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Why tough ''360'' reviews and employee ranking are gaining fans.
Kris Frieswick, CFO Magazine
June 1, 2001
Working as a senior finance executive at Boeing would be a pretty great job, right?
Before you answer, consider what would happen during your annual review: CFO Michael Sears would gather all your direct reports in a room, where they would discuss your strengths and weaknesses. Then he would confront you with their opinions, citing examples to back him up.
Few finance executives — or anybody, for that matter — would be completely comfortable with such a review process. But Sears swears by it. As far as he knows, it hasn't scared anybody off, he says, and he's used the approach for more than 10 years.
"Some people look good from the top down," says Sears, "but they don't look so good from the bottom up. And if you just gather paper data on a person, it's hard to get at some of the real issues."
Sears isn't the only one complaining about the limitations of traditional paper-based evaluations. What's wrong with older processes, many HR experts say, is that they tend to quantify what employees do, rather than how they do it. At best, traditional reviews identify and grade skills, while offering little real qualitative insight into performance. At worst, they deal with irrelevant skill sets, and burden managers with rafts of evaluation forms that lack correlation to company goals. Such failings might explain why, according to a study conducted by the Society for Human Resource Management, only 61 percent of HR managers are satisfied with their overall evaluation systems. Indeed, many managers have been scrapping their old systems altogether.
It's no surprise, then, that alternative performance-evaluation techniques have been gaining ground. In addition to Sears's technique — a particularly intense version of the 360-degree peer review — some companies have adopted ranking schemes, employee-driven appraisals, various hybrid skills assessments, and an approach that might be called the enlightened nonreview.
HR experts suggest that despite employee fears, and, in some cases, controversy over their use, alternative techniques can be worth considering. Even though the methods take more time, management energy, and interpersonal communication than do traditional reviews, they can effectively identify true competencies.
The 360 Terror
Competency-based performance management, in fact, is the backbone of most of the alternative approaches. Competencies, associated with the "how" of an employee's style, are "a set of personal traits or habits that are related to superior job performance," says Michael Schwalberg, a Scarsdale, New York- based clinical psychologist and co-author of Leverage Competencies, published last year by the Financial Executives Research Foundation. In contrast, the far-narrower "skill" elements describe what an employee can do: negotiate a contract or prepare a budget, for instance.
Particularly in vogue these days is the "360," through which employees are evaluated by their direct manager, their own direct reports, departmental peers, and others within the organization — as well as customers and suppliers, perhaps. A William M. Mercer study indicates that last year, 26 percent of companies used such "multirater performance management," up from 11 percent in 1995, and that another 20 percent are considering it.
"You can be the best salesperson in the world, but if you're alienating your internal or external customers, you're not our best employee," says Kathy Baum, HR director for Glacier Hills Retirement Community, in Ann Arbor, Michigan. She became familiar with the 360 a few years ago as HR manager at the National Center for Manufacturing Sciences (NCMS), a nonprofit Ann Arbor research-and-development organization. To identify and evaluate employee behavioral competencies, the NCMS included a 360 element in its evaluation process in 1995. Supervisors selected reviewers for their subordinates, although they allowed the subjects to suggest some changes to the list. Reviewers then rated employees on a one-to-five scale in various categories, and results were presented to subjects in a graphic format.
In line for her first review, "I was terrified," says Baum. "But when I finished panicking, I became converted to the entire process." For one thing, she explains, the review carries far more weight if it includes peer opinions. "If you were my supervisor and you were always saying that I needed to do something better, eventually I'd write that off as being picked on. But if my peers were saying the same thing, I'd realize that it's not just my boss."
NCMS employees' merit increases were based 20 percent on the results of the 360 review and 80 percent on direct performance criteria, such as meeting budget or accomplishing a previously stated job goal. In the last two years, the NCMS has stopped doing 360s, citing workforce shrinkage from 120 to 34 employees — a size that made it "hard to keep the personal feelings out" of a 360 review, according to current HR director Sue Cruden. "A hundred people is breakpoint for a truly objective, anonymous 360," says Cruden. "Any less and it doesn't really work."
In a way, Cruden's concerns mirror those of the critics of 360s, some of whom claim the reviews are basically popularity contests. While Baum concedes that can be the case, she says companies can prevent this by developing a consistent, repeatable, and fully anonymous system.
"It's like fire," says Baum. "If used correctly, it can do wonderful things. If you don't handle it correctly, it will burn you badly." Her system compensates for reviewer biases by aggregating at least three reviewers' scores into one average score in each reviewer category. In addition, anyone giving a particularly low score must give feedback explaining why. The Boeing Co.'s Sears says that during his group discussions with an executive's direct reports, he encourages participants to create a "consensus picture" of the executive in question, helping to eliminate such "outlying" views.
Despite the success that some companies have with 360s, the level of commitment managers must give to maintaining these time-consuming programs leads other companies to try them and drop them, says Colleen O'Neill, talent-management leader for Mercer. She sees another problem if companies aren't "clear about what the main objective is for the 360. Is it just developmental, or will it have an effect on pay? If it [has an effect], that's going to really change what you're measuring."
Joan Moore, president of The Arbor Consulting Group, an HR management consulting firm in Northville, Michigan, suggests one reason some companies back out quickly is that, "You have to have guts to do it. We see a lot of companies start down the path and peg compensation to it. Then, when the reviews don't come out the way they want, they back off."
At Boeing, the 360 that a finance executive does with Sears won't affect compensation. His process is used only for personal-development purposes and, in fact, "I don't even keep a record of it," he says. Nor is it used companywide; Boeing also has a more-traditional performance-skills-based appraisal process. But the CFO says problems identified using his method frequently show up in the formal performance evaluation, which is tied to compensation. "I don't usually see a lot of negative comments that I didn't already know about," he notes.
Some disagree with their appraisals. "I have seen reactions that go from 'I didn't know that I did that, but I'll work on it' to 'That's not true; that's not me,'" says Sears. "I remind them that this is a gift of honest feedback from direct reports, and there aren't many people who get the opportunity to get that kind of feedback."
Attracting an unusual amount of controversy lately has been the ranking technique. In the most commonly used form, managers evaluate their direct reports relative to one another, and must at least categorize each candidate as being in the top, middle, or bottom group of performers. This "forced distribution," called rank-and-yank by some critics, was popularized by General Electric Co., which routinely weeds out many among the bottom tenth. Ranking draws fire from employee groups and HR consultants, some of whom believe it can be used to discriminate against various employee demographic groups. The ranking practice has spawned numerous employee class-action lawsuits at such companies as Microsoft, Ford, and Conoco. The Conoco suit, filed by a group of middle-aged white males, alleges that British and European managers selectively discriminated against them during ranking.
In reality, of course, claims Hewlett-Packard Co. CFO Bob Wayman, ranking is inherently discriminatory — against low performers. "Ranking is an outgrowth of a fundamental American entrepreneurial principle," he says. "The whole idea of our economic system is competition and relative performance. Companies that do well win, and employees who do better than others move up faster and get paid more. People do relative ranking in their lives every day, making performance-based judgments about people."
At HP, which has used ranking for more than 30 years, managers annually rank all employees based on preset goals, and general competencies like teamwork. In Wayman's finance department, cross- organizational involvement is also an element, and cost control and related issues get more weight than they do elsewhere. All of HP's 90,000 workers are ranked in one of five "bands," says Wayman, based on a "reasonable distribution" that the company keeps relatively fluid. "We don't have a specific percentage that must fall into each band," the CFO says. The results all come to Wayman, who standardizes the findings, "but we don't have it all diagrammed out on a blackboard. It's not that specific. You make a judgment about what the person did in their job, and how hard it was, versus how hard it was for others."
The process doesn't end there. Wayman reviews the overall band distribution, and probes more deeply if the "reasonable" distribution isn't achieved. "As the boss, you want to put people in the middle or upper bands," he says. "You don't want to have to face people who aren't performing relatively well." Wayman says he often "pushes back" on managers to get more accurate — and in some cases more brutal — appraisals.
To avoid any discrimination problems with ranking, HP performs a thorough demographic analysis — age, race, "and anything else that we can legally look at" — to identify any statistically significant biases. If he finds them, Wayman seeks "a lot of backup to justify why all those people were there." Would he move people up to reduce the size of one group in a lower band? "Not if they were all underperformers," he says, adding that, so far, no lawsuits have been filed against the system.
HP uses ranking to determine compensation, promotions, and options packages. In addition, the company will soon incorporate a 360 peer- review component in the mix, although 360 results will be used primarily to determine future courses of training for employees.
Flexibility is the most important component in a ranking system, says Wayman. "The managers have to make the necessary judgments if a certain department is really strong, with lots of star performers," according to the CFO. "And I would be OK if they're not meeting the distribution." Managers must consider other factors besides rank when making job or compensation decisions — for good reason. "When I moved to the CFO position," says Wayman, "my ranking dropped from a 5 to a 2. It was because I didn't know how to do the whole CFO job."
Ranking can be an economical way for companies to make difficult staffing decisions quickly, supporters of the technique say. And "it's a great tool when you want to get people's attention and say 'new day, new rules,'" adds Mercer's O'Neill. "But for some companies, it's just not the right system," she maintains. "Applying it from top to bottom can be incredibly burdensome and complicated. It's best to do it within discreet groups. The devil is in the details." Ranking must be conducted with a blind eye to demographic variables, she adds. "If you try to work the system, you're in trouble." And like the 360, ranking is easy for companies to drop after a bad experience.
Susan Gebelein, an executive vice president with the management and HR consulting firm Personnel Decisions International, in Minneapolis, adds that "a lot of companies are ranking based on current performance. That's really wrong," because so much of an employee's value is in his or her potential for the company, which also can be measured in a ranking. "A lot of managers aren't very good at seeing potential," says Gebelein.
Believing in Your Assets
Another alternative appraisal approach — at the far end of the spectrum from ranking — is the employee-driven evaluation, or "bottom-up" critique, conducted by companies that want workers involved in standard-setting. In the most extreme cases, employees conduct their own research on their business units' long- and short-term needs and goals, and draft job-specific goals and standards while interviewing their own peers, supervisors, and reports for feedback. The supervisor then gets the findings. Still a very rare tack, it is not far from what's being done at privately owned Flint Ink, an Ann Arbor company that makes ink for newspapers, magazines, and consumer packaging.
Flint once did traditional evaluations on its 4,000 employees — a massive undertaking, according to Tom Emerson, director of employee relations, and one the company didn't do very well. "We talked to our employees about what they didn't like about evaluations, and they said [evaluations] had no credibility," he says. "The managers didn't know what they were talking about; they micromanaged small problem areas, but overlooked big areas of strengths and competencies." Employees called it "evaluation by ambush," noting that they were told to "meet a standard that they'd never even heard of before."
So when Flint revamped the evaluations three years ago, it created an employee development plan (EDP) in which half an employee's score derives from performance in the core-competency areas of teamwork, productivity, quality, problem-solving, dependability, and communication. Supervisors weigh each area by its importance to a specific job, then score the employee on a 1-to-4 scale in each area. The other half of the evaluation reflects performance of job-specific responsibilities, and this is where the employee input comes in. While the boss identifies macro responsibilities, the employees develop judging standards — and interestingly, often set standards unrealistically high, requiring supervisors to intercede and lower those standards before the evaluation, according to Emerson.
A crucial element of the program is a series of workshops showing managers how to give feedback and, more important, showing employees how to receive it. The EDP system also ties employees' scores directly to company succession-planning. "That shows our senior executives that we're very serious about everyone being part of this," says Emerson.
The company is planning to use a revenue-per-employee measurement to track the program's success. But Flint president and chief operating officer Dave Frescoln already considers it a hit, based on employee response. "We tell people that they're our most important asset," he says. "If we really believe that, we ought to be spending a significant portion of our time developing our people."
Kris Frieswick is a staff writer at CFO.
For Your Benefit
Top reasons that executives give for doing reviews.
Source: SHRM® /PDI 2000 Performance Management Survey
Who's the Boss?
Groups that contribute to performance appraisals.
Source: SHRM® /PDI 2000 Performance Management Survey
Reviewing Without Reviews
Some companies get so frustrated with the limitations of traditional employee evaluations that they choose not to do any at all.
According to Mary Jenkins, co-author of Abolishing Performance Appraisals, companies don't need to critique workers to determine their pay levels, or to create a legal paper trail if an employee needs to be disciplined. "We have a love affair with performance appraisals," says Jenkins. "We've been trying to do them for 50 years, and there's about a 90-percent dissatisfaction rate with the process."
The average appraisal today aims to do too much. "Feedback, coaching, development, pay decisions, legal documentation: in trying to serve all those masters, it fails," she says. Unintended consequences include the squirreling away of criticism or praise for months, until a formal review. Evaluations also can backfire as legal tools. "Managers know that appraisals are demoralizing, so they're lenient," according to Jenkins. "Unless they want you out the door, you'll get ratings that are OK." So if a problem arises, the paper trail suggests the employee was performing well.
The executive team at Glenroy Inc. was so disenchanted that it got rid of appraisals altogether in 1989. Life is fine without them, says James Daugherty, CFO of the privately held Monomonee Falls, Wisconsin, packaging manufacturer with annual sales of $40 million. "Everyone said that legally we'd be in trouble," he says, "but we haven't found a downside yet. Those problems just didn't materialize."
What has materialized is a corporate culture emphasizing ongoing communication, not once-a-year critiquing. "If you wait a year to talk to someone, you'll only tell them the bad stuff. You'll miss the teaching moments," says Daugherty. "We think it's more positive to be in a mentoring mode. When things need to be talked about, we talk about them."
To cover potential employee-discipline issues, he says, managers keep paper records of conversations and actions. Development issues are handled one-on-one with employees through career-goal conversations, or if Daugherty notices an employee skill gap.
Daugherty determines pay levels and raises by researching market rates for a given job, then starts new hires at that rate. Every year, employees get an automatic 5 percent increase until they're making 10 percent over market. Then the raises stop. To make more, employees must change to a new job with a higher pay grade. Glenroy awards companywide bonuses based on corporate performance.
Employees requiring lots of supervision and hand-holding often don't do well in Glenroy's new environment, admits Daugherty, but those who like it stay a long time. And the system motivates him constantly to restructure his relationships with his employees, something Daugherty thinks makes him a better CFO. "If I were just sitting in my office all day," he says, "we wouldn't be as good a department as we are when I'm out there talking all the time to my staff." —K.F.