Why Some Companies Are Ending Employee Performance Ratings

Why Some Companies Are Ending Employee Performance Ratings

MAX NISEN NOV. 15, 2013, 5:06 PM 1,871

Even though some major companies like Microsoft have decided to eliminate their stack ranking systems, the controversial employee review process will never go away entirely. Industries like defense and aerospace, for example, tend to value execution over creativity, so need a way to measure and compare employees. Ranking workers on a bell curve that features a set number of high, average, and poor performers meets that need. But increasingly companies are moving in the opposite direction, and using an entirely ratings-free system.

While it’s still only a small fraction of businesses, around 6% according to Cliff Stevenson of The Institute For Corporate Productivity, big names like Adobe, Expedia, and FedEx are among the companies that no longer rank their employees. Instead, they focus on incremental or divisional goals rather than on individual ones.

Advocates of stack ranking argue that such measures are required to spur internal competition and weed out poor performers. However, companies that have stopped grading employees altogether have seen positive results in employee engagement and no negative impact on any performance metric, Stevenson’s research found.

“The very concept of the performance review is very backwards-looking; it’s ‘What did you do over the past year?'” Stevenson said. “Instead, they started looking more at development and enabling employees for the coming year.”

Feedback becomes continuous rather than being delivered a few times a year in an extremely high-stress meeting.

“The concept is that you get your feedback not once a year or quarterly, but as things happen,” Stevenson said. “As you finish a project, your manager has the discretion to come to you then and talk to you about success or areas for development as they see fit.”

It’s a completely different, and arguably superior, way to manage people than rating and ranking them.

The rigid, quarterly, numbers-focused stack ranking system came about as an effort to manage large, distributed, and unwieldy workforces. But in an age when we have better data and a better idea of what makes people tick, it’s not necessary.

Especially for small businesses, where individual employees have an outsized impact on a company’s performance, touching base and rewarding employees as needed is a much better option.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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