Issue: Performance Reviews Performance Reviews By: Holly Rosenkrantz Pub. Date: March 11, 2019 Access Date: September 24, 2021 DOI: 10.1177/237455680508.n1 Source URL: http://businessresearcher.sagepub.com/sbr-2022-109219-2918905/20190311/performance-reviews ©2021 SAGE Publishing, Inc. All Rights Reserved. ©2021 SAGE Publishing, Inc. All Rights Reserved. Are they still an effective management tool? Executive Summary The annual performance review, which has been part of the American workplace for almost a century, is evolving in the digital age. While some high-profile corporations such as Adobe, Deloitte and GE have garnered attention for announcing they will no longer use yearly reviews to evaluate employees, the practice remains intact at most mid- and large-sized companies. Performance reviews remain popular because they are widely considered an effective tool for determining promotions, salaries and bonuses – and also for encouraging underperforming workers to improve and shedding those who do not. Because these reviews can improve performance by requiring managers to communicate their expectations and goals, many companies now do evaluations more than once a year and have added elements such as informal conversations – sometimes called check-ins – to the process. Key takeaways include: Performance reviews entered the business world after they were already a standard practice in the U.S. military, but have changed with the times, reflecting popular cultural trends and the latest theories of human behavior. In recent years, many companies, including GE and Microsoft, have stopped using forced rankings, a once-popular system in which managers have no choice but to give a pre-determined number of workers the lowest ratings. Internet-based companies such as Facebook and Warby Parker have modernized the review process so that the reasons for pay raises are clearer, managers do not discriminate against women and the approach is less top-down. Full Report Warby Parker and co-CEO Neil Blumenthal have introduced informal elements to the review process, including asking employees to rate their happiness on the job. (Bryan Bedder/Getty Images for Lucky Magazine) Dick Grote will never forget his first performance review. Grote was a young industrial engineer at General Electric, and he met with his boss in a one-on-one meeting that typically corresponded with the annual appraisal. Grote – now a management consultant – can recall the meeting so easily that one might think it occurred last Page 2 of 11 Performance Reviews SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. week, not half a century ago. He still has his copy of the report that his boss handed him; sometimes he carries it in his coat pocket and shows it to people. Back then, GE was known for its rigorous performance evaluation system. Grote thought he was doing well – until his boss turned their meeting into something of a dumpster fire. “It was devastatingly bad,” Grote says. “I was not doing a good job, and here was my boss telling me I wasn’t doing a very good job.” What made the review particularly painful was his boss’s answer to the final question on the appraisal. All GE reviews ended with “Would you hire this person today?” and a box for Yes or No – and Grote’s boss had checked No. “I was very embarrassed,” Grote says. “I wanted to dig a hole and bury myself in it.” But Grote credits the negative review with forcing him to shape up and meet GE’s expectations. He says he immediately upped his game and remained with the company for five years, until United Airlines recruited him. Today, Grote advises businesses on how to get the most out of their employees, and he is an evangelist for regular appraisals. “Performance reviews are an ethical obligation of leadership,” he says. “Every person who works for an organization deserves to know the answer to the question, ‘How am I doing?’ ” Performance reviews have been a staple of U.S. business culture for nearly a century, but they are a fraught practice. Managers and employees both tend to dread the ritual. And in today’s workplace, many employers consider the traditional appraisals old-fashioned and one-dimensional. 1 It is no surprise that several high-profile companies in recent years have gone out of their way to make it known that they have dropped yearly performance evaluations (“In Big Move, Accenture Will Get Rid of Annual Performance Reviews and Rankings” read one typical headline). 2 Other businesses have been reassessing their continued use. Yet performance evaluations remain in force at the majority of mid- and large-sized U.S. companies because reviews have evolved with the times and, as Martin Conyon, a management professor at Bentley University in Massachusetts, points out, they are still considered the best method for determining whether someone gets a raise, gets promoted or gets fired. Worker Quits on the Rise Annual number of employee quits, in millions, 2010-18 Note: Number for 2018 is an estimate. Source: Roy Maurer, “Why Are Workers Quitting Their Jobs in Record Numbers?” Society for Human Resource Management, Dec. 12, 2018, https://tinyurl.com/y42srkpn The number of employees in the United States who have voluntarily left their jobs has risen every year since 2010. Page 3 of 11 Performance Reviews SAGE Business Researcher ©2021 SAGE Publishing, Inc. All Rights Reserved. At a time when research shows that company loyalty is at historic lows, many executives say performance reviews can help create a strong workforce while also setting up a system for rewarding and retaining stellar employees. 3 Reviews also establish a documented history of how someone has performed at a company, something that lawyers and HR experts say can become crucial evidence in legal disputes. And at companies where reviews have disappeared or gone out of regular use, it is often the employees who clamor for reinstating them because they want managers to give them direct feedback on how they are doing, something that often only comes with a formalized process. 4 “Properly designed, performance reviews are good for companies and good for employees,” Conyon says. “If you think about this as a talent management system, how else are you going to do this?” The use of performance evaluations in large-scale organizations began a century ago in the U.S. military. 5 During World War I, the military began a “merit system” to weed out subpar soldiers and transfer or discharge them. Later, in the run-up to World War II, the military introduced a ranking system to figure out which soldiers could be moved into leadership positions. 6 Guiding these evaluation systems was the principle that the men who possessed good soldiering and leadership qualities were born that way. In other words, someone either had it or didn’t. 7 With the end of World War II, the practice of rating and ranking soldiers migrated to the world of business, as did many of the former military leaders who had been conducting them. About 60 percent of all U.S. companies were using annual performance reviews at that time, a number that swelled to 90 percent by the 1960s. 8 These companies, like the military, used the yearly evaluations, and the process of rating employees’ strengths and weaknesses on something like a 1-5 scale, for informational purposes. Companies were not so much focused on improving an employee’s on-the-job performance as on determining the composition of the company’s workforce – the weak links, the average players and the best and brightest. Companies would, in turn, use this information to shed those they considered liabilities and reward the higher-performing workers with pay raises and promotions. 9 Using performance rankings to terminate swaths of underperforming employees did not come into play until the 1980s. General Electric CEO Jack Welch brought attention to this no-holds-barred approach, and he adhered to a survival-of-the-fittest view of labor management that relied on a system formally known as the “vitality curve,” but more often called “rank and yank” or the forced ranking system. 10 The idea was that the company should be in a continuous quest to attract, hire and retain the highest performers, and that such a quest – a “war for talent,” as the consulting firm McKinsey famously dubbed it – would lead to a stronger company year after year. 11 Although GE was one of many corporations to use this subset of the traditional annual review, Welch, who served as CEO from 1981 to 2001, helped associate his company with it. 12 Under the forced ranking system, employees are evaluated annually, managers give subordinates a numerical rating and each worker is ultimately placed along a continuum, from best to worst. The result is a bell curve, and the star employees get salary increases while the underachievers – 10 percent in GE’s case – are shown the door. 13 “There is no sugarcoating this,” Welch wrote in 2005 in his book “Winning.” “They have to go.” 14 Watch video with professor Loizos Heracleous on Jack Welch’s approach to personnel management: As it turns out, the forced ranking method of review became popular because of a problem that arose with the onset of annual performance appraisals, one that still exists today. When managers rate employees, they are often reluctant to give workers below- average ratings and instead rate most as average and a handful above average. 15 By forcing supervisors to stack employees against each other according to a quota system (typically 10 percent at the bottom, 70 percent in the middle and 20 percent at the top), the forced ranking system left managers with no choice but to identify a company’s supposed deadwood.