Introduction
If you're a change-minded senior executive looking for ways to improve performance, cut costs, or free up resources that can be redirected against important issues waiting in the wings, you might give serious thought to scrapping your company's performance appraisal system. It devours staggering amounts of time and energy, it depresses and demotivates people, it destroys trust and teamwork and, adding insult to injury, it delivers little demonstrable value at great cost.
Here's a quick and easy performance appraisal cost-estimating exercise you can apply to your own company: alexei ramirez jersey double the alexei ramirez jersey number of employees who receive appraisals, add three zeroes, and place a dollar sign in front of the resultant number. That's the cost of the performance appraisal system at your company. If you think $2,000 per employee is too high, don't double the number of employees, just add three zeroes. [ Lest you think this estimating methodology too cavalier, please know that two very thorough cost estimates were submitted by respondents to the e-mail survey that gave rise to this paper. One came in at $1,945 per employee and the other at $2,200. The latter included the costs of union participation so it was rounded down to $2,000.] But you probably won't like that result either.
If you do scrap your company's performance appraisal system you will accomplish more than realize a sizable cost savings; you will also, in one bold move, unfreeze your organization's culture and eliminate one of the chief structural obstacles to any changes you and your management team might be contemplating.
The one thing you should not do is listen to those who will implore you to let them redesign the performance appraisal system to make it more supportive of the changes you have in mind.
Some reading these words will consider the previous comments outrageous and unfounded. But, as Craig Brooks, the director of a Winona, Minnesota human services organization and a 26-year veteran of performance appraisal sessions claims, "I could retire on the salary I earned during those meetings." An exaggeration? Perhaps, but the point is clear enough: performance appraisals chew up a lot of time and money. On the other hand, they supposedly provide benefits that offset these costs. But do they? The Internet offered an unprecedented means of finding out and so, during the last two months of 1995, three e-mail messages were posted in quick succession to several discussion lists on the Internet (see the list at the end of this paper). The first message dealt with the form and function of the "classic" performance appraisal system ― one where a manager appraises the performance of a subordinate or "direct report." The second proposed an informal cost-benefit analysis of such appraisal systems. It included a starter list of costs and benefits as well as a call for additional costs and benefits from anyone interested in participating. The third presented a summary and synthesis of all responses and some rather obvious conclusions. The bottom line? Performance appraisal systems provide questionable benefits at amazingly high costs. In one company alone, the costs were conservatively estimated at almost $100 million.
The Benefits
The Accepted Mythology of Performance Appraisal Systems
From the viewpoint of senior executives, performance appraisal systems are generally regarded as a necessary part of the organization's management system. This condition seems to exist because of the widely accepted, generally unquestioned benefits of performance appraisal systems. If asked, a typical executive might indicate the following benefits:
The system provides employees with an opportunity to receive feedback regarding their performance, usually at least once a year and often on an interim basis during the year. This leads to reduced error and waste, increased productivity, improved quality and service for customers, as well as enhanced employee motivation, commitment, and a sense of ownership.
The system provides an opportunity for performance related discussions that include the following aims: setting work objectives for the employee, aligning individual and organizational goals, identifying training and development needs, and discussing career progression opportunities.
The system standardizes performance appraisals and makes them objective by providing uniform processes and criteria. This further results in a fair, valid, and legally defensible basis for rewarding and recognizing individual performance.
The system affords the corporation legal protection against employee lawsuits for discrimination and wrongful termination.
A perhaps less typical but more candid executive might add a final benefit: the formal performance appraisal system shores up an organization's hierarchical authority system. It gives the supervising manager control over the carrots and sticks in what is essentially a carrot-and-stick management system.
The list of benefits above, with the exception of the last one, represents an idealized view of performance appraisal systems, a view that is espoused by many but achieved by few, if any. Why? What is it about organizations that causes performance appraisal systems to fall short of this ideal? Can we or should we try to change things so that performance appraisal systems work the way we want? Or is
The Reality
Figure 1 - A Basic Performance Appraisal System
The general form of a basic performance appraisal system is depicted in Figure 1. A discussion follows.
Based on his or her perceptions, a manager prepares an appraisal of another employee. Appraisals typically have two components: text, and a number. The number is usually the basis for determining the employee's merit increase (i.e., the size of the pay raise for the subsequent year). This is often quite modest and amounts to little more than a cost-of-living increase, an offset against inflation. Moreover, differences between the maximum and minimum increases are also quite modest. The merit carrot is not a very big one.
Perhaps the most significant aspect of the structure depicted in Figure 1 is that the appraisal has as its primary input the perceptions of the manager. Technically speaking, they are the only input. Given this model, it is obvious that if the system is to work effectively the manager's perceptions must be objective, accurate, comprehensive, and free from any significant bias, distortion or undue influence; otherwise, the system is patently flawed. This leads to the following assertion:
The structure of the typical performance appraisal system makes managers who prepare appraisals the targets of efforts aimed at influencing, shaping, and just plain manipulating their perceptions and the appraisals based on these perceptions.
Several people have an interest in influencing a manager's appraisal of a given employee's performance. The most obvious is the employee. But there are others. These include other employees who are being appraised by the same manager, and anyone with a vested interest in having a given employee receive a good or a bad appraisal; for example, clients, customers, mentors, co-workers, and other managers whose own subordinates must compete for a finite pool of merit increase monies, plum assignments, and increasingly limited promotion opportunities. In a word, the politics of performance appraisal can be fierce. The preceding assertion may be elaborated upon as follows:
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