Scrap Your Performance Appraisal System

Want to improve your sales organization fast? Consider ripping up your annual performance appraisal system. If tearing up all those forms seems too harsh, try something a bit more polite, such as shredding them. One way or another, just get rid of a process that actually hurts your results.

Yes, we know that virtually every major corporation uses performance appraisal systems. We know that they have become an integral part of salary recommendations, succession planning, and employee development programs. But the key question is: Do they work? Moreover, do performance appraisals improve performance, or are they a colossal waste of time? Has anybody bothered to find out, or are we just assuming that performance appraisals must be a good thing because everybody uses them?

The answer is: Performance appraisals don't work. In 1965, the Harvard Business Review reported the results of a landmark study by Herbert Meyer, Emanuel Kay, and John French Jr., which tested the effectiveness of traditional performance appraisal systems at General Electric. Unfortunately, this meticulous research, conducted decades ago, has had almost no impact on the prevalence of performance appraisal systems at major corporations. Our own research suggests that this article is as relevant today as it was when first published. Not many people listened then. We hope you take note now.

Why the process fails
Naturally, we would expect that performance appraisal efforts, like any other management activity, would show poor results if done poorly. To avoid this problem, Meyer and his colleagues were careful to select a location that based performance appraisals on job responsibilities, not on personal characteristics, and that provided managers intensive training in the techniques for conducting appraisal reviews. In other words, they studied performance appraisal systems at their best.

Their conclusions should alarm any manager or company that relies on performance appraisals. The team found that comprehensive annual performance appraisals were of questionable value, and more often than not, these appraisals eroded rather than improved performance. Let's look at some specifics.

In general, the managers they studied offered both praise and criticism during their evaluations. On average, the number of positive comments slightly exceeded the number of negative remarks. Interestingly, employees tended to ignore the positive comments and viewed them largely as a cushion for the negative points the manager brought up. These negative comments, rather than serving as an impetus for improving performance, tended to make employees defensive. The more criticism they heard, the more their actual performance declined after the appraisal. If you think pointing out areas of weakness improves someone's performance, you are dead wrong.

Further examination of their research shows that praise tended to be about general characteristics, but criticisms tended to be about specific incidents. That's something like saying, "You're a good employee, but..." As a result, employees discounted the positive remarks and focused instead on the negative comments.

Another notable conclusion related to timing. Annual performance reviews were -- and in many cases still are -- done around the time of salary adjustments. Presumably, the performance review explained an upcoming salary action. Employees viewed this connection with a high degree of suspicion. They believed that negative comments were not made with a genuine interest in helping them improve their performance; instead, they viewed the appraisals as a nit-picking exercise designed to justify a meager raise.

A better approach
The research conducted by Meyer, Kay, and French suggests another important question. If annual performance appraisals erode performance, what can managers do that actually enhances productivity? Their research elaborated on instances when managers held work planning and review sessions with their employees rather than annual performance reviews.

Here again, their findings dovetail with our research. They found that short-term goal setting was much more likely to improve performance than annual performance reviews. When we ask employees about their annual goals, we tend to get somewhat vague answers. When we ask about this month's goals, the list is much more specific. Frequently setting goals and discussing specific expectations is of much more value than setting broad annual goals.

At our sales summits, we ask sales executives how relevant the targets they set at the beginning of the year are after six months. The overwhelming response is that those initial goals are rarely meaningful after just two quarters. A declining or rising economy, a competitive entry, or a competitive blunder can create situations that make annual targets less meaningful.

Reviewing expectations often allows managers to give genuine praise for real accomplishments. Praise offered once a year is hardly ever believed, because it is usually much too general. Frequent reviews also enable managers to hold meaningful discussions about the resources employees may need to accomplish their goals. Few things are more frustrating for salespeople than to be out there charging hard and generating customer interest for products the company has become unable to ship or to provide.

Finally, setting expectations regularly and often can provide a framework for effective coaching. Managers can use these opportunities to discuss how employees can improve their performance by relying more on their individual strengths. While it's sometimes tempting to try to remake people, great managers understand that people hardly ever respond positively to criticism. It's not just because criticism feels like a slap in the face; criticism usually stems from areas in which employees have little talent to draw on to improve their performance. Effective managers find the most painless way possible to minimize the consequences of employee deficiencies.

How often should managers hold these discussions? Clearly, there is no one right answer for every employee. Some employees want or need to discuss these issues more often than others. Don't assume that your best people want less attention. They frequently want more, especially if these discussions focus on the positive. Even senior executives like to discuss their accomplishments regularly with their bosses.

We suggest that sales managers frequently sit down with their direct reports -- for at least an hour. The discussion should include these matters:

performance, as measured against quantifiable goals. How have they performed against revenue, customer engagement, and other important metrics?
the talents and strengths they bring to the job, and how they already have leveraged and can continue to leverage them most effectively
their weaknesses and any areas of their job in which they struggle
skills that they might want or need to acquire
knowledge that they might want or need to acquire

The manager and salesperson should then agree on goals and targets. More important, they should also discuss how they could effectively work together to accomplish these goals and realize these developmental aspirations.

Setting expectations, providing appropriate resources for meaningful goals, recognizing accomplishments, and taking an interest in employees' growth and development are all key factors in building employee engagement, improving productivity, and lowering turnover. Why not institute a performance appraisal system that actually helps you accomplish these goals instead of one that works against you? Yes, you will undoubtedly face some internal battles to make this happen at your company, but these are battles well worth fighting.

About the authors:
Benson Smith is a consultant, speaker, and author for The Gallup Organization and an expert in the area of sales force effectiveness. Tony Rutigliano is a senior managing consultant, speaker, and author for The Gallup Organization and an expert in the areas of sales force effectiveness, organizational effectiveness, and talent assessment. Smith and Rutigliano are coauthors of Discover Your Sales Strengths: How the World's Greatest Salespeople Develop Winning Careers (Warner Books, February 2003).