It is without doubt the hottest topic of debate in performance management circles at the moment. Should you use an overall performance rating as part of your employee performance reviews or appraisals?

In many ways it seems an obvious thing to do – most companies want an easy way of understanding who their good and bad performers are. Indeed, the 2014 e-Reward performance management survey found that 77% of organisations used performance ratings.  But there is now an increasing backlash against rating performance and some high profile companies such as Adobe, GE and Microsoft have abandoned them.

The problem with performance ratings

The main issue with performance ratings is that studies have found them to actually demotivate employees and negatively impact performance, except for those people rated at the highest end of the scale. Furthermore, research into neuroscience has found that performance ratings activate a flight or fight response in the brain which decreases subsequent performance, except for those getting a top rating.

Researchers have also found that employee performance is improved through good quality feedback, and that assigning a performance rating tends to prevent that feedback from being taken on board. The rating is what the employee remembers after the event, and not the discussions that went with it.

A final problem with performance ratings is that they are largely subjective and prone to a number of well-recognised rating biases such as the ‘contrast effect’, ‘halo and horns effect’, ‘similar-to-me effect’ and ‘central tendency bias’. In an experiment reported by MindGym, the ratings of a group of employees with radically different levels of performance were analysed, and their performance ratings showed little correlation with their actual levels of performance.

Why performance rating can be useful

Despite these problems, many organisations are still using performance ratings. The main arguments for rating performance are:

  • It provides a convenient way of managing performance related pay (although you can manage reward without performance ratings – find out how here)
  • It enables organisations to understand who their top performers are for talent planning purposes
  • It can provide supporting evidence when taking action against poor performers (e.g. in dismissal cases)
  • It lets employees know where they stand in relation to their peers

Should you rate performance?

This is the key question and there is no right answer as it will ultimately depend on what your ultimate goals are for your performance management process. Our advice would be to question whether you really need performance ratings and, if you are using them, evaluate their effectiveness in achieving your performance management goals. Do some internal research to find out from your employees and managers whether they find that ratings actually improve performance and motivation or negatively impact it.

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How performance ratings can be improved

If you decide that you should rate performance, here are some things that you can do to minimise the potential negative impact of ratings and improve their accuracy:

  1. Consider asking targeted questions that identify high/low performance, rather than providing a single performance rating. For example, Deloitte ask managers four questions instead of using performance and potential ratings.
  2. Train managers in how to rate performance objectively and avoid rating biases
  3. De-couple performance ratings from pay reviews. Performance review discussions and ratings will be more honest if pay reviews take place several months after the performance rating is assigned, and the pay review takes into account other factors such as market rate and changes in job responsibility, as well as the performance rating.
  4. Avoid the use of forced distribution for ratings. Research has found that it can have damaging effects on morale and that any benefits tend to be limited to the first year or so of its use.
  5. Monitor the consistency of ratings across the organisation and check for patterns or bias. Consistency can be further improved through ‘peer reviews’ or ‘calibration’ whereby groups of managers get together to review and compare each others ratings and highlight any noticeable rating patterns or stand-out decisions.
  6. Avoid the use of labels such as ‘satisfactory’ or ‘competent’ for middle ratings. They can be demotivating as nobody wants to be described as average. Instead, consider more positive terminology like ‘effective’.

Your performance management software should support your chosen approach

Some performance management systems are completely centred around an overall performance rating. With Clear Review, you are not tied into rating performance – you can choose to focus on qualitative feedback and performance development instead. If you want to have ratings, Clear Review gives you the option of rating individual elements of performance, having an overall rating, or asking targeted questions, the choice is yours.