The Guide to Modern Employee Performance Management Traditional Performance Management

Before you can build a modern performance management process, you need to understand traditional performance management: where it started, how it evolved over time, and where it can still be improved.
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The history of performance management and performance evaluations dates back nearly 2,000 years. Even with all this time to evolve and improve, some of those centuries-old strategies are still largely unchanged, and the same age-old problems continue to crop up today.

Annual Performance Reviews

The history of performance reviews dates back at least as far as 230 AD when China’s Wei Dynasty rated members of the official family on a nine-point scale. Even then, Chinese philosopher Sin Yu’s criticism sounds remarkably familiar: “The Imperial Rater seldom rates men according to their merits, but always according to his likes and dislikes.”

Despite their shortcomings, annual performance reviews continued to be used for years to follow.

By the 1940s, about 60 percent of U.S. companies had formal employee performance evaluation processes, which rose above 90 percent over the following two decades.

These evaluations were originally intended to help identify and keep top performers, and get rid of low performers. Over time, it played a larger role in compensation and promotion decisions, and eventually expanded its role into employee development programs.

These days, a typical performance review is an annual meeting between manager and employee. It’s usually administered sometime around the end of the fiscal year, in order to review that year’s results and make easier comparisons across employees.

During an annual employee performance evaluation, manager and employee discuss the employee’s key strengths and weaknesses, ideally with evidence of both. The process ends with an overall assessment of how well the employee meets expectations, followed by setting performance and development goals for the next year.

Ratings Scale

For World War I, the U.S. military created a merit-rating system to identify and dismiss poor performers. As American businesses grew in headcount, they began using ratings more in the 1960s and ‘70s as a more effective and efficient uniform system.

Most employers assign each employee a numerical or descriptive rating on a scale of 3, 5, or 7. The majority of employees are generally rated at the middle of the scale, indicating they meet expectations. Many companies then have a calibration process where managers gather to compare ratings across employees with the goal of consistent and fair evaluations.

By standardizing processes, employment decisions feel safer, fairer. Ratings provide the perception of greater accuracy and objectivity, particularly when compensation and termination decisions are based on them.

Mercer’s research confirms employees like when ratings clearly indicate how well they are performing and how that compares to their peers. Meanwhile, the same research shows 61 percent of organizations eliminating performance ratings in 2016 and 2017. In Aon’s study, just over half of employees, and even more of high performers, want their companies to stop using ratings.

Stack Ranking

When World War II was fast approaching, the US Army devised forced ranking to quickly identify enlisted soldiers as officer candidates.

Again, corporate America learned from the military, with General Electric (GE) leading the stack ranking revolution in the 1980s. CEO Jack Welch championed what he called the “vitality curve” and everyone else called “rank and yank.” The annual review gave every employee one rating, which GE used to fire the lowest 10 percent and focus development on the highest 20 percent.

In the 2000s, forced ranking had reached 60 percent of the Fortune 500 companies. Welch explained

"People need to know where they stand. Failing to differentiate among employees—and holding on to bottom-tier performers—is actually the cruelest form of management there is."

However, research indicates performance declines when people are rated against each other. And when their ranking could lose them their job, employees are less creative, less collaborative, and struggle more with stress. GE has gradually modernized, moving away from forced rankings toward frequent feedback via an app. Microsoft, Accenture, and Adobe have made similar moves.

What's Next?

Now that you're familiar with the history of performance management, it's time to look into the present and the future. In the next chapter, we'll take a closer look at the evolution of increasingly modern performance management processes being used in some of the world's top organizations.

"When you think of the leadership association people have with Jack Welch and the ranking and rating, it suited a certain time; it does not suit today and today's worker in my opinion. It's a process that looks in the rearview mirror, that's focused on what you've done a year ago.”

– Donna Morris, Executive Vice President, Customer and Employee Experience, Adobe

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