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Mar 20, 2017

Note: This is the first of three articles dealing with managing performance and compensation in the post-ratings organization. The second article on bonus and comp distribution will post Tuesday. The third discusses calibration formulas.


Many early-adopter organizations who jumped aboard the train to abolish employee performance ratings are finding themselves on a challenging journey that is characterized by two key questions:

  1. What does the elimination of ratings do to the organizational culture of high performance which is still propagated and undisputed in most of those organizations?
  2. If this culture is to remain intact – in the form of pay-for-performance, for example – how will salary and career development decisions be made if ratings are no longer used?

There are already some indications that employees are opposed to both a return of the non-transparent, manager gut-feeling approach associated with older performance management concepts and the equalizing tendencies of a rating-free performance management world that are clearly emerging. Recent studies have also disproved the myth cultivated for a number of years that the millennial generation is no longer interested in rapid career or salary development.

How will we differentiate?

If we accept the resulting necessity of performance differentiation, then we can probably agree that this is better based on transparent criteria and calibrated decision-making processes than purely on individual management judgment. Whether the necessary classifications are being called “ratings,” “performance clusters,” or “potential levels” is simply a matter of terminology. They still semantically reflect the result of a differentiation process among employees. Such differentiation is essential in all organizations that have a limited quantity of long-term incentives and bonuses to distribute, that employ more than only CEOs and that want to call out both high and low performance as what it is. For them, it is simply a good management practice to call a spade a spade, and follow the highly promoted leadership behaviour of “telling it like it is!”

What about pay?

In many organizations, the official decision to discontinue ratings has basically read something like this: “We’re getting rid of ratings, but we still have performance-based remuneration.” The “but” already suggested that early adopters realized one question remained unanswered: How will this performance-based remuneration actually work in the future? This question mark has remained unanswered at most companies since, and will raise its head again when the next bonus, salary, and promotion rounds take place – usually around the turn of the year.

Delegating these decisions to individual managers or to some machine-based algorithms is not the answer. Such concepts will simply delegate the problem or make the previous situation even worse. This still leaves us with the unanswered question of how we can reward employees differently, allocate performance-based long-term incentives, or promote only those people who are suitable, if “ratings” no longer exist as a basis for decision making. The question isn’t whether a ratings-based approach has weaknesses – of course it does. It is inherently subject to the human bias factor: The assessors are human beings, and those being assessed are human beings.

The real question is: If we don’t have ratings anymore, what else do we have?

Operating results as a ratings guide

There is another often lauded solution to this dilemma which is to link these decisions to the company’s operating results rather than individual performance. This is indeed a practicable solution for variable compensation decisions. In back-office functions and teams where collaborative work processes should be explicitly encouraged and individual performance may be difficult to define, this is probably even an adequate solution from both a cost-benefit and a people leadership perspective.

But it leaves the question open how do such approaches tally with “pay for performance” philosophies if they are not at least partially supplemented by spot bonuses for special individual achievements?

Their biggest weakness, though, lies in not providing a fundamental solution to the actual dilemma. Key decisions in the talent management cycle, such as promotions or career planning, can only be based on each employee’s individual performance and potential. The company’s financial performance is of little help here. Hence, an approach based on company’s operating results delivers, at best, a partial answer, but is not a universal alternative to ratings in integrated talent management.

Ratings are human nature

Human beings are not all the same, nor do they want to be. Some accomplish tasks better than others. And they even enjoy this competition which is one of the driving forces behind progress, innovation, and success in the development of humankind, a highly competitive species. It is not the opposite of team work, because otherwise sports teams with players of different skill levels wouldn’t be able to win as a team. This logic applies to all areas of life, including work.

People’s tendency to compare themselves and pass judgment on others has reached unprecedented levels in recent years, though. Everything and everyone is being “rated” and “liked” on countless social platforms and rating sites. Thanks to modern technologies, this happens in real time and everywhere. In fact, we all rely on the opinions of our community, friends, and followers as we navigate our life’s decisions.

Not everyone’s a high performer

It’s true that “everyone is a talent,” but that doesn’t mean everyone is a high performer in their current task. What this claim really means is that we must find the right task to match each talent, and this is the responsibility of employers and managers, as well as employees themselves. If we want to demand and reward high performance, then we should say so and be blunt about achieving it in the end. And conversely, it should be made clear when an employee is not achieving it. Tell it like it is!

So where does the discussion about abolishing ratings take us, other than this key open question: On what basis should we make necessary and differentiating decisions in an integrated talent and performance management approach? The further course of the discussion will remain suspenseful: Lots of smoke-bombs still to be expected by the various protagonists. But in the end, they all need to answer this key question, without taking us backward.