5 Key Shifts in the Movement to Abolish Traditional Performance Management

5 Key Shifts in the Movement to Abolish Traditional Performance Management

Starting from the year 2000, the practice of individual performance evaluations and forced ranking, often referred to as the ‘bell curve,’ became mainstream in European and American businesses. However, academic research in organizational behavior and industrial-organizational psychology has concluded that the normal distribution-based performance management approach is problematic.

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For example, in January 2005, three professors from the Massachusetts Institute of Technology (MIT) published a paper titled ‘Punishing by Rewards: When the Performance Bell-curve Stops Working For You.’ Their research indicated that the implementation of forced performance distribution in organizations led to certain psychological pressures. While these pressures could motivate employees when maintained at a certain level, the sustained pressure and the practice of eliminating the lowest performers resulted in decreased morale, a lack of job security, and employees focusing solely on visible ‘performances’ to earn favorable reviews from managers. Ultimately, this led to talent attrition and company stagnation.

The conclusion of this paper is that companies should seek a balance between applying pressure and maintaining morale to ensure stability. They should also separate high performers from average workers and avoid using performance evaluations that demotivate high achievers.

The academic research questioning forced distribution in performance management had a more significant societal impact with the publication of the paper titled “The Best and the Rest: Revisiting the Norm of Normality in Individual Performance” in the Journal of Applied Psychology in 2012.

The conclusion of this academic research is that individual performance distribution within organizations more closely resembles a Pareto curve (or “ski slope” shape, following the 80/20 principle) rather than a normal distribution curve (referred to as the “bell curve” or 2-7-1 distribution). The paper is based on five independent studies that examined 198 samples comprising 630,000 individuals across various industries. In 93% of the samples, individual performance exhibited characteristics of a “ski slope” distribution. This means that a small number of star employees within the organization contributed to the majority of the company’s output, while the actual performance of most employees was “below average.” The research demonstrates that the top 1% of personnel in an organization generated 10% of the organizational results, and the top 5% produced 26% of the organizational results.

This discovery challenges traditional human resource management concepts in several ways:

  1. Performance Measurement Methods: The normal distribution implies that most performance management systems are based on the average employee. However, in a Pareto distribution pattern, such performance measurement methods are ineffective. Therefore, performance measurement research will primarily focus on identifying the few high-performing individuals who make the most significant contributions to the organization.
  2. Talent Development, Motivation, and Organizational Performance Improvement: Under the assumption of a normal distribution, if you improve the average performance of the majority of employees, the overall organizational performance can grow in a predictable manner. Traditional performance management methods often emphasize “rank and yank,” where the lowest-performing 10-15% of employees are eliminated. After removing these low performers, the organization’s performance is expected to improve in the next performance cycle (as shown in the diagram). For instance, in a system based on the normal distribution assumption, leadership, training, development, and compensation incentives all focus on changing the performance of the majority of employees (those clustered around the average) to enhance overall organizational performance.

However, according to the Pareto distribution principle, performance incentives, talent development, and similar measures only have a significant impact on the few high performers, leading to a noticeable effect on organizational performance.

Organizations may even need to study how the interactions between the majority of low-performing individuals and the few high performers affect the latter. There’s an old Chinese saying, “A tall tree attracts the wind,” suggesting that average performers may hinder high performers.

  1. Performance Prediction: Traditional normal distribution models are not conducive to predicting individual or organizational performance. In contrast, the assumption of a Pareto distribution pattern allows companies to identify the few high performers and proactively manage individual and organizational performance.

Based on academic research in organizational behavior and human resources management (OBHRM), companies have started to experiment with canceling performance management for the majority of “average” employees. Simultaneously, they have relaxed incentives and development efforts for this majority, shifting their HR focus toward the “superstars.”

In late 2013, the HR consulting firm Mercer suggested that companies should reevaluate their traditional performance-based compensation strategies. Data indicated that although many companies allocated salary increases based on performance ratings, the pay gap between employees had not widened:

Experts proposed a more radical performance-based compensation scheme, categorizing company employees into “elite performers” and “non-elite performers.” The compensation strategy for elite performers included:

  • Significant and substantial salary increases.
  • Benchmarking salaries to positions in the top quartile of the market (75% or higher).
  • More frequent salary reviews and adjustment cycles (semi-annually).
  • Various forms of recognition and incentives.

For “non-elite employees,” the compensation strategy involved:

  • Continuing employment contracts.
  • Fewer salary increases.
  • Benchmarking salaries to positions in the lower quartile of the market.
  • Less frequent salary reviews and adjustment cycles (once every one and a half to two years).
  • Non-monetary rewards.

While very few companies have actually implemented this “far-right” human resources management policy, reforming performance management models has become a consensus in the academic and corporate world. Some top American companies initiated the “abolition of performance ratings” reform in this context. On November 12, 2013, Microsoft’s global headquarters announced the abandonment of the employee performance rating system (Stack ranking) it had used for over a decade. Instead, they emphasized teamwork and individual employee growth, eliminated forced distributions, and abolished ratings.

Over the past eight years, Microsoft has successfully transformed, and its stock price has risen eightfold compared to the end of 2013 when they abolished performance ratings.

From 2014 to 2016, there was a wave of management reforms in the United States that were similar to the abolition of performance forced distribution or ratings. Last week, Google’s move to abolish performance management, based on the operational details it announced, appears to be a ripple effect of the performance management reform initiated by Microsoft eight years ago. Many high-tech companies, including IBM, Accenture, Adobe, and others, followed suit. There doesn’t seem to be any new concepts in Google’s approach.

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