Why Performance Appraisals Don't Improve Performance

NEW YORK ( TheStreet) -- Consider the total number of labor hours your company spends setting personal objectives and appraising performance.

But do appraisals improve job performance?

In 1999, the Gallup Organization published a study of 80,000 employees from 400 organizations to determine what creates high performance. The conclusion was that the performance orientation of a workplace is determined by 12 issues. Interestingly, not one of the 12 was related to appraisal or pay.

In 2002, the Corporate Leadership Council surveyed 19,000 employees in 34 companies and 29 countries to mathematically rank the effectiveness of 106 performance drivers (e.g., selection, training, career paths). The most effective driver was "fairness and accuracy of informal feedback." It increased performance by more than 35%.

But the study found that pay ("recognizing and rewarding achievement") had only a small impact -- it improved performance by 4.4%. Appraisals were even worse. For example, semi-annual appraisals reduced performance by 1%.

Yet, in attempting to build a high-performing organization, senior leaders push the appraisal and pay buttons over and over again: "This year, let's change our five-point scale to four points."

At my former employer, the Chief HR Officer (CHRO) decided to fix a persistently low score on the climate question, "People are rewarded according to their job performance."

The first year, the CHRO announced the company would "strengthen" the pay-performance link through mandated distributions (e.g., only 10% can get a 5 rating, etc.). Ironically, after years of stable ratings, the pay-performance score dropped precipitously while the cross-industry average remained stable.

The second year, the CHRO decided he needed to push harder. This time, he took away managers' discretion to allocate bonus dollars and mandated fixed payouts by performance rating. The result was another statistically significant drop in pay-performance satisfaction.

The third year, the CHRO decided that high performers would get a fixed 20% increase and mid and low performers would get nothing.

By year four, 34% of employees felt their pay and performance were linked -- down from a starting point of 47%. With two percentage points considered statistically significant, perception of pay-performance dropped 13 percentage points in four years.

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