Performance reviews – prevalent but not popular

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IBM Analytics

Performance reviews – prevalent but not popularResearch insights into the current status of performance evaluation

Haiyan Zhang Ph.D.

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Performance reviews – prevalent but not popular

Performance reviews provide employees with feedback and are intended to improve employee motivation and contributions, but lately they have received a great deal of criticism with some calling for organizations to “kill performance reviews”1. A few companies such as General Electric and Microsoft are reportedly abandoning their performance evaluations altogether.2,3 How widespread is this movement away from traditional performance reviews?

Based on IBM Kenexa’s recent survey to North America HR practitioners from 508 organizations, the IBM Smarter Workforce Institute analyzed performance evaluation practices and future plans of the organizations. The results provide timely insights into the status of performance evaluation.

Executive summary• Despite high-profi le criticism of performance evaluation

systems, almost all organizations surveyed (97 percent) conduct some form of performance evaluation. Eighty-two percent use formal rating or ranking approaches, and just 13 percent use a system without any prescribed approach.

• One quarter (26 percent) of organizations are considering changing their current performance evaluation practices. Among those (74 percent) who are not planning on changing:

– Only 9 percent are satisfi ed with their current practices.

– Twelve percent have recently changed their performance evaluation approaches.

– Most have other reasons for maintaining their current arrangements – they see no better alternatives (35 percent), it would be diffi cult to change their current approaches (16 percent), or they have specifi c concerns (e.g. budget issues, potential legal implications, etc.) (10 percent).

• Performance evaluations are more likely to be reported as being eff ective in organizations that use prescribed approaches and provide formal training to managers on how to conduct performance evaluations.

• The use of forced distributions or rankings does not result in better identifi cation of top and bottom performers.

Research method

The analyses are based on responses from HR practitioners in 508 organizations, a subsample of the IBM Kenexa 2015 Compensation Trends survey that represents 21 industries, multiple ownership types (public, private, joint venture, non-profi t and government), and different company sizes (fewer than 500 employees to greater than 25,000 employees) across US and Canada (See Appendix for more information).

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How prevalent is performance evaluation?Despite the headlines about organizations moving away from formal performance reviews, the vast majority of our respondents (97 percent) still conduct some form of performance evaluation. As shown in Figure 1, 82 percent evaluate employee performance with formal rating or ranking approaches, while 13 percent of organizations undertake performance reviews, but do not have a prescribed approach. The commonly used rating and ranking methods include:• Rating without forced distribution (57 percent)• Rating with forced distribution (19 percent)• Ranking or paired comparison (6 percent)

Figure 1: What evaluation methods are commonly used?

Common rating and ranking methods

• Rating without forced distribution means a manager assigns a score to employees based on certain absolute criteria.

• Rating with forced distribution requires a manager to evaluate each individual, and rank them typically into one of three categories (excellent, good, poor). Managers are guided on the percentage of employees that should fall into each category (distribution).

• Ranking or paired comparison is when a manager rates an individual employee’s performance by comparing his/her performance with that of others.

No prescribedapproach 13%

Other 2%No performance

evaluation 3%

Formal rating or ranking 82%

57%

19%

6%

Rating withoutforced distribution

Ranking or pairedcomparison

Rating withforced distribution

Eighty-two percent of organizations use formal rating or ranking approaches to performance management.

Source: IBM Kenexa 2015 Compensation Outlook Survey (N=508).

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When we factor in the size of companies, it is perhaps unsurprising that the larger the organization, the more likely they are to conduct performance evaluation. Not only that, but they are also more likely to implement prescribed approaches. As shown in Figure 2, just one in one hundred large enterprises do not have performance evaluations compared to six percent of small businesses; 88 percent of large enterprises use formal rating and ranking approaches, while 68 percent of small businesses use formal approaches, a 20 percentage-point diff erence.i

Figure 2: Performance evaluation methods used by different sized

organizations


Note: Business size4: Small business =fewer than 100 employees,

Small-Medium business=100-999, Medium businesses=1,000-9,999,

Large enterprises=10,000 or more.

Are organizations considering a change? While we know that most organizations have yet to abandon performance reviews, it could be a change they are considering in the future. However, our analyses reveal that three quarters (74 percent) of organizations are not even thinking about changing their current performance evaluations. See Figure 3.

SmallBusiness

Small-MediumBusiness

MediumBusiness

Large Enterprises

Rating without forced distribution

No performance evaluation

No prescribed approachRanking or paired comparison

Rating with forced distribution

Other

51% 4% 6%2%13% 24%

55% 16% 2% 3%7% 17%

62% 19% 2%2%5%10%

54% 28% 1%3%6% 8%

We might conclude that organizations are sticking with their current approaches because they are happy with them. A closer look at the data reveals this to be an incorrect assumption. In fact, of the organizations sticking with what they have, less than one in ten (9 percent) are satisfi ed with their current practices. Another 12 percent have recently changed their performance evaluation approaches.

If the majority of our respondents are unhappy with their current performance evaluation processes, we might reasonably ask why more aren’t making changes. Our analyses reveal some signifi cant barriers to change:• There are no better alternatives (35 percent) • Current processes are culturally ingrained and diffi cult to

change (16 percent) • They have specifi c concerns, e.g., budget issues,

potential legal implications (10 percent).

Figure 3: Are you considering changing your current performance

evaluation practices?


i For the large enterprises, 88 percent is the total of 54 percent (rating without forced ranking), 28 percent (rating with forced ranking), and 6 percent (ranking or paired comparison). For the small businesses, 68 percent is the total of 51 percent (rating without forced ranking), 4 percent (rating with forced ranking), and 13 percent (ranking or paired comparison).

No better alternative Just made changes

Do not knowOther (e.g. budget reasons,potential legal implications)

Difficult to change Satisfied with current approaches

Yes 26% No 74%

35%

16%

10%

18%

9%

12%Why

no?

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Of those organizations considering change, the detail of exactly what changes will be made varies. Almost a quarter (22 percent) want to remove formal rating and ranking (i.e., rating with forced distribution, rating without forced distribution, or ranking or paired comparison); 19 percent plan to change the rating criteria or scales; 14 percent plan to change the process or frequency of reviews; and 8 percent plan to implement new systems or tools (Figure 4).

Figure 4: What changes are organizations considering?

As shown in Figure 1, one in fi ve organizations use rating with forced distribution, a method that is claimed to eff ectively diff erentiate between top and bottom performers by its proponents.5 However, our results do not fi nd signifi cant diff erences between rating with forced distribution and rating without forced distribution in diff erentiating top and bottom performers (73 percent vs. 76 percent) (Figure 5).

Figure 5: Effectiveness of various performance evaluation methods

Source: IBM Kenexa 2015 Compensation Outlook Survey, subset of

respondents considering changes to their current performance evaluation

system (N=108).

Which evaluation method works better? As revealed above, the view that there is no better alternative is one of the major reasons that organizations are reluctant to move away from their current practices. In light of this, an understanding of the relative eff ectiveness of diff erent evaluation methods could help organizations decide on the best approach for them.

Compared to no prescribed approach, formal rating and ranking approaches are more likely to be reported as eff ective in identifying top and bottom performers (73 to 81 percent vs. 54 percent) and for correcting unsatisfactory performance (65 percent to 68 percent vs. 36 percent) (Figure 5).


Note: The chart shows the percentages of employees who agree or

strongly agree with the statements of My organization’s current

performance evaluation approach is effective in identifying high and low

performers and in correcting unsatisfactory performance. *Differences

between the formal approaches and no prescribed approach are

signifi cant (P<0.05).

22%

19%

14%

8%

Remove rating and ranking

Change rating criteria / scale

Change process / frequency

Implement new system / tool

73%

76%

81%

54%

65%

60%

68%

36%

Identifying high andlow performers*

Correcting unsatisfactoryperformance*

Rating without

forced distribution

Rating with

forced distribution

Ranking or

paired comparison

No prescribed

approach

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Our analyses further reveal that when organizations train managers on how to conduct performance evaluations, the evaluations are more likely to be seen as eff ective, in the following ways (Figure 6):• Encouraging communication between managers and

employees (75 percent vs. 58 percent)• Reinforcing favorable performance (71 percent vs. 60

percent)• Correcting unsatisfactory performance (66 percent vs. 53

percent)• Identifying training and development needs (57 percent

vs. 39 percent)

Figure 6: Performance evaluation seen as more effective when

organizations provide manager training

ConclusionWhile some high profi le examples of organizations moving away from performance reviews have been reported, the vast majority of organizations have yet to follow suit. However, this does not appear to be a result of high levels of satisfaction with the system, but rather a view by many that there is simply no better alternative.

For those organizations using ratings with forced distributions to diff erentiate high and low performers, one option is to do away with the forced distribution component. Our fi ndings indicate no incremental ability to diff erentiate with this approach.

Organizations looking for a more dramatically diff erent way to evaluate employee performance may benefi t by learning about new approaches and outcomes that have been tried by others. A recent Smarter Workforce Institute research paper on the impact of a non-traditional performance evaluation system could provide helpful insights. Download the white paper, Can performance management inspire? at http://www-01.ibm.com/software/smarterworkforce/institute/publications/


Note: *Differences between the organizations who provide manager

training on performance evaluation and those who do not provide

manager training are signifi cant (P<0.05).

75%

58%

66%

53%

57%

39%

71%

60%

Manager training No manager training

Encouraging communicationbetween managers and

employees*

Reinforcing favorableperformance*

Correcting unsatisfactoryperformance*

Identifying training anddevelopment needs*

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Appendix

Figure 9: What size organizations participated in the survey?

34%

22%

18%

14%

11%

Compensation &Benefit Professional

HR Mgr/Dir/Exec

Compensation &Benefit Mgr/Dir/Exec

HR Pro

Other Pro/Mgr/Exec

Figure 7: Who participated in the survey?

43%

30%

18%

7%

2%

Privately owned

Publicly traded

Non-profit

Government owned

Joint venture

10%

29%

39%

23%

99 or fewer

100-999

1,000-9,999

10,000 or more


Figure 8: What are the ownership types of the organizations in the

survey?


Source: IBM Kenexa 2015 Compensation Outlook Survey (N=508)

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IBM Smarter Workforce Institute The IBM Smarter Workforce Institute produces rigorous, global, innovative research spanning a wide range of workforce topics. The Institute’s team of experienced researchers applies depth and breadth of content and analytical expertise to generate reports, white papers and insights that advance the collective understanding of work and organizations. This white paper is part of IBM’s on-going commitment to provide highly credible, leading-edge research fi ndings that help organizations realize value through their people. To learn more about IBM Smarter Workforce Institute,please contact us at [email protected]. Follow@IBMSmtWorkforce on Twitter or visit our website:http://www-01.ibm.com/software/smarterworkforce/institute/

How IBM can helpToday’s human resources organizations need to attract and grow top-performing talent, create engaging social and collaborative cultures, and connect the right people to get work done. IBM solutions combine market-leading talent management and social collaboration tools with the power of workforce science and advanced analytics. We help organizations build impassioned and engaged workforces, and deepen client relationships that can lead to measurable business outcomes.

To learn more about IBM Smarter Workforce solutions and services, please visit ibm.com/software/smarterworkforce

About the AuthorsHaiyan Zhang Ph.D. is an Industrial/Organizational Psychologist with the IBM Smarter Workforce Institute. Her areas of expertise include qualitative and quantitative methods, recruitment and selection, performance management, employee motivation, and cross-cultural research. She is particularly interested in how research evidence can be used to inform HR practices. Her current research focuses on the impacts of technology-enabled HR transformation on employee attraction, engagement and performance. She has presented and published research fi ndings at various conferences and peer-reviewed journals nationally and internationally. She has also served as a reviewer for a number of conferences and journals, and is a member of Society for Industrial and Organizational Psychology (SIOP). Haiyan received her Ph.D. in Human Resource Management from the DeGroote School of Business at McMaster University, Canada. Prior to her doctoral study, Haiyan had extensive research and management consulting experience in China.

ContributorsSheri Feinzig Ph.D. is the Director of IBM’s Smarter Workforce Institute, and has over 20 years of experience in human resources research, organizational change management and business transformation. Sheri has applied her analytical and methodological expertise to many research-based projects on topics such as employee retention, employee engagement, job design and organizational culture. She has also led several global, multi-year sales transformation initiatives designed to optimize seller territories and quota allocation. Additional areas of expertise include social network analysis, performance feedback and knowledge management. Sheri received her Ph.D. in Industrial/Organizational Psychology from the University at Albany, State University of New York. She has presented on numerous occasions at national conferences and has co-authored a number of manuscripts, publications and technical reports. She has

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served as an adjunct professor in the Psychology departments of Rensselaer Polytechnic Institute in Troy, New York and the Illinois Institute of Technology in Chicago, Illinois, where she taught doctoral, masters and undergraduate courses on performance appraisal, tests and measures.

Louise Raisbeck is responsible for marketing communications in the IBM Smarter Workforce Institute. She has worked in the fi eld of workforce research for more than 10 years and is responsible for turning research insights into engaging, thought-provoking and practical white papers, reports, blogs and media materials. Louise is a member of the Chartered Institute of Public Relations and a former director of a top 10 PR consultancy in the UK.

AcknowledgementWe would like to express our great appreciation to Alison French for her valuable suggestions on survey questions and assistance with data collection. We would also like to extend our thanks to Jevons (Jianwen) Qin for his help in preparing the data for analyses.

References1 Ryan, L. (Feb., 2015). Let’s kill performance reviews in

2015. Retrieved from http://www.forbes.com/sites/

lizryan/2015/02/19/lets-kill-performance-reviews-

in-2015.

2 Adday, M.. (Aug., 2013) Here’s why GE is replacing performance reviews with an app. Retrieved from http://

fortune.com/2015/08/13/performance-reviews.

3 Ovide, S. & Feintzeig, R. (Nov., 2013) Microsoft Abandons ‘Stack Ranking’ of Employees Retrieved from http://www.wsj.com/articles/SB1000142405270230346

0004579193951987616572.

4 Eastman, R. (Jan. 2010). Sizing up Small-to-Medium Business (SMB). Retrieved from http://smbresearch.net/

sizing-up-smb.

5 Schleicher, D. J., Bull, R. A., & Green, S. G. (2008). Rater reactions to forced distribution rating systems. Journal of Management, 899-927.

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Performance reviews – prevalent but not popular