No, Really: We Don’t Do Forced Ranking and Performance Reviews

It’s a workforce-management tool based on the premise that in order to develop and thrive, a corporation must identify its best and worst performers, then nurture the former and rehabilitate and/or discard the latter. It’s an elixir that in these slow-growth times has proved irresistible to scores of desperate corporate chieftains – but indigestible to a good many employees (2003, para 2). -Argyris

Chris Argyris

It’s been three years since we last ranked employees or gave performance reviews at TLC, and we think it’s working reasonably well.

When I tell people this I get a variety of responses. Last year when I discussed these ideas at Kaizen Camp many people vehemently argued that it was unfair to NOT give employee reviews. I think this perspective is based on the following assumptions:

• Reviews, in practice, actually constitute an objective and therefore fair and reasonable way to assess individual performance
• Assessing individual performance is desirable and effectively improves performance

In our experience, employee reviews were highly costly both in time, money and most importantly morale. In the end they produced either no value or worse, real damage. Even after working with a representative committee of employees for two years, we did not find a formula for performance reviews that seemed fair and reasonable. Along the way we made some discoveries that prompted us to spend more time thinking about how to improve the systems people work in, rather than trying to “improve the people.”

Since we ended reviews, we have seen employee retention improve substantially. A host of other metrics that one could argue would be likely to be affected by “performance management” have also improved. I can’t prove (or disprove) that not doing forced ranking was a major driver of these outcomes, but I feel safe in saying that at the least it has done no harm.

When people outside the company hear that we don’t do performance reviews or employee ranking and the company didn’t blow up when we stopped doing it, the next question tends to be… so what do you do instead?

Implicit in this question seems to be the suggestion that we must actually have some sort of sub-rosa ranking system. I think this arises out of the common belief that forced ranking, performance reviews and performance goals are necessary for setting compensation. Eliminating performance reviews didn’t make the need to establish compensation go away. It did eliminate costly approaches to solving the problem that didn’t seem to work well anyway.

As someone who likes to explore Lean systems, and who believes that rules are waste, I get confused when people, even inside the lean community, ask me what we replaced forced ranking with. When we stopped doing performance reviews and ranking, we didn’t see any need to replace them with another policy set. We removed wasteful policies by removing them, not by augmenting or replacing them.

We don’t have a perfect formula established for setting compensation, in part because we suspect there might not be one. As much as possible, we try to compensate people at rates that let them focus on their work. Even after removing wasteful processes, the reality remains, negotiating compensation is a difficult interpersonal problem. We believe most employees didn’t ever really want to sit through the process of a performance review — they simply had the expectation that the yearly review was the best time to have a conversation about compensation. We try our best to give our employees a short and clear path to an executive if they want to request a “salary review,” which serves this purpose more directly and with less waste.

The problem with making an extrinsic reward the only destination that matters is that some people will choose the quickest route there, even if it means taking the low road. Indeed, most of the scandals and misbehavior that have seemed endemic to modern life involve shortcuts. ― Daniel Pink

The espoused theory is that structured performance management systems produces an impartial system, but the theory in action that I’ve seen is that managers and employees can game any metrics-based system to produce the outcome they want.  A question I would ask managers who question our approach is this: have you ever arrived at a different perspective about an individual’s performance and therefore changed your your opinion about their “fair” compensation after going through a structured performance management process?

If you want people motivated to do a good job, give them a good job to do.  -Frederick Herzberg

When evaluating the outcome of our decision to stop forced ranking and performance reviews, our starting assumption has been that being satisfied with the terms of your employment is probably a prerequisite for knowledge workers to produce quality outcomes in the long run.

Instead of motivating employees with specific rewards tied to specific metrics, we believe that in the aggregate employees are far more motivated by opportunities to: collaborate successfully with peers, assume self defined autonomy for tasks they have expertise in and achieve new levels of self-realization by challenging themselves to learn new skills in a safe-to-fail environment.

As long as we are watching company level metrics that can reasonably be expected to tell us something about how we are doing on this front, and these metrics seem to be telling a positive story, we don’t feel the need to establish a new set of policies to replace forced ranking and performance reviews.