It’s that time of year when managers and supervisors sit down with their subordinates and have that annual dreaded conversation, the performance appraisal.
This conversation is made more difficult this year by the fact that there is less to go around in salary increases and bonuses. There cannot be a minimum increase to keep up with inflation, because there is no inflation to offset. In some cases, a company can provide some increase by returning a portion of the wages previously reduced in order to survive the recent economic downturn.
A question that needs to be pondered by management is what type of appraisal system we should use this year. Believe it or not, some employers are revisiting an old favorite, FDS. The forced distribution systems method is where the individuals being appraised are ranked into four categories: A, B, C and D. This method of performance appraisal gained fame and popularity based on the endorsement of former General Electric CEO, Jack Welch.
According to the Journal of Management, up to 20 percent of all U.S. business organizations and up to 25 percent of the Fortune 500 firms use some type of FDS. In recent years, Yahoo! Inc. has stripped away its performance labels in hopes that reviews would center more on substance and less on explaining away a grade. Yahoo also instituted a “stack-ranking” system to determine how compensation increases are distributed. It asks managers to rank employees within each unit, with raises and bonuses distributed accordingly.
Any structured approach to the performance appraisal process has positive and negative consequences. Let’s look at both.
The positives
Using FDS will reduce “rating inflation” the number of average ratings by supervisors who are averse to confronting the poor performer. It reduces favoritism, and provides a justifiable way to eliminate the poor performer. Once an employee is identified as a poor performer, they tend to resign knowing that they will not receive any future increase. Ultimately, as the poor performers are replaced, productivity, profitability and shareholder value increase. The use of FDS also systematizes the performance review process across the organization, lessening the chance of claims of disparate treatment.
The negatives
This process ignores the reality that in some small work groups there are no poor performers and in others there are no good performers. Replacing lower rung employees each year can be costly. It can negatively impact overall morale resulting in lower productivity.
A study performed by Drake University professor Steve Scullen demonstrated that forced ranking loses its effectiveness after a couple of years. Each year there are fewer poor performing employees to identify, forcing managers to cut a certain percentage each year. This does not get to the root cause of the problem, the manager or supervisor who cannot properly train, coach, motivate and supervise their employees. Constantly replacing lower performers will not solve the real problem, the immediate supervisor.
Another potential negative of FDS, if it is used for a long period of time, is the culture may become more competitive, decrease morale and the overall perception of fairness on the part of management.
If FDS is not a viable alternative for your organization, there are other alternatives to be considered. One is reviewing your current method of appraisals and add a self appraisal component if it does not exist. This permits the employee to rate themselves prior to the appraisal conference and provides a forum for discussion with the appraiser. Management can also set clear guidelines and expectations for the individuals performing the appraisals. A review session should be scheduled to reinforce the proper strategies for the preparation and execution of a performance appraisal.
Another strategy is to add a step where the next level of management reviews both the self-appraisal, and the actual written appraisal to insure that guidelines and accepted criteria are being properly applied. Here is an opportunity for the next level of management to input into the process and challenge possible inflated ratings before the appraisal is conducted.
Finally, management can also input into the strategy that would be used in cases where a problem employee has been identified. Again, this proactive approach can prevent potential conflicts and legal action. One thing to remember when conducting a performance appraisal, if you cannot come to consensus on a rating with an employee, you can “agree to disagree” and move on.
