Performance Reviews: Valuable or destructive?

Episode #96 Performance Reviews: Valuable or destructive?

We’ve had a host of listener questions about performance reviews, most recently from one of our Leadership Beyond the Theory graduates, Scott. I also recently revisited a 2016 article from Harvard Business Review, which identified the trend of some major companies dropping the performance review cycle altogether.

During June in Australia, a lot of our local listeners step into the performance review cycle, and go through the gruelling schedule of meetings, documentation, and feedback.

Hopefully this is a reminder of why we do these and what good leaders do to make the exercise worthwhile and valuable for themselves, for the people they review and for the organisation as a whole.

A big shout out to my mentor and friend Danny Hovey, who basically took a range of tools, concepts, and techniques, combined them with his expertise in neuroscience and put together what I believe is the most comprehensive and practical performance management regime that I’ve ever seen. Made it easy for me as CEO to get performance and talent management under control.

Now the process didn’t help to improve the talent per se, but it was an incredibly valuable window into being able to see the talent we had, and in some cases didn’t have. It also enabled informed conversations with leaders, right through the levels of the organisation that we never would have been able to have otherwise.

• We’ll start by taking a look at the pros and cons of performance reviews.

• I’ll ask and answer the question, what is a performance standard?

• I’ll finish by giving you a rare insight into the performance management cadence that we set up within CS Energy.

The Pros and Cons of Performance Reviews

As with most things, performance reviews have pros and cons, but they also fulfil a couple of very important functions.

1. They give a structured environment for people to receive feedback, and sometimes it’s the only way you can be sure that a conversation has even been held. They enable you to assess performance for any discretionary incentive awards.

2. They train leaders in how to give feedback because performance standards are a pseudo script for leaders to follow. We’ll get to these shortly.

3. They let you calibrate where you’ve set the performance bar. So if someone you instinctively know hasn’t performed particularly well, is still ticking off all of their KPIs at the end of the year, you may have let them set soft targets against the low standard.

4. They allow senior management to calibrate performance across business units, teams, and functions. Because let’s face it, we all know there are hard markers, and then there are easy markers.

For performance reviews to work, the first thing to put in place is really clear standards for behaviour and performance that are communicated well to your people. This is done through a range of artefacts. You have performance standards appropriate to the level in the organisation that the person is operating at. You have well-designed KPIs (key performance indicators) for annual achievement over and above their day job. And these are normally the things that are the subject of incentive payments. Then, you have really clear communication of behavioural expectations through artefacts, such as the code of conduct, the company values and the target culture that you’re trying to create, which of course has to be measured.

These are all designed to help you give your people clarity because people often lack clarity about where they stand.

Every single day when your people come into work, they really want to know three basic things. It’s not that hard. What they want to know is first of all:

1. What are your expectations of me?

2. How am I going against those expectations?

3. What does my future hold?

The performance review cycle, if done properly, should go a long way to answering those questions.

Let’s have a think about the pros and cons of performance reviews.

the Pros of Performance reviews

1. They provides consistency

Everyone in the organisation is evaluated against the same standards. Then you can have an apples for apples comparison between individuals not withstanding, of course, the different views that each leader will take about how they rate the performance.

2. They give you something that is formal and recorded

It doesn’t matter how good regular feedback is, people often don’t pay attention until something turns up in writing on their employment record, that actually gets their attention.

3. They summarise the micro feedback that’s been given throughout the year

Now just be really careful here. They don’t replace that feedback. They summarise it. There should be absolutely no surprises at the end of year performance review. People should already know how they’re performing.

4. They feed into the talent management process

I’m going to do a completely separate episode on talent management as it’s too big to handle here, but we need to remember that there’s no potential without performance. And the outputs from the performance management process are critical to your ability to map, develop and reward your talent.

5. They help to break down the halo effect

They force you to look at performance against predetermined criteria. The fact that someone may be a great person, who everyone gets on with, who communicates well and is a team player, doesn’t mean that they’re a high performer, even though the halo effect tries to convince us otherwise. This helps us to actually look at facts rather than these impressions.

6. They ensure that there’s more than one person in the conversation

There’s no scrutiny on someone’s performance, unless it’s reviewed through an organisational process. It gives visibility of performance to leaders in the upper echelons of the organisation.

7. They give individuals clarity on where they stand

They may already be getting regular, targeted, timely and specific feedback, but if they don’t, this is an opportunity. When continual feedback isn’t given, performance reviews are a must.

8. They let you see which leaders are doing their jobs and which ones aren’t

From a meta level, how a leader conducts performance reviews themselves, tells you a lot about their performance.

the cons of Performance reviews

1. They are time consuming

There’s no doubt about it.Both the setup and the review take a lot of effort and energy. And if the setups done poorly, which it normally is, it makes the review process futile.

2. Many leaders who don’t take the process seriously see it as a compliance activity

It’s just another organisational process that they loathe and they drag their feet through. The quality of what happens in the performance review is really, really low.

3. Poor leaders are poor at conducting reviews and feedback

To avoid having a difficult conversation they’ll often just say, “Don’t worry, you’re doing a great job”. This creates an incredible number of problems. My experience with under performers is that quite often, if I identify a performance gap, I’ll sit someone down and I’ll talk them through it and I’ll explain exactly what that gap is and what I think they need to improve.

Sometimes they’ll just look at me and say, “Well, my last eight years of performance reviews say that I’m an exceptional performer”. I can’t even begin to tell you the number of problems that creates.

4. Performance reviews aren’t always given in context

Targets can be set at a point in time, but quite often they’ll shift, and at the end of the year you end up evaluating the wrong things.

5. Many performance reviews only look at the KPIs and achievements, not the behaviours and the longterm growth of the individual.

This inattention to fixing poor behaviours is a weakness that lets poor culture develop in any organisation.

6. They can easily be gamed for bonuses

We see people setting up a slam dunk at the beginning of the year, by how they set their KPIs, meaning that they can get their rewards without any real performance at the end of that year. So what do we lose if we do away with performance reviews? Well, for a start, we lose any chance of a structural organisation wide view of talent. For the individuals, they mostly lose the opportunity to receive any meaningful feedback. And then for your leaders they lose any sort of growth in confidence and competence that might help them to address performance issues.

The performance standard

A performance standard tells an individual what you expect from them, and this is critical in the setup. It should answer the question “What are your expectations of me?”

Performance standards apply to a particular level within an organisation, not a specific individual role. So in this way, it’s different to a position description. The position description talks about the specific tasks, duties and responsibilities of an individual role, whereas a performance standard is a generic performance yardstick for that level in the organisation.

For example, you might have one performance standard for everyone who is at the team leader level. There might be one that applies to the executives of an organisation, and when I was at CS Energy, I even created one for myself as the CEO. The key point is that everyone at the same organisational level, for example, a vice president has the same performance standard.

It doesn’t matter whether that VP is responsible for a mine site or for marketing in a corporate sense, the standard applies equally to all leaders at the level. Each separate performance standard has a number of categories along which lines everyone is evaluated. It doesn’t matter whether it’s the CEO standard or the standard for someone who’s working on the front line, the six categories remain the same.

You could do these in four categories or five categories is completely up to you. Six is probably the maximum I’d recommend, but that’s what we had at CS Energy. Those categories were safety, commercial, leadership, management, developing people and working across boundaries. Those were the six areas where at each level in the organisation, everyone had a role to play, and that role was specifically defined in the performance standard.

In the most comprehensive incarnation of a review process, there are four elements.

There’s the behavioural standards, which are based on things like the code of conduct and the company’s values, as we spoke about before. There’s the performance standard, which we just talked about, that tells you what your day job is. The third thing is the annual KPIs, which you use to evaluate your short term incentives for the year. And then the final component is a career development plan.

A performance agreement is basically a one stop shop for individual feedback. It’s structured and it’s consistent between levels, between teams, and between different job families. It’s basically the template that guides the feedback conversation in the review process for a leader who isn’t confident or experienced in giving direct feedback to their people.

Behind the scenes: the performance management cadence at CS Energy

I want to finish off by giving you a view of my performance feedback cadence. How did I actually apply this? And what did I find work best in the field?

Just for context, as Chief Executive at CS Energy, I had 5 direct reports who were all senior executives. This is pretty easy to manage right, I’ve got very capable, competent people and I’m giving them constant feedback, all the time, about everything that they’re doing and we’re in constant communication in terms of their jobs and what they’re facing.

With 20 direct reports in a flat organisational structure, you’re not going to be able to run a cadence like this because it’s quite involved. What’s not getting done though, when the span of control is this high? That’s a question for another day. Obviously every executive that reported to me had a performance agreement, which had all of those four elements that we spoke about before.

The cadence for me was built around fortnightly meetings with every direct report. We’d have a formally structured and scheduled fortnightly meeting. One of those meetings was on their agenda. It was half an hour. The alternate fortnight that meeting would be on my agenda, which was an hour. I also had an open door policy so I’d see them many times in passing between these formally scheduled meetings.

The meeting that I used to run for an hour, that was specifically to review their performance. It wasn’t formally documented and filed each month, but this was the best way to give feedback. I went through the 4 areas the values and behaviours, how they were performing in their day job against the performance categories, the KPIs, the over and above stuff that their bonuses were linked to and the professional development plan.

Every six months, I go through the same process, but in a longer meeting normally about two hours where I go one on one with a formal review of performance, and we’d actually document that.

Basically the same assessment, but we get really serious about documenting with examples and facts. The same process at the six month mark, we do as the basis for the annual review, a two hour meeting, where once again, we’d document and finalise everything that went on during the year.

Now, what happened next is what’s critical. We went through a moderation process. This wasn’t a forced ranking process. It was driven by the executive team and it was supported by HR and the Organisational Development team. If we had a bonus pool to distribute, let’s say we had 75% of maximum bonus in a pool, we made sure that it was distributed based on performance, and individuals were rewarded, or not, based on their performance. Some individuals got zero out of their potential 75% of the bonus pool, and some got a full bonus, 100% because that was based on individually how they went.

It wasn’t just on raw scores though, we had to get a relativity between teams. I mentioned before that sometimes you get hard markers and sometimes you get soft markers, and so we had a reasonableness test that came from the top. And when we moderated scores, we had pretty robust discussions, let me tell you, between different executives about the performance of certain individuals in their teams.

But if we hadn’t gone through that process, we never would have arrived at a relativity measure that we thought was fair for everyone involved. The evidence, once it was moderated, became one of the inputs into the talent management process, which as I said, we’re going to save for another day.

There are a few important conclusions we need to make before deciding what to do with the annual performance review cycle. Abolishing the annual review process only works if you believe that all leaders throughout your organisation have the skill, the diligence and the courage to give feedback to their people as and when it’s required.

All of my experience tells me that you shouldn’t believe this, because it’s simply not true. By abolishing the annual review cycle, you’re just leaving a gap that won’t be filled, although it will save you time and money if it’s being done poorly now.

For me, this is a kin to waving the white flag and saying that we really give up on the notion of leaders being able to materially change the performance of their teams and the individuals they lead.

Equally, if you decide to persevere with the annual performance review, but you don’t push your leaders to hold the dozens of micro conversations with their people on a daily basis, the whole process can turn into an expensive sham.

Performance reviews add value when they confirm and communicate what every individual in your organisation should already know. What are your expectations of me? How am I going against those expectations? And what does my future hold?