Performance Reviews

Performance reviews have been an integral part of the corporate world for decades. You know them and love them, or perhaps you only know them.

Despite a steady stream of honest attempts to leave them behind, they just won’t disappear. With so many aspects of HR built on the assumption of a valid and regular performance review process, it’s likely reviews are not going anywhere, anytime soon. Odds are you’re going to regularly meet with a superior to discuss your job performance in some way, no matter what.

If you have a legal question about the validity of the performance review process in your employment situation, knowing more about the purpose, history, and ideal method of performance reviews themselves might help you learn where you stand, and where you go in the future.

Methods and particulars vary by organization, but all performance reviews are based on some recognized universal principles. These all get back to the best way to talk with an employee about his or her job performance, both for purposes of improvement, and for legal protections for the employer in case of complaints of wrongful-termination or discrimination.

History and economics have played important parts in the development of performance reviews over the years. When there were more people than jobs, the review process was focused on knowing which workers to release if needed, and which to encourage to stay. In those times of scarcity, the traditional performance appraisal with an emphasis on personal accountability tended to work well. However, in times (and fields) where workers are scarce and more in-demand, the emphasis of the review process shifted to “developing people.”

It was during World War II that the US armed services found it advantageous to identify and eliminate poor performers, and devised a method to document the process behind just that. This system was based on forced ranking: a method of identifying enlisted men who might make good officers. Following the war, these methods followed the GI’s home. In the 1940’s, approximately 60% of US companies used the same sort of appraisals to identify and communicate job performance levels.

Plenty of reasons drove the adoption of this standardized methodology. In the heavily-unionized labor world of the time, strict seniority levels determined pay raises. Merit scores could pick out the more apt candidates for promotion to management. It was all based on rewarding the “good” while telling the “bad” to move along, usually at the end of a stick with a pink slip on it. Any notions of personal development through the review process was an afterthought

However, a shortage of managers forced a shift in priorities. There weren’t enough managers to go around, so companies started using the review process as a method of not only identifying potential managers, but to actually develop employees into supervisors, and managers into executives.

A psychologist by the name of Douglas McGregor first proposed actively engaging employees in the review process during the 1950s.

McGregor’s idea: employees should, with feedback from their managers, set their own performance goals and track their own progress against those goals. It was hoped this process would develop the employee’s potential.

McGregor later coined the term “Theory Y” to describe this different approach.

The one drawback McGregor noted: Time. Following “Theory Y” to the letter would take managers up to two days per employee, per year.

General Electric – always at the cutting edge of American corporate management – started splitting appraisals into two areas during the 1960’s. The GE performance review process included separate appraisals for accountability and growth. This was intended to shine a light on the development of potential.

However, the pendulum effect started taking hold. The 1960’s management style focused so much on development of potential that establishing accountability for past performance seemed hopelessly old-fashioned and almost forgotten.

Then, inflation hit. In the economic world of the 1970’s, steadily-increasing prices made merit increases very consequential. It was important to not only have a job, but to be paid steadily more for doing that job just to cover basic living expenses.

Supervisors were given a great lever to use through the review process. Many were authorized to give increases of up to 20% or more. These raises applied to the strong performers only, and were used to elevate them over the background of average “satisfactory” employees.

Additionally, the impact of anti-discrimination laws raised the stakes for the review process. Unfairness in the advancement and reward process could – and sometimes did – result in costly federal litigation.

Forced Ranking

The famous Jack Welch brought forced ranking to GE. The goal was to reward top performers, accommodate the “satisfactory” ones in the middle, and tell those at the bottom to move along. It was a way to compensate for the “participation trophy” culture of the 1960’s and force the labeling of real differences in performance.

It was a brutal process. Welch coldly separated the “A” players (who were to be adulated); the “B” players (who would be accommodated); and “C” players, (who should be separated). The development resources only went to the “A” players at the top of the game. They had shown their potential by actually performing at higher levels than others. These high performers were chosen to advance into senior, upper-level positions.

However, this this paternalistic and strict approach didn’t seem to address one particular aspect of the problem of managing a corporation: There weren’t enough prospects for the executive suite. The pipeline had gone dry, starved by a laser-like focus on developing only the very top performers.

A study published by McKinsey pointed up a shortage of capable executives. It set the tone for appraising and rewarding job performance in the 1990s.

In 1993, federal tax legislation made executive salaries of over $1M less common by removing the tax deduction for any amount over that number. The law exempted any performance-based pay. This led to a shift to outcome-based income (bonuses) for executives. That sudden shift in focus to outcome-based compensation trickled-down to workers in the field. After all, it was their results most executives counted on to establish their own performance ratings.

By the 1990’s, it was estimated 60% of the Fortune 500 used a forced-ranking system. In the years since – and with the retirement of Jack Welch -- most have backed away from their former insistence on a strict A/B/C delineation. One reason: Employee hatred of the system.

Studies showed they hated numerical scores. Employees would rather be told they were “average” than branded a “3” out of a possible 5 points.

Wharton Business School’s Iwan Barankay showed that in a field setting, performance declines when people are rated against others. The ratings themselves seemed inaccurate.

The Return of People Development

Companies are under pressure to up their talent development efforts. This is doubly true at consulting and professional services firms.

With a tight labor market, keeping good people is once again important. Companies have been trying to reduce or eliminate “dissatisfiers.” These are the things that drive employees away, and are seen as reducing performance

At some companies, annual reviews have been replaced with feedback delivered right after client engagements. It’s seen as being more helpful to managers do a better job of coaching and allows employees to apply the advice more effectively.

The Inevitable Performance Review

There’s a strong resistance in HR against eliminating traditional performance reviews. That’s because HR itself is built on the assumption of a valid and ongoing performance review process.

Employment law experts have advised companies against throwing out the performance review in an effort to embrace some new method that might not stand up in court during an unfair termination suit, especially when the new methods might not address the problems inherent in the old.

Thus, it appears we’re stuck with the performance review process – pretty much the “classic” performance review process – for the foreseeable future. The differences come in how well this process is implemented, and the intentions behind it. The dual poles of the magnet will continue to be accountability vs. development.

How to Do a Performance Review

Here are some tips about what goes into a good performance review:

  • The performance review should contain few surprises. Any news of the employee’s positive or negative performance should have been communicated to him/her before the review.
  • An effective reviewer should discuss positive and negative performance points on a weekly or daily basis with the employee.
  • The formal performance review should be a chance to clarify the points that need discussion, and document the communication of those points, and the employee’s response to them.
  • Performance reviews might feed up into an annual raise, but meetings shouldn’t just be annual.
  • Quarterly reviews are more helpful, and expected. The employee should discuss performance and goals formally four times per year.
  • Goals should be set. Performance should be tracked against those goals.
  • Documentation is key. All assumptions underlying the performance review process rely on full documentation of goals, attainment, advisory of problems, and employee response.
  • The method behind determining goal attainment must be made clear to the employee and the reviewer.
  • “Average” is not outstanding. Employees who do what is expected should be considered “average.” Outstanding recognition requires more effort and distinction.
  • Performance reviews require preparation. Both parties should be prepared. To “wing it” is to fail.

Performance reviewers who take these tips seriously and focus on delivering results will develop a great tool to use to help manage and develop employees. It’s important to realize that the dreaded performance review process is so very critical to what a manager actually does. Perhaps It shouldn’t surprise us that so much hate is directed at an institution an practice at the center of the whole management discipline.

How Not to Do a Performance Review

You can gather from the points listed above that there are all kinds of wrong ways to handle a performance review. The wrong way seems the rule rather than the exception throughout most American companies. Many employees have gone their entire careers having never once experienced an accurate, helpful, valid performance review. Both sides tend to want to avoid anything real about the process, except in extreme cases when dismissal becomes necessary, and the reasons behind dismissal must be documented for HR compliance reasons.

This is sad and disturbing for a variety of reasons. It makes the performance review a dreaded burden for both sides. Managers will most often seek to avoid any conflict with employees, leaving their review at “You’re doing great,” or “Just keep up that training.” These are positive-sounding, non-confrontational things to say that neither hurt nor help in the short run. In the longer-term, they’re a waste like any other.

Perhaps the worst way for a manager to mess up a performance review is to miss an opportunity to advise the employee of the specific consequences of their actions, and to fail document it in a way that proves it was made clear to them. Employees must be advised and given a chance to respond. The cardinal sin of the performance reviewer is in “dropping a bomb” on an employee who never saw it coming, just because they need to trim staff or to serve some sort of grudge.

The reviewer needs to have advised the employee of their performance regularly through the preceding period, with the formal review only a chance to formalize the message that had already been sent. It’s also a good place to have the development conversation. You remember development, don’t you? Up there? Earlier in the article?

If you are an employee who feels shortchanged through an invalid performance review process, or if you’re a reviewer or employer with questions about the legalities around the performance review process, don’t suffer in silence. Post your legal need and help is available at UpCounsel. Our team of legal experts is hand-picked from the top 5 percent of all lawyers and paralegals in the US. Post your query and let our prime team look at your situation.