Annual performance appraisal (APA) is one of the most awaited, and yet least liked, organizational processes. On the face of it, APA provides the organization with a methodology to set goals, review performance, calibrate rewards (and rebukes) for performance (and non-performance) and counsel employees. Organizations see APA as the only sustainable methodology for management by objectives and to ensure engagement and accountability. APA provides major opportunity to review employee performance and business performance in tandem, and also establish engagement between managers and employees. Invariably, APA is linked to the increment and promotion cycle of an organization which leads to great expectations as well as strong disappointments, individually and collectively. APA is one process which is driven by the human resources department of an organization, regardless of the site or business autonomy or decentralization models that could exist.
The focus of APA, over the years, has moved from goal setting and performance reviews to increments and promotions. Managing expectations in an equitable manner, and moderating the financial outcomes of the APA process has become a key concern for corporations. In this paradigm, the performance rating system, and within that, the bell curve, have become important tools. The performance rating system involves rating of employees in terms of various performance levels. One typical 5 point rating scale could be below average, average, good, very good and excellent. Some others tend to have better category names signifying that all employees are at least acceptable; for example, average, good, very good, excellent and outstanding. While the phraseology could vary from company to company (including just ordinal numbers such as 1 to 5), the intent that there would be a significant gap between a low performer and high performer is core of all APAs.
The bell curve
The lever in the APA process is the assumption that like all natural processes, performance of individuals follows the pattern of a statistical normal curve, commonly called bell curve (BC), with the vast majority being at the midpoint of the performance spectrum and smaller minorities being at lower or higher points, relative to the mid-point. The ratings correspond to the levels of rewards (or increments) “granted” to employees. Over time, the concept has become an important aspirational lever for employees with all employees wanting to be rated better and also earn more. With the linkage between better ratings and promotions, the aspirational lever became even more critical, negating the expectations of a normal curve, and instead generating a curve skewed more towards the better ratings. The general trend of supervisors not wanting to be factual or critical about employee performance, and instead “buy” harmony only accentuated the trend.
As if to counteract this trend, human resource departments began to seek force-fit of the bell curve, insisting upfront that ratings should conform to a normal curve, with at least 5 percent being at the lowest rating and not more than 5 percent being at the highest rating. This, coupled with normalization processes across departments and hierarchies ensure that the bell curve is followed, almost in a mandatory manner. In a talent scarce milieu like India, managers found an ingenuous way of circumventing the spirit of bell curve, while following it, by resorting to special critical talent increments and special retention increments. To the broader employee team, it would appear that the APA process and the bell curve are tools for the ‘empire’ to strike back at uncontrollably expectant employees. As a result, what was envisaged as a perfectly logical methodology to align organizational goals and employee goals and performance has become an annual tug of war between diverse interests.
Bell that tolls
The APA process has merits but the force fit of bell curve certainly has strong demerits. Bell curve has the unsavoury potential to push high performers (and high performing organizations) towards needless burnout on one hand or slide them down to a low performance mode due to the demotivation of high performers affected by the force fit of bell curve. High performance organizations are likely to have a very large base of high performers, and any mandate that no more than 5 percent need be rated as high performers would demotivate a large employee base. For some, the bell curve would push them further for elusive better ratings in the upcoming years leading to burnout and eventual exit for better rewarding careers elsewhere. Some others give up aspirations and scale down performance to reflect what they believe were undeservedly low ratings. This downward glide path again prompts the company to give lower ratings in the next APA cycle leading to the repetition of the disengagement cycle, and eventual exits. While force fit of bell curve is disengaging for high performers it, by contra, spreads needless largess for low performers and in low performing organizations.
Attempts to relate individual performance to operational and business metrics has not been too successful either. Typically, business performance is influenced by factors under the control of employees and beyond the control of employees too. In some case, employees may face the burden of self-serving, value destroying strategies pursed by their managers and senior leaders. The larger an organization becomes, and the more complex its businesses become, the greater would be the impact of disengagement and demotivation factors discussed above. Over time, companies have started realizing that both APA and BC processes created, progressive disengagement, if not silent strife, in organizations. As the organizations scale up the issues only become shriller. As a result, many global companies such as GE, Cisco, Accenture, Deloitte, Microsoft, Adobe, Infosys, MindTree and Wipro began to jettison the bell curve concept. TCS has been the latest to jettison the system. (Ironically, GE has been a strong proponent, if not a pioneer, of the force-fit bell curve system!). Most companies still retain the APA concept, although everyone recognizes that regular and progressive feedback would be more salutary than knee-jerk, once a year review.
Past, present and future
The alternative to bell curve is nothing but abandonment of the concept itself. There are, of course, companies still subscribing to the bell curve, a modified bell curve, or simply any sort of curve, considered appropriate to the organisation. Those who still subscribe to the bell curve see it more as a tool to control employee costs, amidst all the references to performance. Others refer to a performance curve which is right-skewed with a few outstanding performers, an overwhelming number of good performers and very few low performers. Others let the curve take its shape but resort to hard ‘bargaining’ to flatten the curve or reshape it to a bell pattern. The real solution, however, is to be authentic in assessments and let the right curve take shape. One of the important criteria in any abandonment of the bell curve would be how equitable rewards for the past and meaningful incentives for future can be built in. Data analytics could be a very helpful tool, in this context, to analyse ratings, rewards, individual performance and business metrics, and come up with normative curves for different businesses, departments, levels, and phases.
The alternative to APA is making it more regular, say, quarterly or monthly, and even co-terminus with conclusion of major projects or assignments. In both the alternatives, managers and leaders from line and HR functions have challenges; each challenge is, of course, a developmental opportunity for individuals and the organization. The first challenge is to develop themselves to become business savvy, and acquire the technical and behavioural ability to view, assess and communicate individual performance in the context of business performance. The second challenge is to communicate oneself as a mentor rather than as a reviewer, and develop in the team a greater emphasis on career development rather than on increments and promotion. The third is to find the requisite time and ambience for more frequent APAs without impacting the regular operational and business activities, more so in larger and spread-out organisations. The fourth challenge is to develop industry level benchmarks of performance rather than within-the-firm relative benchmarks for assessment. The fifth challenge is to integrate the more frequent APAs with cultural anchors such as excellence, empowerment and accountability.
Organisations need to appreciate that there is more to enable better business and individual performance than performance appraisal or bell curve. In fact, the culture of an organization would have much greater impact on shaping the performance. Cultural appraisal would, therefore, be a more meaningful methodology to ensure that individuals and organizations are performance focused. Again, as in the case of bell curve, there should not be any temptation to force fit culture on individuals. The desired culture must emerge naturally, with genuine ownership and sustainability. Many organizations tend to develop customised cultural formats (and revise them, from time to time) but the core cultural anchors are common for any firm and any industry. These are safety, quality, customer satisfaction, empowerment, accountability, collaboration, productivity, authenticity, transparency, ethics and human values. No company can go wrong in its culture journey, by whatever name it is called, if these elements are integrated into the culture map of the company.
Given the critical influence of the above factors on performance, culture appraisal becomes far more important than performance appraisal. Culture appraisal is far more involved and important than morale survey. For staying true to its name, culture appraisal has to be inclusive, open and transparent. Managers and leaders have to question themselves and debate with their teams how they are benchmarked on each of the cultural factors. The key issue is how the cultural anchors can be translated from their qualitative flavour to quantitative rigour, particularly when some of them, like safety, quality and customer satisfaction, are strongly behaviour driven. Fortunately, all of them have direct metrics or surrogate markers. Positive culture teams tend to be naturally high performing teams. Clear culture maps, open and inclusive culture reviews, timely performance appraisals, flat rewards and profit shares together constitute a stable, sustainable and sure methodology for alignment of individual and business performance on increasingly high trajectory, year over year.
Posted by Dr CB Rao on April 20, 2016