A couple of years ago I read about a company that struggled through all of the classic problems companies encounter when they attempt to improve their performance appraisal systems.
An imperfect system
The initial change they made was to adopt a 1 to 5 rating system, where:
- 1 = Significantly below others
- 2 = Somewhat below others
- 3 = Solid, average performance
- 4 = Somewhat above others
- 5 = Significantly above others.
Unfortunately, the system was implemented with too few instructions on how to calibrate people. This led to the disappointing result of virtually all ratings being either 4 or 5. There were very few 1s, 2s, or 3s.
Tweaking for improvement
Realising the problem, three months later, they fielded a new round of performance appraisals, admitting the mistake they had with the first one. They asked that all departments achieve an average rating of about 3 across all their employees.
Secondly, they outlined seven dimensions of performance and each employee was to be rated on each. The results were again disappointing. Specifically, roughly 85% of employees received a rating of 3 and there were very few 4s or 5s or 1s or 2s.
So what are the key elements of an effective performance appraisal system that avoids such pitfalls? Here is my point of view:
1. Some kind of grading system and guidelines are necessary
The 1 to 5 system this company decided upon is good, as is the notion of having specific criteria which constitute what generally causes employees to be successful within a company.
2. Require an approximate bell-shaped curve to achieve differentiation
Many companies require that the ratings roughly approximate a bell-shaped curve at the level of department manager or above, where there are an adequate number of employees in the sample. For example, on a 1 to 5 system, they may require the 1 to 5 ratings have a distribution of roughly 5%, 15%, 50%, 20% and 10%.
3. Training is needed on a regular basis
Managers need to be reminded over and over again of the importance of sound performance appraisals for the development of people.
They also need to be reminded that it is an absolute necessity to discuss with the employee the individual’s specific rating and their strengths and areas needing improvement.
There are many HR professionals who will argue that rating systems in general drive wedges between employees and create too much of an environment of competition.
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No doubt, if the managers are not trained properly to give performance appraisals, this can happen. A high-quality performance system is a necessity; but don’t underestimate the need for constant attention or it will soon atrophy.