Argh. It’s coming up to that time of year again. And I ask you why? why? why? This isn’t an intro to a history lesson on why we have performance reviews. I’m sure they solved a problem when first invented. Pay for Performance has some merit and you can kind of understand that the annual performance review is something to anchor this to. But work is changing! We can’t just keep applying the old way of doing things and assume it still works in today’s context.
Most people reading this will have experienced the annual performance review, and there will be very few of us who have ever looked forward to it. Firstly, there is all the pre-work. You need to remember everything you’ve done in the past twelve months. Document it in a way that makes you sound amazing. You need to seek out advocates who’ll sing your praises and convince them to put this in writing. Then you need to spend an hour with your manager when you know that neither of you want to be there and there is a whole lot of ‘real’ work you should be doing.
You knew that right? That your manager hates doing performance reviews just as much as you hate receiving them? They take up too much time. Also, your manager has probably been asked to make sure he/she differentiates the team’s performance. This means on a 5 point scale don’t just put everyone as a number 3. You need someone at 1 and 5 and probably a couple of people at 2 and 4. In my experience, managers don’t like differentiating performance for a couple of reasons. Either, they can’t because they don’t know their team well enough; or they don’t want to get any of their teams noses out of joint. There is a third reason, a more noble one. It's because they have worked really hard to hire and develop a team of people who are all top performers, and for this reason they quite seriously can not differentiate the team’s performance.
Why do companies have performance reviews when most employees and managers don’t feel they are getting value from them? The main reason is to review pay and to set bonus amounts. It’s called ‘pay for performance’. There are a couple of flaws in this model. When you first start working at an organisation your pay is set using a few data points: your expectations; how this stacks up against the company budget and who else could be hired for this amount; how hard to find your skill set is. Maybe some other things like; how badly the hiring manager wants you; and how good they are at influencing back into the organisation to hire you at whatever amount you ask for; your reputation; the contacts you will bring with you; how well you sold yourself at interview…..
Let me work this through for you in a real life example. Person A, Tony, was hired 10 years ago as an Agile Coach when this was a difficult skill set to find. He was a highly regarded project manager who had come across the Agile Manifesto in a previous role and was one of the few people in Melbourne qualified in this project management methodology. He was also a really good sales person and Tony convinced the hiring manager (also a big Agile fan) that he had a couple of other offers on the table, was critical for the success of the project and should be snapped up immediately at any cost. He has now been at the organisation for 10 years receiving annual increases because he is a great performer. Agile has now really taken off in that organisation and most projects are run with an Agile Coach. There are now 8 people working in the organisation with the same skill set as Tony.
One of them is Lily. She started working as an Agile Project Manager about 5 years ago with an organisation that has a well-established Agile practice. She has worked her way from smaller to large scale projects with excellent mentors. She would easily be as good an Agile Coach as Tony. She’s a little softly spoken and the previous organisation she worked at was a company with a great culture that tended to pay less than the big players. Also, Agile Coaches are no longer so hard to find in the market. Because of all of this, when Lily was hired into the company 12 months ago, her pay was set at $40k less than Tony’s. She would like to take 6-12 months parental leave once or twice in the next five years which may set her pay even further behind.
When you look at the salaries of everyone in the team, there is a huge variance. Some are due to capability level, but most are due to factors that don’t relate to their actual performance. So why then, do we continue to review pay based on performance, built upon an individual’s starting salary?
Market forces are hard to contend with but I can think of a way around this. What if we threw job security out the window, and opened up the job market so that you always got the best person for the job at the value the market is willing to pay? Could this really work? Well it wouldn’t be great for Tony, because he’s way over paid and when he goes out to market he’ll realise this. But it would be good for the organisation as they are spending way more than they need to. It wouldn’t make much difference to Lily as she is being paid what she’s worth. Although it may make a difference to her when she takes time out of work to care for her babies. If she keeps her skills up to date and her network then she should continue to be paid at the market rate as she dips in and out of the workforce.
As I start to congratulate myself on thinking up an entirely new way of working that is going to change the world, I suddenly realise that what I am talking about is the gig economy, also known as freelancing. More and more evidence is pointing to this as the future of work and here is another reason why.
So now I’ve blown up ‘pay for performance’ as a way to set salaries, where does that leave the annual performance review? It leaves it as an excuse for poor leadership. A good manager doesn’t need to formalise feedback to a team member once or twice a year. They will have a high performing team where no-one needs to be ranked ‘in the bottom 10%’ because he or she has already performance managed anyone who isn’t up to the job. And when I say performance managed, I mean helped them to lift their performance or transition to a better suited role where they can be a top performer.
“Ban the performance review!” you think I’ll cry. Well I’m not going to. If the annual performance review is the only time employees get to hear feedback on how they are performing, where they can improve, and how to develop, then don’t take that away from them.
I do think banning the performance review is a good aspiration though. It's out of date and perpetuating bad practice. Before we can take away the performance review, organisations will need to lift their leadership capability, drive a culture of in the moment feedback and address any associated policy like 'pay for performance', Lets pay people fairly for the work they do and ensure pay equity across teams. For larger organisations this is a huge change to process and policy. For smaller, growing organisations, just think twice before you go straight to 'pay for performance' and the annual performance review.