Employee performance often drops at companies that nix performance ratings because managers lose a key reference tool and employees become less engaged.
This article has been updated from a post originally published on May 12, 2016 by CEB, now Gartner.
As performance management approaches continue to evolve, ratings have inevitably come under the spotlight. Some companies have even considered eliminating altogether the numeric or qualitative labels they use to grade employees or rank them against each other.
The question is whether eliminating performance ratings does what managers want: Improve the performance of employees — and the company.
Why organizations might remove ratings
Few organizations rely solely on formal scheduled evaluations anymore. Many now provide ongoing, forward-looking feedback and leverage peer feedback — performance-management tactics that have been shown to improve employee performance. Amid this shift, ratings can seem like time-consuming administrative busywork disconnected from day-to-day work.
HR teams that favor an end to ratings see four potential benefits.
- Improved manager conversations. Managers can spend more time discussing past and future performance, and less time defending ratings.
- Additional time for informal feedback. Managers have more time to provide informal feedback because the bureaucracy around deciding the right rating has been simplified.
- More differentiated pay decisions. This occurs when managers have discretion to differentiate pay on their teams without being tied to assigned ratings.
- Increased employee engagement. Employees are more engaged when anxiety around the ratings process is removed.
“These expectations about removing ratings make sense, and employees might initially respond positively, but that positivity tends to fade after the first performance review cycle,” says Blakeley Hartfelder, Gartner research consultant.
Why removing ratings rarely works
The reality, according to 2016 research by CEB, now Gartner, is that employee performance drops by around 10% when ratings are removed, and less than 5% of managers can effectively manage employees without them.
“Employee performance tends to drop when ratings disappear because managers struggle to make and communicate performance and pay decisions without ratings,” says Hartfelder.
In fact, the study showed eliminating ratings leads to four unintended outcomes:
- Manager conversation quality declines by 14% because managers struggle to explain to employees how they performed in the past and what steps to take to improve future performance.
- Time spent on informal conversations decreases by 10 hours because managers do save time, but don’t shift that time to ongoing, informal performance conversations.
- Top performers are less satisfied (by 8%) with pay differentiation because managers have trouble explaining how pay decisions are made and linked to individual contributions.
- Employee engagement drops by 6% because managers are unable to do the very things that are proven to engage employees —setting expectations, holding clear performance and development conversations, and providing appropriate rewards and recognition.
Members of the Corporate Leadership Council can read more about the Real Impact of Eliminating Performance Ratings.