Is it time to give up on performance appraisals?

Every workplace has its idiosyncratic seasonal events, and HR is perhaps most visible during the annual performance appraisal. Why? Because employees dislike them. They are time-consuming, involve too much paperwork, HR would even do better to drop them altogether and find a better performance-management tool. Sound familiar? You’re not alone.

A recent US poll of 2,677 people (1,800 employees, 645 HR managers, and 232 CEOs) by San Francisco-based rewards-and-recognition consulting firm Achievers revealed 98% of staff find annual performance reviews unnecessary. Remember – among the 2,677 respondents, a quarter were HR professionals.

Edward Lawler, professor of business at University of Southern California, reacted by declaring: “Performance appraisals are dead.” But he also unveiled research showing 93% of companies use annual appraisals, and only 6% have considered dropping them.

The UK picture is similar. CIPD research from 2009 showed more than 80% of HR practitioners carry out performance appraisals. But management consultancy Hay Group found half of public sector workers and one-third of business leaders describe appraisals as a box-ticking exercise. The Institute for Employment Studies (IES) published a report last year, warning that HR under-communicates the aims of performance management, and “too often talks about performance management as an administrative procedure”. The Institute for Leadership and Management (ILM) reports 93% of UK workers are concerned low-level management skills are directly impacting on business.

Professional bodies such as Acas recommend firms conduct appraisals to provide evidence of performance problems in case of unfair dismissal claims. But they are not legally required. “There is a lot of ambiguity around performance management compared to the strict laws around making people redundant,” says Selwyn Blyth, partner at law firm, Pinsent Masons. “Appraisals are part of work cultures and our clients would look at me in horror if I said they weren’t.”

HR departments have invested large amounts in appraisal processes – one reason why they may be reluctant to shed them. But HRDs argue that money was well spent. The processes are good – the managers are the problem. “One of the skills that is often not developed is understanding what an appraisal is and why it is relevant to the whole organisation’s success,” states Charles Elvin, chief executive of the ILM. “Being able to appraise is a fundamental management skill.”

ILM’s research shows only 18% of UK employers expect managers to have received management training before their appointment.

Mary Mercer, principal consultant at IES, says bad management has pushed HR to enforce the appraisal system. “It is not HR’s responsibility to manage staff,” she argues. “HR has tried to force people into it by having complicated forms and monitoring – trying to get around the fact that managers aren’t doing it effectively.”

The economic argument for a robust appraisal system linked to the organisation’s wider strategic objectives is strong. Good performance management can provide successful staff development, ensuring internal promotions and lower recruitment costs. According to ILM, only 55% of managerial vacancies are filled internally.

The appraisal process takes time and must be built into budgets. CIPD research suggests recruitment costs for a senior manager can top £8,000. With a workforce of 100,000, spending three hours on each appraisal at £10 per hour amounts to £3 million. External factors mean organisations wanting to increase their turnover have a greater challenge. The IMF downgraded its UK 2012 forecast in July to a GDP rise of just 0.2%.

“That says raising the productivity of employees is key,” says Deborah Allday, senior partner at Hay Group.

Allday suggests that one barrier to appraisals increasing performance is organisations placing too much emphasis on best practice. “Each company is unique because it has its own strategies, so each needs to have its own performance model underpinning performance management.”

Hannah Stafford, head of business psychology at HR consultancy ETS, agrees organisations too often use off-the-shelf solutions. “They are doing all the right processes, but not in a way that gets the data they need. Everything in your performance management should be linked to the company’s strategic objectives.”

Allday clarifies: “HR reporting that 90% of managers completed their appraisals on time is not a useful statistic.”

Beyond the bespoke approach, there are areas of consensus. Commentators agree meeting once a year is not enough. The formal appraisal, where pay may be reviewed, should be punctuated with regular one-to-one meetings and smaller interim reviews, depending on the business’s size.

“Appraisals should be a summary of conversations that have taken place day to day,” says Paul Matthews, founder of management development company, People Alchemy. “When there is a surprise in an appraisal – good or bad – not enough communication is occurring.”

HRDs who have recognised these characteristics are using appraisals to drive staff performance and generate data for senior management teams. Three years ago, global professional services firm PwC implemented a fresh approach that emphasised the ‘big picture’. “We took the firm’s performance goals and explained each one, then gave examples of how they might translate to individuals’ objectives,” says Toni Graves, head of performance and reward at PwC. “People want to know how their role plays into the firm’s overall strategy.”

The collation of performance appraisals results has also been simplified by technological developments. HRDs analysing data from reviews have reported improvements that would otherwise have been missed.

Sam Shepherd, group HR manager for hotel chain, Jury’s Inn, recently rejuvenated the organisation’s online appraisal tool. “We can collect appraisals of 300 managers within one month and produce reports within weeks. If I found out a high proportion of managers were frustrated at one hotel, I could go there straight away. That wouldn’t happen with a paper-based system.”

Chris Whitfield, projects and strategy implementation manager at housing charity Shelter, is in the process of installing a new performance appraisal system. He has involved employees throughout the process, a method he says will make staff more dedicated. “Some organisations like to set objectives from the top and cascade them down, but if you set and impose, you never get the same commitment as if you involve the whole team in objective setting,” he says. As at many organisations, the focus is shifting from purely performance to include behavioural measures.

But if performance appraisals were abandoned, some smaller organisations would continue to function. “If the people running the organisation were talented, performance management would happen naturally without HR,” suggests Graves.

Matthews agrees: “At more personalised businesses, informal appraisals happen daily. But that control mechanism needs to be in place in larger organisations.”

Despite criticisms, performance appraisals are set to remain an important component of performance management. Lawler believes HR directors should focus on their improvement.

Looking ahead, HRD professionals seem enthusiastic about technological innovation streamlining processes. “In future, we will be doing reviews on a tablet – that will be less intrusive than around a computer,” says Shepherd.

Graves favours social media. “It would enable people to give constant, short feedback in the same way people leave comments on Twitter,” she says. “These would remove barriers and make appraisals feel more like how we react daily in our personal lives.”

What the debate has revealed is good news for HRDs. There is no need to reinvent the wheel – the system is good, but misunderstood. As one HR expert puts it, “It is frustrating, because it’s just not rocket science.”

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