Workplace Reality #3: Most performance review systems are broken and useless

This post is part of the series on 9 Realities of Modern Workplace.

In this post, we talk about Reality #3: “Most performance review systems are broken and useless“.

I have written many posts on performance and performance appraisals before (managing performance, annual review, self-appraisal) and so have others (Forbes, Wall Street Journal, payscale). Most have been critical of the performance appraisal systems. It is very hard to find articles that talk about good systems; most such articles talk about what it should be (Forbes, Gallup). So the statement above shouldn’t feel very shocking. However, I have very specific reason to use the words broken and useless that I want to explain. Hopefully this will also explain why organizations behave in a certain way in some cases.

Performance Review System

Performance review is the process by which an employee’s performance is evaluated. Organizations use this process to make sure they are getting good returns on their investment in a particular employee. Idea is actually quite good: rate the employees based on their performance, use the rating to rank the employees, and then compensate them according to the rank. Tell poor performers to improve or get out, to be replaced by better performers. This will maximize the ROI on people investment.

However, this makes certain assumptions:

  1. It is possible to objectively rate (based on performance measurements) employees across the organization
  2. It is possible to compare rating (or performance) of any 2 people and rank them relatively
  3. Employees will agree to linking compensation to value creation
  4. There is always a steady supply of talent available who will perform better at the same compensation

Unfortunately, none of these assumptions hold true in today’s organizations.

  • #1 requires rating is based on objective metrics and is done by able managers. Both of these are hard to come by.
  • #2 requires quantification of every performance which is hard. How do you compare the performance of a business analyst vs. a sales person?
  • #3 makes the compensation fluctuate widely which employees can’t handle
  • #4 depends on external factors and always comes with a time lag which hampers quick results

Broken and Useless

System is intended to adjust compensation and rewards every year to align with performance of the individual. This is expected to create incentives for high performance. Since above assumptions don’t hold true, rating and ranking results are inaccurate. This means compensation and rewards are not aligned with performance all the time. Instead of incentivizing value creation, it may create unhappy employees and thus hamper performance.

System is also intended to give feedback so that employees can improve their performance. For the reasons cited above, this feedback is not useful at all, and can be harmful in some cases.

Dealing with the reality

Most people use performance review system outcome as a way to measure their own worth, and their career growth. If they get a raise or get promoted, they think they are growing, and they are worth more. If they get no raise or promotion, they think they are not growing or are worthless for the company (my earlier post evaluating your performance).

It is critical to wean yourself away from the myth that performance review outcomes are a good indicator of your career growth and personal worth.

If you can do that, following statements will make sense:

  1. Performance rating your manager gives you may have little correlation with your performance
  2. Bonus, salary increment, rewards that you get may have little correlation with your performance rating
  3. Performance rating may have little correlation with your worth to this or another company

If you can adjust yourself to live with above statements, you will realize that you can deal with your workplace much better.

In the next post, we will discuss the Reality #4: “Promotions and bonuses are determined more by available budget and market conditions, less by your capabilities or your performance“. Stay tuned.

Caveat: Above post exaggerates the situation by assuming that all parts of the system are broken. Most companies will have some parts broken and not all, so your personal experience with your performance review system will be better than the above description. However, being ready for the above scenario serves you well.


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