The Real Impact on Employees of Removing Performance Ratings

Employee performance often drops at companies that nix performance ratings because managers lose a key reference tool and employees become less engaged.

“Many times I’ve wondered, if we just eliminated the entire formal performance management system, would we see any impact on the business?” says one SVP of human resources at a major manufacturing company. This executive isn’t alone in wondering whether their performance management approach is actually paying off.

The 2019 Gartner Performance Management Benchmarking Survey showed 81% of HR leaders are making changes to performance management, and 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 remain in the minority, but they hope to see four potential benefits.

  1. Improved manager conversations. Managers can spend more time discussing past and future performance, and less time defending ratings.
  2. Additional time for informal feedback. Managers have more time to provide informal feedback because the bureaucracy around deciding the right rating has been simplified.
  3. More differentiated pay decisions. This occurs when managers have discretion to differentiate pay on their teams without being tied to assigned ratings.
  4. 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 Jeanine Prime, VP, Team Manager, Gartner.

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Why removing ratings rarely works

The reality is that employee performance drops when ratings are removed. When Gartner originally studied the dynamic in 2016, performance dropped by around 10%. In 2018, that decline shrank to a still-significant 4%.

“Employee performance tends to drop when ratings disappear because managers struggle to make and communicate performance and pay decisions without ratings,” says Prime.

In fact, both studies show that eliminating ratings leads to four unintended outcomes:

  1. Pay differentiation becomes less obvious, disappointing talent. Without performance ratings, managers have trouble explaining how pay decisions are made and linked to individual contributions. Employee engagement and intent to stay decline when employees doubt that pay is differentiated by merit.
  2. Manager conversation quality declines, because managers struggle to explain to employees how they performed in the past and what steps to take to improve future performance. High performers are especially sensitive to perceptions that the quality of management conversations are declining, potentially creating outsized negative impact on top talent.
  3. Time spent on informal conversations decreases because while managers do save time when formal performance-ratings responsibilities are eliminated, they don’t shift that time to ongoing, informal performance conversations.
  4. Employee engagement drops 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.

This article has been updated from the version published on June 29, 2018 to reflect to reflect new events, conditions or research.