Why right now it’s time to transform performance management

Sometimes, tools or practices that have served us well become obsolete.  Remember how cool CDs were?  The Blackberry?  Blockbuster? One-hour photo printing?  The world moves on, and failure to adapt is a slow death.  That’s where we are with performance management.  It’s long been overtaken by better practice, but many organisations are still stuck with it. 

In this note I want to argue that if you’ve not moved away from classic annual performance management, the time to do it is right now, for these reasons:

  1. Organisations have changed rapidly in the last two years
  2. People, work and society have changed even faster
  3. The PM deal of good performance for improving pay is dead in the water
  4. Year-end 2022 could be the perfect storm

As a bit of background, I’ve been fortunate enough to take people on the journey to continuous performance management twice – we transformed performance at CYBG in 2017 and expanded that to Virgin Money in 2018/19.  I know how tough it is to deal with resistance and inertia, I’ve seen what does and doesn’t work and found ways to progress.  In the last five years we learned, analysed, experimented, and refined practice.  My arguments here are grounded in science, good practice and lived experience.  I care about this, because I know it is possible for PM to drive performance and give colleagues better working lives. 

Over the course of the week I’ll share a couple of pieces on the case against performance management, what a better approach can look like, and how to get started.  For now, let’s look at why it’s more important than ever to change:

  1. Organisations have changed

The level of ambiguity now is greater than ever – in the UK we’ve seen systemic shock after systemic shock – Brexit, Covid, war in Ukraine, 4 Prime Ministers in 6 years.  Organisations must be far more adaptable, able to evolve goals and strategy rapidly.  Operations, structures and role demands have to change as a result of faster digitisation (McKinsey) the move from bricks and mortar stores (PWC),  supply chain and inflationary cost pressures (BDO).  

Organisations are adapting – more agile methodologies, investment in upskilling and reskilling, new tech, revisiting communication and organisational values (emphasising adaptability and innovation).  However, it is striking that performance management (which should be driving performance of the whole workforce) often doesn’t feature in these discussions – reflecting that classic PM doesn’t support organisational need.

2. Our people have changed, and so has the way they work

Through Covid we spent so much time coping that we didn’t really take stock of all the change going on around us.  HR had to focus on safety, health, and managing operational resources. There wasn’t the headspace to see the workforce transform.  

It has transformed though – half a million over 50s left the workforce through Covid (ONS), and close to 3 million people have started work from school or university.   That’s more than ten per cent of the workforce who are new, but also less visible and less connected to organisations in the remote/hybrid world – as evidenced by the “quiet quitting” phenomenon emerging on TikTok.  

More fundamental is that life has changed for every one of us.  The relationship with work has been challenged by furlough, redundancy, and role changes.  Home is now a place of work, and 38% of UK workers are still hybrid (ONS).  Around 2m people have long Covid (ONS), and 10% of the population are experiencing persistent mental health challenges (BMJ).   Where we work, when we work, how we work and our ability to function have all been impacted.  All of these impacts disproportionately impact protected minorities, with performance systems carrying real risk of systemic discrimination (Personnel Today).  

High Performance depends on a whole host of factors – wellbeing, location, connectivity, relationships, personality, experience, nature of role, quality of management.  Classic PM tends to simply focus on the process, rewarding those who’ve delivered the most, likely to be the people with the most advantages.   

3. The mental deal is dead in the water

The performance deal for colleagues goes along these lines: “I agree performance and development goals.  If I work hard, deliver on goals, build skills and experience, then my salary and career progresses”.  Pay frameworks support this – new starters begin at the bottom of a pay range and progress towards a market rate.  

However, it doesn’t work.  Collectively, real median income rose by less than 1% between 2007 and 2021 (economicshelp.org).  Individually, it can easily take 20+ years to reach market rate for a role.  

Classic PM works on the basis that this deal remains in place, but people just aren’t buying it anymore.  The exit of over 50s, the great resignation, historic high levels of vacancies (1.3m March to May this year), “quiet quitting” and the volume of industrial action all demonstrate dissatisfaction.  This reflects the very real financial pressure people are under, but it also reflects that people don’t believe companies are keeping their promises around performance and reward.

4. Year-end 2022, the perfect storm?

There’s a lot of dissatisfaction, and it is going to get worse – industrial relations are wobbly; pressure is on companies to drive performance;  pressure is on colleagues to pay the bills.  Inflation is double digit, and energy costs in October will rise by about £800 (even after Liz Truss’ magic).  Someone earning median fulltime salary for the UK will need a pay increase around 4% to cover those costs alone.  In May, annual pay growth was 4% with inflation at 9% (The Guardian).

How does this relate to the performance year-end?

Colleagues need a good pay rise.  Their route to that is a good performance rating.   This year, more than ever people will be pushing for a high performance rating.  Let’s assume 50-60% of colleagues argue they’ve performed strongly – that’s not going to match the corporate distribution curve. 

The organisational view is likely to focus on retaining and rewarding their good performers – more pressure to “hit the curve”.  Every manager in every round-table discussion is going to turn up with acute pressure from their team for high ratings, and they’ll have to calibrate with a more varied workforce and less visibility than ever.

It leaves managers in an invidious position – through Covid they’ve built stronger relationships, stronger teams, and now they’ll have to tell many colleagues “We don’t think you’re as good as you do”.  That’s going to disengage people, diminish trust and increase cynicism.  And managers aren’t well set to handle this –   Over 60% are experiencing some degree of burn-out, impacting their ability to perform well (HRDirector.com).

Even if the exercise was perfect, the outcomes will still be damaging.  The gap between pay deals and inflation means even the top performers will be worse off in real terms.  Some will conclude they need to move to be properly rewarded (and there were 1.3m vacancies in the UK last quarter).  Others will stay, just more cynical and more toxic – diminishing performance (see this month’s HBR).  

This year-end will amplify the failings of performance management.  It exposes the contradictions in working practice.  There will be transparent impacts – retention, grievances, sickness.  The more pernicious impacts are long-term – lower engagement, trust, wellbeing and psychological safety.  And lower psych safety can lead to 37% higher turnover, 33% lower productivity, 36% lower collaboration (Accenture).   Following a classic-year end process could easily mean you spend thousands of hours of work to make your people perform worse.

So, what to do?

There’s no simple solution.  The economic position is brutal.  While organisations can’t tackle the economic position, they can definitely take actions that strengthen engagement, trust and performance.  

There are three things I’d recommend now:

  1. Commit to transforming your performance approach.  Tell your people what you’re going to do, tell them why, get them involved.  Be open about the context, the challenges right now and acknowledge that the current process doesn’t work. 
  2. Listen to people about their experiences of performance and appraisals.  You’ll hear horror stories, but it is cathartic, and it gets people engaged in creating something better.  Use this to inform your design approach, and test ideas with people as you do.
  3. Treat this as a break point for reward distribution – e.g., consider flat awards this year, to give you time to shape a reward strategy fit for the future.

Moving to a new performance approach isn’t about refining a process.  It’s about changing beliefs and behaviours, to drive better performance.  It is a win-win change though – raising organisational performance, strengthening culture, creating more agility, helping managers and giving colleagues better working lives.  The key is to get started, and I’d be delighted to help you with this – so if you’re interested in making work better, please reach out!

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