basis for | | | | cost of the time used. |
| determining the employee's merit increase (i.e., the | | | | Johann Hanekom, CEO of a 500-person subsidiary |
| size of the pay raise for the subsequent year). | | | | of a South African telecommunications company, |
| This is often quite modest and amounts to little | | | | indicated that the labor costs required to recover |
| more than a cost-of-living increase, an offset | | | | all operating expenses and burden at his company |
| against inflation. Moreover, differences between | | | | are pegged at $85 per hour. Using his estimate of |
| the maximum and minimum increases are also | | | | hours, the annual per-person cost of performance |
| quite modest. The merit carrot is not a very big | | | | appraisals at his company comes to $2,200. This |
| one. | | | | amounts to a company-wide cost of $1.1 million |
| Perhaps the most significant aspect of the | | | | per year. (Hanekom's estimate includes the cost |
| structure depicted in Figure 1 is that the appraisal | | | | of union participation.) |
| has as its primary input the perceptions of the | | | | Hanekom also suggested that the linkage |
| manager. Technically speaking, they are the only | | | | between merit increases and the performance |
| input. Given this model, it is obvious that if the | | | | appraisal system contributes to a form of |
| system is to work effectively the manager's | | | | structural inflation. Whether through union |
| perceptions must be objective, accurate, | | | | bargaining or the uncoordinated demands of |
| comprehensive, and free from any significant bias, | | | | people for decent ratings, wages and salaries |
| distortion or undue influence; otherwise, the | | | | increase more than would be the case if there |
| system is patently flawed. This leads to the | | | | were no performance appraisal system or if it |
| following assertion: | | | | were not linked to the annual pay increase. In |
| The structure of the typical performance appraisal | | | | short, performance appraisal systems provide |
| system makes managers who prepare appraisals | | | | financial leverage to employees and unions as well |
| the targets of efforts aimed at influencing, | | | | as to management. |
| shaping, and just plain manipulating their | | | | Conclusions |
| perceptions and the appraisals based on these | | | | A reasonable person would be hard pressed to |
| perceptions. | | | | argue that the benefits of performance appraisal |
| Several people have an interest in influencing a | | | | systems outweigh their costs. The costs are |
| manager's appraisal of a given employee's | | | | extraordinary and many of the supposed benefits |
| performance. The most obvious is the employee. | | | | cited do not withstand serious scrutiny. Of what |
| But there are others. These include other | | | | benefit or credibility, for instance, are career |
| employees who are being appraised by the same | | | | discussions in organizations where downsizing and |
| manager, and anyone with a vested interest in | | | | layoffs are the order of the day? |
| having a given employee receive a good or a bad | | | | Performance-related discussions between bosses |
| appraisal; for example, clients, customers, | | | | and subordinates do not require a formal, |
| mentors, co-workers, and other managers whose | | | | full-blown performance appraisal system. Indeed, it |
| own subordinates must compete for a finite pool | | | | can be argued that the real coaching and |
| of merit increase monies, plum assignments, and | | | | counseling sessions that shape and improve |
| increasingly limited promotion opportunities. In a | | | | employee performance occur informally, outside |
| word, the politics of performance appraisal can be | | | | such systems. The same can be said of goal |
| fierce. The preceding assertion may be elaborated | | | | setting and feedback. It is also questionable if |
| upon as follows: | | | | much of what passes for feedback in formal |
| Many efforts to influence the perceptions of the | | | | performance appraisal sessions is deserving of the |
| managers who prepare appraisals, and the | | | | term. [ For a quick look at how the concept of |
| appraisals they prepare, are independent of and | | | | feedback in the social sciences differs markedly |
| often have no relation to the performance of the | | | | from its technical origins, see my article, |
| person being appraised. | | | | "Feedback About Feedback," in the Human |
| People and politics are not the only forces tending | | | | Resources Development Quarterly (Jossey-Bass: |
| to negate the positive potential of performance | | | | Fall 1995). For a scholarly and well-researched |
| appraisal systems. There are also important | | | | examination of the evolution of feedback thought, |
| systemic or structural factors at work. | | | | see George P. Richardson's marvelous book, |
| An appraisal leads to a merit increase. The size of | | | | Feedback Thought in Social Science and Systems |
| the merit pool is limited and the distribution of | | | | Theory (University of Pennsylvania Press: 1991).] |
| these monies is typically according to some | | | | If feedback is viewed as information about actual |
| formula. Thus, in a performance appraisal system | | | | conditions compared against a set of reference |
| that allocates merit increase percentage on a | | | | conditions, and if the results are measurable and |
| five-point scale, not everyone can receive a five | | | | measured, what role does the manager really |
| because there isn't enough money available to | | | | play? If they are neither measurable nor |
| support such an outcome. This is a restraint, a | | | | measured, what role can the manager play? |
| "can't do." By the same token, the numbers | | | | The need for a basis on which to allocate the |
| assigned must fit within the limits of the available | | | | annual merit increase presupposes the need for |
| pool of merit monies. This is a constraint, a "must | | | | an annual merit increase. If this is indeed the case, |
| do." Restraints and constraints can also include | | | | the reasons for it need to be examined. If it |
| EEO and affirmative action considerations. | | | | serves as a cost-of-living increase, a hedge |
| Because merit rating numbers must be adjusted | | | | against inflation, this can be done on a flat-rate |
| to meet various restraints and constraints, the | | | | basis without the need for a performance |
| language and tone of the appraisals must in turn | | | | appraisal system. |
| be adjusted so as to be consistent with the | | | | If pay increases are warranted for other reasons, |
| numbers. From this follows an inescapable | | | | it is unlikely that they require a performance |
| conclusion: the honest, fair, valid, and objective | | | | appraisal system to administer. Bonuses or other |
| assessment of all employees is literally impossible. | | | | special increases can and should be tied to very |
| The structure, restraints, and constraints of the | | | | specific, very visible, very measurable results, and |
| system do not permit it. | | | | this doesn't require a performance appraisal |
| The preceding discussion looks at performance | | | | system. Profit sharing is another case in point. |
| appraisal systems mainly from a managerial | | | | Poor performers probably constitute less than 10 |
| perspective. But how does it look to employees, | | | | percent of the work force, so why incur the |
| and what are its effects on them? People | | | | expense of keeping book on the entire work |
| responding to the Internet queries provided the | | | | force? Moreover, keeping book on poor |
| following answers to these questions. | | | | performers does not require an elaborate, formal |
| Reductions in Productivity | | | | performance appraisal system. Worse, the books |
| Several people cited temporary reductions in | | | | kept on those who are not poor performers can |
| productivity in the aftermath of the appraisal | | | | backfire in court. As Craig Brooks wrote, "The |
| review sessions. One person estimated this period | | | | typical, traditional performance appraisal is |
| of reduced contribution lasts for about three | | | | worthless and, in fact, lawyers have told me the |
| months. An employee of the federal government | | | | appraisal itself quite often is management's worst |
| said this period lasts at least six months. Even if it | | | | enemy in disciplinary grievances and court |
| is assumed that such periods last no more than a | | | | challenges." Brooks is not alone. Several people |
| few days or weeks, and that they represent a | | | | pointed out that performance appraisal systems |
| decrease in productivity of no more than 10 | | | | might increase, not decrease the costs of |
| percent, the costs are still astronomical. | | | | appeals, grievances, and lawsuits. The legal |
| Erosion of Performance | | | | protection provided by performance appraisal |
| Tauo Jokinen, a product development manager | | | | systems seems questionable. |
| with Nokia, conjectured that performance | | | | Perhaps the greatest cost of all is that |
| appraisal systems actually erode performance | | | | performance appraisal systems silently mock |
| over time as a result of people endeavoring to | | | | senior executives who call for change. This is |
| set goals that are achievable, thus ensuring | | | | embarrassingly apparent when initiative after |
| themselves a decent appraisal. This might be | | | | initiative pleads to have the performance appraisal |
| viewed as a form of structural deflation regarding | | | | system changed to support its aims. Such pleas |
| performance, and it is quite reminiscent of the | | | | offer compelling testimony that performance |
| late Kenneth Berrien's view that management | | | | appraisal systems are seen as a basic device for |
| might control the lower limits of productivity but | | | | getting individuals to comply with the aims of |
| employees are clearly in control of the upper | | | | management. This emphasis on compliance is the |
| limits. [ Berrien's comments were made in the | | | | status quo that such systems maintain, no matter |
| context of a discussion about the balance of | | | | how much they are redesigned. This emphasis is |
| control between a supra system and its | | | | out of place in a world where the ability to elicit |
| subsystems, and can be found in Chapter VII of | | | | contributions from employees matters more than |
| General and Social Systems (Rutgers University | | | | the ability to ensure compliance. As a purely |
| Press: 1968).] | | | | practical matter, given the time lag between |
| Creation of Emotional Anguish | | | | changes in the aims of management and changes |
| Also cited were negative emotional states: | | | | to performance appraisal systems to support |
| worrying, depression, stress, and anguish (on the | | | | those new aims, it seems unlikely that changes to |
| part of those giving as well as those receiving | | | | performance appraisal systems can keep pace. |
| appraisals). After first acknowledging the "hard" | | | | In conclusion, performance appraisal systems |
| costs of performance appraisals, Harry Heflin, an | | | | could be eliminated with no harm done and with |
| engineer with Intersys who is also chairman of | | | | great economic and emotional benefit. |
| the IEEE Engineering Management Society in | | | | Consequently, change-minded executives should |
| Boston, wrote, "But I think the real cost is the | | | | not listen to pleas to redesign their company's |
| emotional anguish as everyone anticipates, | | | | performance appraisal system but should instead |
| prepares for, and works the process." | | | | give serious thought to scrapping it. |
| Damaging to Morale & Motivation | | | | The Internet discussion lists are named below: |
| Closely related to the emotional factors cited | | | | |
| above are the penalties paid in the form of | | | | 1. .tudelft.nl (business process reengineering) |
| decreased morale and motivation. These are | | | | 2. (change management) |
| deemed especially severe when the performance | | | | 3. (consulting) |
| appraisal system is seen as "bad" or unfair. An | | | | 4. (human resources) |
| element of unfairness cited by Charles Ladd, a | | | | 5. (learning organizations) |
| TQM consultant, is the use of performance | | | | 6. nceton.edu (TQM in manufacturing and service |
| appraisal systems to reward or punish people for | | | | companies) |
| what are really natural variations in system or | | | | 7. . |