More U.S. companies moving away from traditional performance reviews

Lately a small but growing number of major U.S. companies, including Accenture, Adobe and Gap, have been saying goodbye to an annual rite of corporate life that employees and managers both love to hate: the traditional performance review.

Now General Electric, long considered Corporate America's bellwether for management practices, is joining their ranks by piloting a big shift in the way it handles evaluations.

GE's overhaul, which the industrial giant recently began discussing publicly, is likely to be viewed as a tipping point in the rush to remake a process that workers and their bosses say needs repair. It is experimenting with replacing a once-a-year formal review with more frequent conversations, introducing an app to help managers and teammates share feedback, and testing the idea of using no performance ratings at all.

Although GE has not decided whether to do away with the ratings, its testing of the concept is considered a milestone - not just because of the company's size, but because of its historic association with the idea of rating and ranking employees. The experimentation is something of a corporate confession that the process, championed in its most aggressive form under then-chief executive Jack Welch in the 1980s and '90s, may be out of step with the modern-day workforce.

"Even more powerful than Deloitte or Accenture saying it's getting rid of scores," said Brian Kropp, the human resources practice leader for CEB, "is when you see companies that are known for developing great talent (do the same). If a company like GE were to make the transition, that would really be powerful."

Nearly 10 percent of Fortune 500 companies have done away with annual ratings, said Cliff Stevenson, a senior research analyst for the Institute for Corporate Productivity, a research network that studies management practices. Adobe and Medtronic were among the earliest large companies to do so, several years ago, followed by companies such as Microsoft and Gap. The number is likely to grow rapidly.

"The snowball has started rolling," Stevenson said. "I would not be surprised to see next year when we do the large survey again that it may jump into the twenties."

Others have a sense of déjà vu, recalling the rush by companies to copy the "forced ranking" system Welch promoted. That system - which GE no longer uses - required supervisors to assign a certain percentage of employees to high, medium and low rankings, and then to cut the lowest ones.

"We had countless chief human resources officers beating on our door, going, 'Look what that did for GE, we need one of those, too,' " said Ravin Jesuthasan, a consultant with Towers Watson. Now, he says, "we're at a similar rush to people going, 'We need approaches like this.' It has a feeling of being the issue du jour."

Jesuthasan and others say the clamor to overhaul performance reviews is being driven by several factors. Technology is one: The amount of data available to companies to track worker performance on a real-time basis, as well as the ability to create apps and tools that managers and workers can use to monitor performance, have grown exponentially.

In addition, over the past decade, the average manager's responsibilities have nearly doubled, from four to seven direct reports, according to CEB. This has led to a decrease in the amount of time that many managers spend informally coaching and mentoring any given employee.

This downward trend in managerial feedback in the workplace has been occurring simultaneously with an upward trend in feedback elsewhere in people's lives, whether from friends liking photos on social media or consumers giving product reviews. That tension has made standard corporate culture feel particularly discordant for younger generations.

"If you put this new generation in the box of the performance management we've used the last 30 years, you lose them," Accenture chief executive Pierre Nanterme said. "People want to know on an ongoing basis, 'Am I doing right? Am I moving in the right direction? Do you think I'm progressing?' Nobody's going to wait for an annual cycle to get that feedback."

This, all while corporate leaders, it seems, haven't actually saved time or money by relegating feedback to a once-a-year cycle. Given the increased number of direct reports, the average manager spends 210 hours a year on performance-review-related activities, including filling out forms and giving evaluations. Once those hours are added to the cost of the system itself, the Corporate Executive Board estimates that a company with 10,000 employees spends about $35 million per year on reviews. Deloitte, which has said it is transforming its system, says it was spending 2 million hours a year on evaluations.

The accelerating pace of change has caused many companies to realize that the goals set at the beginning of the year may be out of date by the end of it. More and more companies are paying quarterly bonuses. Unless managers check in with employees more often, a single conversation at the end of the year can be pointless.

That increasing pace of change is the biggest reason GE is trying to evolve its program, said Athena Kaviris, a senior human resources executive for GE Transportation. "Anything you wait a year to give meaningful feedback on is already old news," she said.

Most of the new performance management systems being rolled out are designed to gather more information, not less. Several of these companies, including Accenture and GE, are building proprietary apps that will more easily chart the ongoing performance discussions between employees and their supervisors, in some cases auto-flagging trouble areas if concerns show up repeatedly.

"The HR function is becoming much more data- and analytics-driven," Kropp said.

The power of such technology not only means that employers can better target development programs but also potentially gives them even more legal defensibility around personnel decisions involving such things as raises or firings, because they have more conversations on record, all collected in one digital hub.

Some think technology has another use: to correct any biases managers may have. The real problem, says Marcus Buckingham, a management consultant who works with companies on employee performance, isn't the ratings - indeed, big companies with hundreds of thousands of employees may need them to help differentiate the best performers from everyone else. It's the sense that ratings are unfair and plagued with bias, with some managers rating people more harshly than others. Better data collection could help mitigate that.

Technology also could help reduce that end-of-the-year paperwork pileup. GE will still have a summary conversation at the end of the year, but the new program is designed to let that final conversation happen more naturally, without employees and managers having to recall a year's worth of accomplishments and setbacks. About 80,000 GE workers are expected to test the pilot program this year, with plans to roll it out companywide by the end of 2016.

A much smaller group - about 8,000 workers this year - is piloting the "no-ratings" concept. Kaviris says that the company has not decided whether to proceed with the idea, but that it's "likely we'll end up still having ratings."

At Accenture, the move away from ratings and a single annual discussion will begin in September. The concept has been in the works for about a year, after the firm sought feedback from its workforce about what it could do to boost employees' desire to work at Accenture, and thus their productivity.

"The most important thing was improving employees' performance," said Ellyn Shook, Accenture's HR chief. "What we realized was, there was nothing about what we were doing that helped us achieve that. Our managers were unhappy, our employees were unhappy."

Although Shook says she doesn't know whether the new system will save Accenture money, she says she is confident that it will give the firm a better return on its investment. Last year, it spent $786 million on evaluations and training for its staff.