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:
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.
Train managers to rate performance objectively and avoid rating biases.
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.
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.
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.
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 Advanced 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.