Monday, July 27, 2015

Goodbye to performance appraisals?

I am not bowled over by the news - rather inaccurately reported in many places- of Deloitte and Accenture doing away with performance appraisals. First, they are not doing away with appraisals, they are doing away with annual appraisals. These, they have concluded, involve too much time and money and do not produce commensurate benefit. An FT article estimates that Deloitte must have wasted £ 200 million every year on these appraisals.

Deloitte will replace its elaborate appraisal with a set of four questions. Accenture will provide appraisal on the go. All of which is fine. But it's important to understand that, while can and must improve the methodology of appraisals, we can't eliminate performance appraisals altogether. We still need to determine who are to be promoted. Where there are performance- linked incentives, we will need measurement of performance. Appraisals won't disappear.

So the real question to ask is: how do we improve appraisals? The first thing is to realise that performance is best measured over a long period, certainly more than one year. This happens in the case of promotions but not in the case of variable pay (except at the very top level). If we accept that there are serious problems with annual appraisals, we should also accept that variable pay linked to annual performance is not a great idea. It rewards a few and demoralises the many, it is prone to error and getting the quantum of reward right in a given situation is also a problem. Doing away with variable pay will substantially reduce the need for annual appraisals.

What about appraisals for promotions? Well, the most important thing, as this article in the New Yorker emphasises, is to eliminate biases to the extent possible. One way to do so is to get make sure that a person is evaluated by many people, not just by one big boss. (You can call this 360-degree feedback or whatever you like). In some businesses, we could even get customers to evaluate certain people.

The second thing is to focus intensely on selection. Once you are reasonably confident you have the right people, you don't have to worry so much about 'managing' performance. Thirdly, upto a certain level, let promotions be time-bound, in other words, go by seniority (as in the bureaucracy). Again, the logic is that if a person has come through an intense selection process, he or she should be able to do well upto a certain level. This fosters cooperation and team spirit which are more important for performance than individual effort, however accomplished an individual may be.

Annual appraisals, especially for the purpose of handing out incentives, are divisive, subject to bias and errors in measurement and a serious obstacle to team work. How many companies, including Deloitte and Accenture, have had these for a years if hard to comprehend.

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