Continuous Performance Management: Why What & How

The last few years have seen a major shift in how companies manage employee performance.

Continuous Performance Management

From the earlier model of once a year process focused on evaluating employees, the trend now is towards continuous performance management with regular conversations focused on employee development and performance coaching. The trend started in large software and consulting companies with companies like Adobe, Google, Deloitte, etc. moving to continuous performance management, but now it’s catching up in other sectors and smaller companies too.

Why did this shift happen?

1. To understand why this change happened, you need to look at the kind of companies where it all started. Companies like Google, Adobe, Deloitte are very different in terms of how they operate, the nature of work, and what they value, compared to behemoth of the previous era like GE where the earlier process of rating and bell curve was popularised. These companies realized that the process of ranking and bell curves was not adding a lot of value for them and instead created more problems.
2. The economic context and the industry also play a very important role in dictating the kind of performance management system used by the company. For example, when human capital is plentiful, the focus is on which people to let go, which to keep, and which to reward. While when talent is in short supply, developing people becomes a greater concern.² Today, the market in most countries is dominated by software, services, brands, and R&D companies all of whom are competing for top talent. Hence this trend towards continuous performance management is on a rise.
3. With research in emerging fields like positive psychology, behavioral science, growth mindset, etc, there is increasing realization that clarity, purpose, and a sense of growth are what helps people perform, and companies are increasingly adopting insights from these new research in their performance management practices. ¹
4. Today in the VUCA world, annual goals and reviews are no longer relevant, the roles are becoming increasingly complex and distinct, and there is a greater focus on teamwork and collaboration vs. individual performance. Companies and employees are also expecting more from each other. With these changes, companies are realizing their traditional ways of managing performance have become outdated.

What has changed?

1. Most companies have done away with forced rankings and the bell curve.
2. Annual Review still exists but is now complemented with regular check-ins, 1:1s, feedbacks, and even quarterly or semi-annual reviews.
3. There is a shift towards a more inspiring, flexible, and transparent goals setting process like OKRs.
4. Many companies have moved away from a system of assigning a single rating or score to employees, to a system with pseudo ratings, multiple scores, or no ratings at all.
5. Compensation conversations have been separated from growth and development conversation to bring a dedicated focus on employee development.

Although the research is clear that more frequent conversation and coaching do help employees feel more engaged, motivated, and perform better, the experimentation is still on and there is no established consensus on which actions to implement in this new paradigm of performance management.

Mckinsey ³ ⁴ reports say that most companies haven’t seen the positive impact of these changes and are continuously experimenting with new ideas and concepts.

Employee still see the process as biased and unfair. Managers still see performance management as a bureaucratic, box-checking exercise. ⁴

How should one implement continuous performance management practices in their organization?

Make it Continuous

The main difference between the process from the previous era and this new one is that you are looking at performance on a continuous basis instead of a one time exercise in a year.

To make it work, you need to build an organizational practice of regular (at least monthly) meaningful 1:1 conversation between manager and employees. Without this, you won’t really change a lot in the process. Online check-ins are good but they can’t replace in-person coaching, feedback, and development conversations.

Building an organizational practice of 1:1 meetings is not easy. Here are a few practical tips on how to make it a habit for your people managers to do regular 1:1s with their team: The Enigma of 1-on-1 meetings and how Behavioral Economics can help

Make your managers ready for it

While the frequency of conversation between manager and employee matters, the quality of the conversations has a much bigger impact. Managers know the most about their team members, but most of them lack the skills and knowledge needed to conduct meaningful conversations, and the confidence and ability needed to evaluate them fairly. So investing in managerial capability is paramount to effective performance management.

Apart from managerial trainings which most companies do, consider micro-learning interventions like Whispers at Google to enable and nudge managers towards have more meaningful conversations.

Not about continuous but “effectiveness”

There are certain practices which are a must for any effective performance management process, continuous or otherwise:

Objective yet flexible goals: Goals make people feel connected to the overall purpose of the organization, clarifies the expectations, and enable objective measurement.

Best practices:

• Today, you need flexible goals that can be adjusted with changing business priorities.
• Making goals transparent increases the perception that the process is fair, as well as drives greater commitment from individuals and teams.
• The goal-setting process should be a collaborative exercise between manager and employee, and not driven from the top.
• Don’t spend time cascading goals from top to down. Follow a market-based approach where top goals are published and everyone’s goals are visible.
• In a continuous performance management process, goals should be reviewed and adjusted regularly during 1:1 meetings.

Consider implementing OKRs which have been a huge success in companies like Google and Intel, and are popular in software product companies . But it takes time for people to appreciate its value, understand the best practices and start following it deligently. If you think OKRs are right for you, get leadership commitment to drive it for at least 2 years. Consider having OKRs champions to promote best practices.

360 Feedback: It's a well-established fact that to make consistently better decisions one should rely on the wisdom of the crowd rather than one expert. 360 feedback has been in practice for long but surprisingly still many companies don’t follow it or don’t use it effectively.

Best Practices:

• When asked to rate, peers and direct reports tend to be nice to each other. Don’t ask to rate, instead use 360 feedback to ask specific questions about the individual employee — strengths, areas of development, what they have done well or can do better, what they should start/stop doing, etc. Also, read the Idiosyncratic Rater Effect.
• Ensure you get feedback only from people who have spent enough time and worked closely with the employee.
• Ask a maximum of 4–5 questions and run the cycle twice during the year. Complement it with the any-time-feedback process with similar questions, particularly if you have employees moving quite often across projects/teams.

Ratings or No Ratings?

Don’t do away with ratings if you don’t have a mechanism of explaining compensation decisions. In the quest to take the anxiety out of performance management, it is tempting to do away with rating systems³. But research shows that it hasn’t had any positive impact and may create new problems, particularly in managing and explaining compensation changes.

Don’t get me wrong, there are very good reasons for doing away with ratings, but it takes time to work out the alternative. You would need strong managerial capability and robust processes to make a no-rating performance management process work. Consider pseudo rating or combination of scores/ratings if a single score/rating system seems to be creating a lot of problems in your organization.

Removing ratings, definitely shouldn’t the first change you implement. Do it, if you think it's best for you after you have adopted OKRs and 1:1s, and invested in developing managerial capability.

What about Compensation?

Ideally, with continuous performance management, the compensation reviews should also become continuous. Bonus can remain to be aligned with business review cycles, whether that is quarterly or annually. But, the salary changes should become an as-needed process. What that means whenever the manager and the company believe that an employee should get a salary raise, they should get the raise then and there, and not wait for the annual exercise. Sometimes that is difficult to implement, so a close substitution is quarterly compensation reviews.

Compensation reviews with ratings

If you have either a single rating or multiple/pseudo rating system, the process of distributing salary increases and bonuses would still be similar to the traditional process:

• Bonuses will be decided based on a formula consisting of metrics and/or performance ratings.
• Salary raise will be decided based on some form of a matrix with one axis being compensation benchmarks(compa-ratio) and the other axis being a single rating score or formula of multiple rating categories.

Compensation reviews without ratings

In such a system, managers are allocated budgets for salary change and bonus distribution. Managers’ recommendations are then reviewed by the calibration committee or senior management and/or HR, and then finalized.

Without ratings, invariably organizations end up creating narrow compensation ranges and granular level/sub-level/grades, where employees at the same level and job function are paid a similar salary. A study by Mckinsey found such systems where compensation was not differentiated, to be perceived as ineffective³.

And if you are not creating narrow compensation ranges and granular levels, you are giving a lot of discretion to the managers and calibration committees to figure out fair salary raise and bonus for employees. You need highly capable managers, robust process, and salary benchmarks for this system to work. When roles are interdependent, collaboration is critical, and results can’t easily be traced to individual efforts³, it becomes difficult to find the right benchmarks or to differentiate between employees. When not done well, which is usually the case, employees find such a process to be unfair.

Calibration — How much is too much?

Calibration has been a well-established step in the performance management processes to ensure fairness. Organizations that do this step diligently, spend a lot of time doing it. To discuss just 30–40 employees would need around 3–4 hours. And even after that most organizations can’t guarantee fairness — no manager or calibration committee can correctly differentiate all employees across categories like “exceeds expectation” vs. “strongly exceeds expectations” vs. “superb”.

So, the questions that need to be asked — Does this process add significant value? Is it the best use of everybody’s time? Is there a more efficient way of ensuring fairness? How much of calibration is too much?

Here is what might work —

• Don’t bother differentiating a lot among the middling performers, particularly if roles are interdependent and collaboration is critical. Assign them the same rating and similar pay.
• Only identify and differentiate stand-out performers and low performers — clear-cut cases who would not need a lot of calibration and discussions.
• Pay a handsome premium(10–15%) to stand-out performers and address the low performer cases³.

Communication

When you have a developmental conversation together with compensation changes, employees tend to focus on the extrinsic rewards — salary and bonus — and learning shuts down. Employees typically have a lot of energy to argue for higher ratings and compensation because it means more money for them. Even if they don’t, managers are worried that they might.

So its best to have 2 separate conversations during the review⁵:

1. Focused on performance and developmental feedback.
2. Focused communicating ratings and compensation linked to those ratings.

If you liked this article, here are some other articles you may enjoy:

All About OKRs

Having Effective One-on-One Meetings

Improving Manager Capability in Startups and SMBs

References

1. Josh Bersin: Continuous Performance Management — Innovation Reigns
2. HBR: The Performance Management Revolution
3. Mckinsey: The fairness factor in performance management
4. Mckinsey: Harnessing the power of performance management
5. Book: Work Rules — Laszlo Bock