Why the Performance-Appraisal Revolution Matters
The trend toward dropping performance appraisals is igniting passions and pushback. Why? Because it cuts at the very heart of a long-entrenched relationship between employer and employee.
By Peter Cappelli
Anna Tavis and I have an article in this month's Harvard Business Review describing the roller-coaster ride that performance appraisals have taken over the past two generations and where they seem to be headed now: back to where they started.
The most interesting thing about this article so far has been the reactions to it, because they reveal something pretty profound about the values in the workplace. If you think about it, the performance appraisal is the heart of the interface between the organization and the employee, manifested through the relationship between the supervisor -- representing the employer -- and the individual. So the changes in performance appraisal reflect what it means to be an employee at different points in time.
The emerging approach is to dump the annual performance appraisal altogether; in part, because it seems to have failed at everything. Everyone hates it, yet it takes a lot of time and money to do; the results of it appear to be mainly driven by biases, primarily demographic differences and similarities between supervisor and subordinate; and it's hard to find evidence that it does any good.
Yet if you talk about dropping them, tempers often flare and people sputter that it would be a disaster without them. I've come to see that this reaction results from a challenge to the way many of us think about our relationship with work and with our employers.
Let's back up to the early years after World War II and the rise of the great corporations that institutionalized performance appraisals. In those days, jobs were for life, and for white-collar workers, the goal was promotion. There was little, if any, merit pay. Rewards came from climbing the corporate ladder. The appraisal process was designed to help develop candidates so that they could climb the ladder and then help determine who was ready to get ahead. It was supposed to be more like a coach and their players including the part where the coach decides who gets to start in the big games.
By the 1990s, that world was quite different. We had gone through a decade of what now looks like stupendous inflation in the 1970s, when annual wage increases to keep up with the cost of living became dramatic. With inflation at 10 percent, supervisors now had the ability -- whether they wanted it or not -- to differentiate those increases to really get the attention of employees: If you gave someone a zero increase, it had the effect of cutting their pay by 10 percent, and if you gave someone else a 20-percent increase, their real pay jumped by 10 percent.
The bigger change was in ideology. The growing interest in maximizing shareholder value and the increasing presence of financial thinking in the operation of big companies fueled the idea that employment is really an economic relationship: If you don't give employees a financial incentive to work hard, they won't do it. In that context, merit pay became the linchpin of the relationship with employees, and the purpose of performance appraisals was to determine merit pay. The goal was to measure past performance, document that measure and then hand out rewards based on it.
A related piece of ideology was the "A player, B player and C player" notion that job performance was really just a function of what employees brought with them to the job. So you'd better reward the A players or they would take their abilities elsewhere, and you'd better not spend money on the C players because it would just be wasted. Forced ranking was the logical extension of this notion, whereby even measuring how well everyone did wasn't necessary. Just find the A and C players by ranking.
Dropping performance appraisals -- as so many leading companies seem to be doing now -- cuts right at the heart of the idea that employment is an economic relationship and the notion that supervision is really just an accounting function: Total up the points and pass out the money. It's taking us back to an earlier idea that employees actually need to be managed and that the supervisor should be helping them improve their performance and develop their skills. Merit pay still has its place, but that role is simply to encourage the main goal of improving job performance and skills.
There are lots of reasons why efforts to drop performance appraisals generate lots of passion. Especially for HR professionals, for example, the systems they built around appraisal scores have to be rethought, and that will take work. But the main reason for the passion is that this new development challenges the very nature of what it means to be employees and how their employers deal with them.
Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania in Philadelphia. His latest book is "Will College Pay Off? A Guide to the Most Important Financial Decision You'll Ever Make."