WHITEPAPER
WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
Teamwork Communication Project Management Leadership Company Values
Contents
01
INTRODUCTION
02
01|ACCENTURE
03
02|DELOITTE
05
03|GENERAL ELECTRIC
06
04|ADOBE
08
05|YAHOO
INTRODUCTION
The annual performance review has long been known to be an ineffective and inefficient solution to developing and motivating employees. In 2013 SHRM conducted a study (6000 HR professionals in organisations with 500 or more employees) to understand what HR professionals’ perceptions were of current performance management practices. More than half of the professionals interviewed said that the overall effectiveness of the annual performance review process was inefficient and detrimental to employee motivation. [i] However, the study also found that the majority (77%) of the companies interviewed still conducted performance reviews on an annual basis.
77%
OF COMPANIES ARE STILL USING ANNUAL PERFORMANCE REVIEWS
2015 saw a number of Fortune 500 companies announcing that they would be replacing their performance reviews with continuous feedback. Research indicated that Employees did not want a review based on their yearly performance, but rather a frequent and helpful conversation that would assist them in their professional development. The purpose of this white paper is to define the problem these companies were having and how, by removing their annual performance reviews, they were able to overcome them. The paper will explore the need for continuous development of employees’ professional skills in the workplace and understand how companies, such as Accenture, Deloitte, Adobe and General Electric, implemented the continuous flow of feedback at work. In addition The paper will explore the detrimental effects stack ranking has on employees will be discussed in the context of Yahoo's implementation of this strategy.
01 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
01| ACCENTURE
“
PEOPLE WANT TO KNOW ON AN ONGOING BASIS, AM I DOING RIGHT? AM I MOVING IN THE RIGHT DIRECTION? DO YOU THINK I’M PROGRESSING?"
Bureaucracy hampers performance In September 2015, Accenture announced that it would be removing the annual performance review and replacing it with an ongoing review process. The CEO, Pierre Nanterme, realised that spending time and resources on a system that did not yield desired outcomes, was detrimental to his workforce. Bureaucracy and the complex nature of the performance review blocked employees from developing their own professional skills and talents. [ii] Nanterme said that: “people want to know on an ongoing basis, am I doing right? Am I moving in the right direction? Do you think I’m progressing? Nobody's going to wait for an annual cycle to get that feedback. Now it’s all about instant performance management”. Keeping top talent Today, one of the biggest challenges that businesses have is retaining top talent. How a company goes about motivating people and stretching their boundaries is vital to keeping highly skilled individuals. The process of performance management, in essence, is to push people to achieve at their highest potential. If employees are settled in their roles, it’s important that they keep challenging themselves, constantly striving to improve and develop their professional skills. [iii] Learn to trust your employees For the millennial generation, the solution is learning to let go. Accenture learnt to trust its people. Nanterme understood that the art of leadership was not to spend time measuring and dissecting each individual's faults, but rather selecting the right individuals and giving them the freedom to innovate and lead. The performance review model that Accenture adopted centrally focuses on
02 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
the individual. How they could personally improve, as opposed to comparing with their co-workers and managers. Modern HR has to tailor its practices according to each employee's performance and expectations. Easy-to-use, effective HR software that provides real value to people is rising in popularity by meeting the demands of this new generation. Accenture is treating company talent as a “workforce of one”.
02| DELOITTE
Annual Reviews are a waste of time Known as the employer of choice for innovative human resource programs, Deloitte announced that it would be redesigning their annual performance review. [vii] The largest professional services organisation in the world, conducted a public survey to find out what managers thought of the performance review process. What they found was that 58% of managers thought the traditional performance review process did not serve a purpose. What's more, approximately two million hours a year were spent on the whole review cycle - filling in forms, holding meetings and doing the actual rating. The survey found that the majority of the time was spent discussing ratings, instead of actual conversations with the employee. [viii] Another observation the survey brought to light was the theory of implied subjectivity of rating. The theory suggests that, if a manager is rating an employee on their ability to engage with another employee, that manager is giving a rating based on how important they think engagement is. When you are giving feedback to someone else, you are actually revealing more about yourself rather than about your colleague. This is called the ‘idiosyncratic rater effect’. [x] 03 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
Creating a nimble performance review To effectively serve the needs of its managers and employees, Deloitte needed a performance management system that was nimble, individualized and based in real time. The system needed to focus on fueling performance in the future rather than assessing past results. Addressing employee performance Deloitte identified three ways of addressing performance: Recognizing, seeing and fueling performance.
5
strongly agree
4
agree
3
fair
2
disagree
1
strongly disagree
Recognizing performance meant understanding, in effect, the individual in question. Deloitte got their leaders to ask What would they do if they were that individual rather than asking what they thought of the individual. At the end of each project or task, managers were asked to respond to future based questions (example: Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus [measures overall performance and unique value to the organization on a five-point scale from “strongly agree” to “strongly disagree”]. Once these ‘data points’ had been gathered and weighted according to the duration of each project, each manager was able to determine and review what they would do with the individual. This turned reviews away from conversations about ratings to conversations about the individual. Although it is great to see and recognize performance, it’s just as important to nurture it as well. At Deloitte, the best team leaders had regular conversations with their team members. These regular check-ins allowed leaders to set expectations for the upcoming week, review priorities, comment on recent work, and provide course correction, coaching, or convey important new information. These conversations provided clarity regarding what was expected of each team member and why, what great work looked like, and how each team member could do his or her best work in the upcoming days. The new system required each team leader to check in with their team lead-
04 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
er every week. This provided the nurturing needed to talk about future development and encouraged team engagement.
03| GENERAL ELECTRIC Having Thomas Edison as one of the founders, is a testament to how General Electric is a game changer in many areas of business, including company culture and management. The company has experimented with varying degrees of performance management systems since its inception in 1892. In 2015, GE announced it would be removing the annual performance review and replacing it with a performance management system, which favored more frequently occurring feedback. [xi] Stack ranking is underperforming
10%
underperformers
Stack ranking is a performance management system whereby employees are evaluated and ranked according to their yearly performance. This performance evaluation process was pioneered by the former CEO of GE, Jack Welch. This process would essentially boil employees down to a ‘performance number’. Managers would set goals for employees to reach over a twelve month period. Employees were then given feedback on an annual basis as to how well they were meeting these goals and a rating on a scale from one to five. The worst performers were then fired. [xii] At General electric this number was typically 10% of the ‘underperformers’. Indifferent performance reviews One of the biggest problems was that managers were required to give employees comments on ratings of 1 or 5. Eventually managers became indifferent in the way they would give feedback to their employees. They soon devel-
05 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
1 2
3 Majority
4 5
4
oped a habit of giving most of their employees a 3, which indicated average performance, and gave no real insight into the health of the organisation. Another problem with the stack ranking system was that it triggered similar effects to physical danger. A recent study indicated that we are evolutionarily wired to have a ‘fight or flight’ response to criticism. [xiii] This had negative effects on employee engagement and hampered productivity. The growth mindset According to research conducted by Carol Dweck, a professor of psychology at Stanford University, employees typically have two approaches to learning. The fixed mindset, which was reinforced by the stack ranking system, argues that people have an inherent capacity that remains the same throughout their life. In a performance management environment, in which the bottom performers get fired, the fixed mindset is naturally nurtured. General Electric overhauled its stack and rank system because they wanted a process that would emphasis the growth mindset. According to Carol Dweck, the growth mindset is the ability to continually learn new skills and competencies. By setting up short term goals and having ongoing development conversations that are not tied to compensation, General Electric reinforced the notion that any employee can rise to the occasion and learn to be successful professionals. [xiv]
04| ADOBE In 2012, Adobe announced that it would replace its performance review process for something more agile and continuous. Managers were encouraged to meet regularly with their managers to have conversations about how things were going and how far they were on track to complete their yearly goals. 06 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
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AT ONE POINT, THE PLANNING ALONE TOOK NINE MONTHS, "SHE SAYS. "IT WAS LIKE PREPARING TO GIVE BIRTH TO A CHILD."PEOPLE WONDERED, "WHY DOES THIS TAKE SO LONG? DOES THIS REALLY DRIVE THE BUSINESS RETURN?"
Adobe evaluates its performance review Prior to 2012, Adobe would evaluate the performance of an employee over a 12 month period. Donna Morris, Senior Vice President of HR, joined Adobe in 2002 and soon realised that the process was not beneficial to the employees it served. At the same time, the company was using stack ranking to determine compensation. This ‘forced ranking’ would ensure that a specific percentage of employees would receive different tiers of compensation. “At one point, the planning alone took nine months," she says. "It was like preparing to give birth to a child. People wondered, "why does this take so long? Does this really drive the business return?” Annual performance is inefficient and unproductive
“
OUR GOAL SHOULD BE TO INSPIRE PEOPLE TO DO THEIR BEST WORK.
Morris realised that the performance management system Adobe was using did not help managers mold an effective and productive team. In fact, months following the annual performance review, Morris noticed that there were more resignations than any other month throughout the year. Adobe’s core value of being genuine simply did not resonate with the performance management system used at the time. Managers had to divide employees into groups, similar to the stack ranking system implemented at General Electric. According to Ellie Gates, director of management effectiveness at the company, “Our goal should be to inspire people to do their best work.” Continuous check-ins Check-ins - Adobe’s new approach revolved around clear expectations, frequent employee manager conversations and continuous feedback (both positive and constructive). The new performance management system allowed managers to determine how often they would have checkins with their employees. Eliminating endless forms and questionnaires meant managers had the opportunity to convey what they expected from their employees and, in turn, employees had the opportunity to give and receive feedback, as well as develop their professional and per-
07 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
sonal skills. What's more, employees were compensated against how well they accomplished their developmental goals. Instead of providing each manager with guidelines on how to compensate their employees, each manager was given a budget and given the freedom to decide how to distribute it.
05| YAHOO However, not every Fortune 500 company has made such inroads with their performance management systems. Some , despite the compelling evidence against the system, still use the method of Stack Ranking. Saving Yahoo from Stagnation When Marissa Mayer joined Yahoo as CEO in 2012, she faced the difficult task of both downsizing and reinvigorating a stagnating company. Her main focus was to find a way to identify and retain top talent, while phasing out ineffective employees. In her first year of office, she instituted a new employee performance review system, saying that she planned to trim the yahoo workforce very surgically and very carefully. [xv] Starting in September 2012, Mayer introduced a system known as QPRs (Quarterly Performance Reviews). Through this popular performance review technique, managers would set and communicate goals and results to the departments, teams and individual employees. Employees would get a score every quarter from one to five. A one meant the employee was consistently missing their goals, while a five meant that they were greatly exceeding their goals. In essence, the system is similar to stack ranking (as seen at GE & Adobe) The target distribution system or stack ranking, put employees in five buckets. Ten per cent of high performing employees would go into 08 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
“greatly exceeds,” twenty-five in “exceeds,” fifty percent into “achieves,” ten percent into “occasionally misses,” and five percent into “misses.” [xvi]
50
10
25
10
misses
occasionally misses
achieves
exceeds
greatly exceeds
5
75%
25%
“
25%
I FEEL SO UNCOMFORTABLE BECAUSE IN ORDER TO MEET THE BELL CURVE, I HAVE TO TELL THE EMPLOYEE THAT THEY MISSED WHEN I TRULY DON’T BELIEVE IT TO BE THE CASE.
Forcing employees into buckets The problem with this system was that it resulted in a forced curve. 75% of the entire company got into the top three buckets, while 25% of every team had to go into the bottom two. This results in an incredibly competitive work environment, where teammates directly competed with each other to make sure they didn't end up in the bottom 25%. By forcing a bell curve, it meant managers were involuntarily required to put employees into buckets, even if these employees were “missing”. One manager reportedly said: “I was forced to give an employee an occasionally misses, [and] was very uncomfortable with it. Now I have to have a discussion about it when I have my QPR meetings. I feel so uncomfortable because in order to meet the bell curve, I have to tell the employee that they missed when I truly don’t believe it to be the case. I understand we want to weed out mis-hires/people not meeting their goals, but this practice is concerning. I don’t want to lose the person mentally. How do we justify?” Report [xvii] after report [xviii] surfaced about the negative implications Stack ranking has on employees, a number of companies started ditching this incoherent and illogical system. However, Yahoo, still continues to move in the opposite direction. Impraise is at the cusp of change As companies realise the importance and benefits of regular check-ins, they will need a platform that assists them in meeting these continuous feedback cycles. Impraise facilitating cross company feedback, with 360-degree reviews. Whether between an employee and an immediate team leader or between co-workers. Companies can use the feedback gathered over the course of a year to pro-
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vide analytics on the learning and development process of a specific employee. This enables managers to quantitatively see how much an employee has improved themselves. As feedback should be a real time process, Impraise offers a mobile-first system, allowing employees and managers to send and receive feedback whenever and wherever they want, breaking communication barriers and encouraging employee development.
10 | WHY DELOITTE, ADOBE & CO. REPLACED THE ANNUAL REVIEW
Resources [i] Society for Human Resource management Survey: HR professionals perceptions about performance management effectiveness, october 2014, retrieved 18 January 2016 from http://www.shrm.org/research/ surveyfindings/articles/pages/2014-performance-management.aspx [ii] Lillian Cunningham, ‘In big move, Accenture will get rid of annual performance reviews and rankings’, The Washington Post, July 2015, Retrieved 18 January 2016 from https://www.washingtonpost.com/ news/on-leadership/wp/2015/07/21/in-big-move-accenture-will-getrid-of-annual-performance-reviews-and-ranking/ [iii] Samann Rahimi, Why millennials and traditional performance process don’t mix, SABA, March 2015, Retrieved 18 January 2016 from https:// www.saba.com/us/blogs/2015/03/10/why-millennials-and-the-traditional-performance-process-don-t-mix/ [iv] Marcus Buckingham, Ashley Goodall ‘Reinventing Performance management, April 2015, retrieved 18 January 2016 from https://hbr. org/2015/04/reinventing-performance-management [v] David Parent, Nathan Sloan & Akio Tsuchida, ‘Performance management: The secret ingredient, February 2015, retrieved 18 January 2016 from http://dupress.com/articles/performance-management-redesign-human-capital-trends-2015/ [vi] Steffen Maier, ‘Deloitte Joins Adobe and Accenture in Dumping performance reviews’, June 2015, retrieved 18th January 2016 from http://blog.impraise.com/360-feedback/deloitte-joins-adobe-and-accenture-in-dumping-performance-reviews-360-feedback [vii] Marcus Buckingham, ‘Most HR Data is Bad Data’ February 2015, Re-
trieved 18 January 2016 from https://hbr.org/2015/02/most-hr-datais-bad-data [xi] Max Nisen, ‘Why GE had to kill its annual performance reviews after more than three decades’ Quartz, Augest 2015, Retrieved 18 January from http://qz.com/428813/ge-performance-review-strategy-shift/ [viii] Michal Addady, Fortune, ‘Here’s why GE is replacing performance reviews with an app’, August 2015, retrieved 18th January from http:// fortune.com/2015/08/13/performance-reviews/ [ix] David Rock, Josh Davis, Beth Jones, Strategy Business, ‘Kill your performance ratings: how your brain responds to performance rankings’, August 2014, Retrieved 18 January 2016 from http://www.strategy-business.com/article/00275?gko=c442b [x] Coral S. Dweck, Ph.D. 2006. Mindset the new psychology of success how we can learn to fulfill our potential. United States. Ballantine books. [xi] Nicholas Carlson, ‘The day Marissa Mayer’s Honeymoon at Yahoo ended’, January 2015, retrieved 18 January 2016 from http://uk.businessinsider.com/marissa-mayer-yahoo-nicholas-carlson-book-excerpt-2014-12?r=US&IR=T [xii] Chris Yeh, Harvard Business Review, What Marissa Mayer got wrong (and Right) about stack ranking employees, January 2015, Retrieved 18 January 2016 from https://hbr.org/2015/01/what-marissa-mayergot-wrong-and-right-about-stack-ranking-employees [xiii] Phyllis Korkki, New York Times, ‘Why employee ranking can Backfire’, July 2015, retrieved January 2015 from http://mobile.nytimes. com/2015/07/12/business/why-employee-ranking-can-backfire. html?_r=2&referrer=
[xiv] Gina Belli, Payscale, ‘Forced/Stack employee ranking Crush Morale’, April 2015, Retrieved January 2016 from http://www.payscale.com/ career-news/2015/04/forced-stacked-employee-rankings-crush-morale