May 31, 2016

What Makes a Performance Evaluation System Work

What Makes a Performance Evaluation System Work

Senator and Hall-of-Fame athlete Bill Bradley once said:

“Leadership is unlocking people's potential to become better.”

Americans have great, perhaps excessive, faith in performance evaluation systems in achieving this goal. Performance evaluations determine pay, continuation of employment and career assessment.

Because much rides on performance evaluations, most people get stressed out when receiving one, and people and organizations complain regularly about them. If performance evaluations are being more widely adopted, how do we make them work constructively, as opposed to destructively?

The paradox of performance evaluations is this: if they are focused on helping an individual maximize his or her potential, they will maximize organizational performance. If focused on organizational performance, they will maximize neither individual nor organizational performance.

When someone is a substandard performer over the evaluation period, the organization responsible for the evaluation has to make one of two judgments:

  • Either the individual has not performed up to potential; or
  • The individual has performed up to potential, but he or she is a misfit in the job or organization.

Unfortunately, most tend to be compliance exercises that do not yield insight for either the individual or the organization.

My overall observations

  • The key to effective performance feedback in any system is the level of trust and respect that exists prior to the feedback process.
  • There are right and wrong ways to provide performance feedback. The right ways to give feedback are simple to articulate, but followed too infrequently:
  • Everyone benefits from getting positive and negative feedback as often as possible and as close to the event that triggers it. If a leader cares about those he or she leads, then feedback will be continuous. Imagine a coach of a high performance athletic team waiting until the end of the year to tell a player that he or she failed to measure up. Great coaches give feedback when it can make a difference.
  • Critique the behavior, not the person.
  • Be specific and honest. Do not attribute the criticism to someone higher up. Own the feedback.
  • Make suggestions for improvement.
  • Praise someone publicly, but criticize him or her in private.
  • Listen to the person’s explanation as to why he or she is not doing something the way the leader thinks it should be done.
  • Follow up.
  • There is no perfect performance management system and none that remains optimal over time. Therefore, adhering to any system as if it were mathematically and scientifically precise is a bad idea.
  • We should test every new comprehensive evaluation system extensively before its use has meaningful consequences. Pitney Bowes introduced the Gallup Employee Engagement Survey tool in 1997, but did not incorporate the findings of an engagement survey into talent evaluation and performance management for five years.
  • Performance evaluations should be based on a “balanced scorecard,” that is, an evaluation system that contains multiple criteria, not a single criterion. I never evaluated executives solely on share price appreciation or on profit improvement. Any system based on a single metric is both inherently incomplete and easily manipulated. My high school trigonometry teacher was evaluated on New York State Regents test scores, so he “taught to the test.” Our class did phenomenally well on the test, but few engaged in any meaningful way with the subject.
  • Every evaluation system needs a “degree of difficulty” modifier. One highly likely source of dissatisfaction for someone subject to performance evaluation is being held to an impossible standard. For example, as Medicare has introduced shared savings and shared risk payment systems, it has applied a risk profile to the patient population. Its methodology is directionally correct, although cumbersome. The same should be true with other evaluations as well, such as those applied to teachers. Improvement, rather than the imposition of top-down standards that bear no relationship to the degree of difficulty in the environment, should be measured.

If leadership finds a chronic disconnect between exceptional talent in an organization and poor results, it is time to determine whether the operating model of the organization is flawed, as opposed to the talent.

  • Give those being evaluated give significant input into both evaluation design and execution to make it more likely to be accepted and improved. The ability to give input into an evaluation system is critical for its legitimacy. Employees appreciated the opportunity to participate in the Pitney Bowes evaluation process, especially in proposing annual objectives.
  • Evaluation and compensation that follows from it should align individual and organizational goals. In many organizations, performance evaluation criteria enable individuals to accomplish their goals, but hurt the organization. In fact, a most important success factors for performance goals is that they align an individual and a department or business with the entire organization’s goals.
  • Organizations should always align the short and the long term. As a former public company CEO, I always had to explain that “shareholder value creation” is much more complicated than it initially seems. The time horizon of “shareholders” can range from seconds to decades. Some “shareholders” are traders who simply want to buy and sell on small share price movements ahead of the market. They have no interest in sustained value creation.

Boards of Directors and management face the trade-off of determining how value can be delivered short term by paying dividends or repurchasing shares, or longer term by investing in organic growth, and doing acquisitions or minority investments. There is no perfect answer and the best answer changes over time. Our performance objectives were adjusted to strike the right balance between the short and long term.

  • Every evaluation system should provide for unexpected events occurring during an evaluation period, and how the person being evaluated responded to them. Any evaluation system that ignores what happens after objectives are set is disconnected from reality. In late 1993, when I became the President of Pitney Bowes Financial Services, we set 1994 profit objectives assuming two anticipated rate increases by the Federal Reserve Open Market Committee. By May, we had experienced five rate increases.

What mattered more was how my team responded to this development, since it increased our cost of borrowing much more than anticipated. We made our budget that year, but the most important question was what people did to adapt to adversity.

  • Every evaluation should include an assessment of the individual’s longer-term career potential. A core management skill is the ability to address and discuss whether the individual has upward career potential. No one should be deluded into believing that he or she has a bright future in an organization, when that is not the case.

Given the importance of career discussions, organizations must insure that they do not have insecure, mediocre people in management positions, because they will not perform satisfactorily in career counseling. Many will feel threatened by stronger talent and try to put them down.

  • Confidential peer, subordinate and client feedback should be provided from time to time to all employees. Supervisors have a single window into someone’s performance, but many people are skilled at “managing upward,” while being terrible at subordinate, peer, and external stakeholder relationships. It is demoralizing for organizations to see someone rewarded primarily because he or she is great at manipulating higher-level management. These cases send a message that the organization’s talent management process is fundamentally unfair.

This last point also indicates the criticality of more robust data. For example, professional sports are getting better at providing teams, agents, and players more robust data through which to evaluate athletes and teams against both objective criteria and other athletes and teams.

I love baseball’s Statcast, a combination of video-captured performance data and big data analytics introduced in 2013. It enables everyone to evaluate athletes in multiple dimensions, including the previously difficult dimension of defensive excellence.

In the past, we relied on human observation, which often was at odds with what the data ultimately showed.

Business should be emulating professional sports in seeking more continuous, robust data collection. Public companies do a poor job of gathering meaningful performance data, and often fall back on reporting in formats mandated by the SEC or by compliance-oriented auditors. As a result, we often do not know whether individuals are creating or destroying future value.

One of the most pivotal events of my life was a conversation with a high school debate judge, who told me that I was not very good, but that I could be good, if I had proper training, and he explained how the training would help me. He took the time to steer me toward a summer training institute that changed my life in giving me both the confidence and the tools to be quick on my feet.

I only wish that everyone could have that kind of feedback throughout his or her lives. All of us would realize our full potential, which, independent of how far we go in life, is the most satisfying personal accomplishment.

We should deprive no one of the opportunity to unlock his or her potential through great performance and career feedback.