In 2015 a number of large, global organisations including General Electric and Accenture announced that they were abandoning performance ratings. Since then, many other organisations have been considering removing their appraisal ratings, but are confused about how they would manage reward, which is frequently tied into performance ratings.
Ratings have long been a central feature of performance management. They provide a simple classification that enables smart decisions around talent, development, promotion, and reward.
But as companies move away from annual performance reviews to a more continuous approach, the idea of an annual rating is being brought into question. Add to this the evidence from neuroscience that ratings do more harm than good, and you have a strong case to remove them.
But what about performance and reward? Without a measure of performance how do we pay for it?
Put simply, if you take away performance ratings then there are two potential paths for reward: consistency or discretion.
Path 1 – Greater consistency
You can stop rewarding different levels of individual performance.
Base pay becomes the rate for the job determined by external benchmark data, internal equity or length of service. Any bonus (apart from incentives/commission related directly to metrics) are based on team or company performance.
Consistent reward encourages collaboration. It is more straightforward and transparent, relieves managers from making tough pay and bonus decisions, and brings central control of reward budgets. There’s already plenty of debate over whether pay drives performance (Dan Pink).
But for many, this is a step back. There’s no scope for individual influence, or flexibility for managers to ‘get pay right’. Performance and contribution vary greatly across individuals. Recognising this through reward seems right and fair for some organisations.
Path 2 – Greater discretion
You can give line managers more discretion to reward different levels of individual performance.
Skilled managers don’t need a rating to make informed pay and bonus decisions aligned with performance discussions. Provide the budget and the market data or pay ranges, and leave them to ‘do the right thing’.
From my conversations with organisations who have removed ratings, empowering managers in this way enables multiple factors (e.g. contribution, value to business, team equity) to be factored into the decision. But this approach brings challenges around fairness and consistency. It requires trust, manager capability, honest and transparent conversations and safeguards from discrimination and bias.
And there is a danger here that, in the absence of a rating, the pay rise or bonus allocation become a pseudo rating.
Is there another way?
As ever, the answer has to be organisation-specific. Or the right approach may be a combination of the two options. For example:
- consistent pay and bonus but individual recognition awards for demonstrating behaviours and values
- consistency at junior levels and discretion at senior levels
- consistency for the majority, discretion for a small discrete subset of talent
What helps is to clearly define your reward strategy right from the start. For example, do you want to reward individual or team achievement? Should reward be controlled and annual, or flexible and in the moment?
So, you can remove appraisal ratings and still reward performance. But you should only do so if this fits with your future reward strategy.