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Should you use performance ratings for employees?

Man in black suit holding a card with 3 yellow stars on it.

The use of employ­ee per­for­mance rat­ing is with­out doubt the hottest top­ic of debate in per­for­mance man­age­ment cir­cles at the moment. Should you use an over­all per­for­mance rat­ing as part of your employ­ee reviews or appraisals?

In many ways it seems an obvi­ous thing to do — most com­pa­nies want an easy way of under­stand­ing who their good and bad per­form­ers are. Indeed, the 2014 E‑Reward per­for­mance man­age­ment sur­vey found that 77% of organ­i­sa­tions used employ­ee per­for­mance rat­ings. But there is now an increas­ing back­lash against rat­ing per­for­mance, and some high pro­file com­pa­nies such as Adobe, GE and Microsoft have aban­doned them.

The Prob­lem with Employ­ee Per­for­mance Ratings

Some stud­ies have found that per­for­mance rat­ings actu­al­ly demo­ti­vate employ­ees and neg­a­tive­ly impact per­for­mance, except for those peo­ple rat­ed at the high­est end of the scale. Fur­ther­more, research into neu­ro­science has found that per­for­mance rat­ings acti­vate a flight or fight response in the brain and decreas­es sub­se­quent performance.

Researchers have also found that employ­ee per­for­mance improves through good qual­i­ty feed­back and that assign­ing a per­for­mance rat­ing tends to pre­vent that feed­back from being tak­en on board. The rat­ing is what the employ­ees remem­ber after the event, and not the dis­cus­sions that went with it.

A final prob­lem with per­for­mance rat­ings is that they are large­ly sub­jec­tive and prone to a num­ber of proven rat­ing bias­es such as the​”con­trast effect”, halo and horns effect”,​”sim­i­lar-to-me effect” and​”cen­tral ten­den­cy bias”.

Why Per­for­mance Rat­ing Can Be Useful

Despite these prob­lems, many organ­i­sa­tions are still using employ­ee per­for­mance rat­ings. The main argu­ments for rat­ing per­for­mance are:

  • It pro­vides a con­ve­nient way of man­ag­ing per­for­mance relat­ed pay — although there are cer­tain­ly a num­ber of ways you can man­age rewards with­out per­for­mance rat­ings.

  • It enables organ­i­sa­tions to under­stand who their top per­form­ers are for tal­ent plan­ning purposes.

  • It can pro­vide sup­port­ing evi­dence when tak­ing action against poor per­form­ers (e.g. in dis­missal cases).

  • It lets employ­ees know where they stand in rela­tion to their peers.

Should You Rate Employ­ee Performance?

This is the key ques­tion, and there is no right answer as it will depend on what your ulti­mate goals are for your per­for­mance man­age­ment process. Our advice would be to ques­tion whether you real­ly need per­for­mance rat­ings and, if you are using them, eval­u­ate their effec­tive­ness in achiev­ing your per­for­mance man­age­ment goals. Do some inter­nal research to find out from your employ­ees and man­agers whether they find that rat­ings actu­al­ly improve per­for­mance and moti­va­tion or neg­a­tive­ly impact it.

How Employ­ee Per­for­mance Rat­ings Can Be Improved

If you decide that you should rate employ­ee per­for­mance, here are some things that you can do to min­imise the poten­tial neg­a­tive impact of rat­ings and improve their accuracy:

  1. Con­sid­er ask­ing tar­get­ed ques­tions that iden­ti­fy high/​low per­for­mance rather than pro­vid­ing a sin­gle per­for­mance rat­ing. For exam­ple, con­sult­ing firm Deloitte has come up with four ques­tions man­agers should ask them­selves when mea­sur­ing staff per­for­mance, instead of using per­for­mance and poten­tial ratings.

  2. Train man­agers to rate per­for­mance objec­tive­ly and avoid rat­ing bias­es.

  3. De-cou­­ple per­for­mance rat­ings from pay reviews — per­for­mance dis­cus­sions and rat­ings will be more hon­est if pay reviews take place sev­er­al months after the employ­ee rat­ing is assigned. Plus, the pay review should take into account oth­er fac­tors such as mar­ket rate and changes in job respon­si­bil­i­ty, as well as the per­for­mance rating.

  4. Try to avoid the use of forced dis­tri­b­u­tion for rat­ings, as research shows they can have dam­ag­ing effects on morale and any ben­e­fits tend to be lim­it­ed to the first year or so of its use.

  5. Mon­i­tor the con­sis­ten­cy of rat­ings across the organ­i­sa­tion and check for pat­terns or bias­es. Con­sis­ten­cy can be improved through​”peer reviews” or cal­i­bra­tion” where­by groups of man­agers get togeth­er to review and com­pare each oth­er’s rat­ings and high­light any notice­able employ­ee per­for­mance rat­ing pat­terns or stand-out decisions.

  6. Avoid the use of labels such as​”sat­is­fac­to­ry” or com­pe­tent” for mid­dle rat­ings. It can be demo­ti­vat­ing as nobody likes being described as aver­age. Instead, con­sid­er more pos­i­tive ter­mi­nol­o­gy like​”effec­tive”.

Your Per­for­mance Man­age­ment Soft­ware Should Sup­port Your Cho­sen Approach

Some per­for­mance man­age­ment sys­tems are com­plete­ly cen­tred around an over­all per­for­mance rat­ing. With Clear Review, we don’t tie you into rat­ing employ­ee per­for­mance — you can choose to focus on qual­i­ta­tive feed­back and per­for­mance devel­op­ment instead. If you want to have rat­ings, our per­for­mance man­age­ment soft­ware also gives you the option of rat­ing indi­vid­ual ele­ments of per­for­mance, hav­ing an over­all rat­ing, or ask­ing tar­get­ed ques­tions — the choice is yours.

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