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Nothing hurts the morale and the results of an organization as much as the on-going retention of weak talent and the under-utilization of your exceptional performers. Many organizations place an inadequate priority on this difficult issue. My goal here is to highlight why this topic is so important and to provide a description of how a first-rate performance appraisal system should directly confront this issue.
The Why
No matter whether you are a company, a non-profit, a government organization, or an educational institution, allowing poor performers to continue to struggle, and not aggressively identifying and stretching your very strong performers, generates two very significant problems.
1) Endorsing Mediocrity - When you allow weak performers to continue to plod along, your organization is not getting the performance it should be getting. Even worse, often you reach a point where you know the individual can’t be productive and you avoid confronting the issue by give them meaningless activities and simply ignoring them. You are wasting money and you are wasting the time of that individual and the organization in not facing reality. Also, you are irritating a number of people in the organization who have to work with this individual. Most importantly, you are discouraging the very strong performers who see this kind of thing going on and often conclude that endorsing mediocrity is not for them and this is not the kind of organization they want to be part of.
2) Underutilizing Talent - Not identifying your strong performers and not stretching them by putting them in key assignments causes you to significantly miss the opportunity to benefit from their good ideas, their drive for progress, and the results they can achieve for the organization. Strong performers need to be told they are strong, and they need to be further developed. The benefit from this is that you will have a growing talent pool of high potential personnel to tackle your toughest challenges, and best of all, the organization will achieve better results.
Having a good performance appraisal system causes the organization to focus on improving the performance of every employee. You confront directly the problems some individuals may be having and you take the opportunity to develop you very best people very quickly.
Incredible things can happen when you put your strong performers against very specific and stretching goals. Steve Jobs of Apple knows this. Back in 2000, he spotted the unique skills of Tony Fadell, a very experienced and talented hardware designer. He hired Tony and had him lead a very small and secret team with the objective of developing a device that would take advantage of digital media and provide individual consumers with a revolutionary portable music device. Tony and his small team developed the iPod which was launched in the fall of 2001 and has absolutely invigorated and revolutionized Apple as a company.
Incredible things can happen when you put your strong performers against very specific and stretching goals. Steve Jobs of Apple knows this. Back in 2000, he spotted the unique skills of Tony Fadell, a very experienced and talented hardware designer. He hired Tony and had him lead a very small and secret team with the objective of developing a device that would take advantage of digital media and provide individual consumers with a revolutionary portable music device. Tony and his small team developed the iPod which was launched in the fall of 2001 and has absolutely invigorated and revolutionized Apple as a company.
Net, you need to stretch your strong performers and create an environment where they love to work. Typically, they don’t like an environment where: 1) it’s loaded up with mediocre and poor performing individuals who often impact negatively the quality of their work; and 2) they are not challenged. This demands that you have an effective performance appraisal system to regularly evaluate the performance of all employees and focus on improving their contribution.
The How
Over my forty years of business experience, I’ve seen a couple of really good performance appraisal systems and I’ve seen a whole lot more that are below average to poor. The one that I was most impressed with was the one that was in use at Microsoft during my years as COO from 1994 to 2001. Bill Gates basically designed this system when the company was very small and he was a very strong proponent of it year after year. It was very clear to me that it paid big dividends for Microsoft.
How did the Microsoft system work? It was basically a five point system; let’s call the scores 1-5, although that is not exactly what they used. For any manager that had over a hundred or so employees under their supervision, the annual performance ratings given to each of their employees each August had to fit into the following five point distribution:
a) The Five Rating - these were the genuine “water walkers” and across your population of personnel, ten percent of your employees had to be given that rating. You could get an exception and make that eleven percent, or nine percent, but the goal was ten percent.
b) The Four Rating - these individuals were above-average performers that were not quite as good as your “fives,” but they were very talented. Across your population, you had to have very close to twenty percent of your employees receiving this rating.
c) The Three Rating - while these employees were average, they were quite valuable to the company. Fifty percent of your employees had to have this rating and you could vary that percentage by 1 or 2 percent, but that’s all.
d) The Two Rating - these individuals had clear areas of improvement that must be tackled. Their performance would be classified as below-average and if they deteriorated further, there would be big problems. Fifteen percent of your employees had to have this rating.
e) The One Rating - these individuals were seriously lagging their peers in performance. For each of them, a three-six month program was put in place to achieve very significant improvement. If improvement was not achieved, they would be given three-six months to find employment outside the company that would fit them better. You had to have five percent of your employees carry the “one” rating coming out of an annual performance review process.
These ratings were discussed with the individual as well as the strengths and weaknesses that go with them. A thorough analysis of performance was written up and in each case, both the supervisor and the subordinate were required to sign the write-up. It was then submitted to HR. For a particular department, if HR did not have all of the signed performance appraisals completed by the target date, then none of the individuals within that department would get their salary increase. Net, 100% of the performance appraisals got done!
The salary increases that went along with the performance reviews varied quite significantly in size. For example, if the overall salary increase that year was five percent, your “five” rated employees might get 13-14 percent increase, your “four” rated might get 8 or 9 percent increase, your “three” rated might get a 4 percent increase, the “two” rated might get 1 or 2 percent increase and the “one” rated wouldn’t get any salary increase. In far too many organizations, the strong and the weak performers all get about the same size salary increase. That sends a terrible message to your strong performers.
This system did an excellent job of making sure individuals knew where they stood. That’s a benefit for the individual as well as for the company. The “five” rated employees were typically selected for the most important assignments in order to develop them further and also to get great performance against the key tasks within the company. The “one” and “two” rated employees were dealt with appropriately.
Stepping back, the key point here is not that you need to duplicate the Microsoft system, but you do need a disciplined, standardized system where everyone gets a review and the top 10-15 % get identified and stretched and the bottom 5-7% are required to improve or face separation.
What happens typically?
In many organizations, once a year HR will pass out the performance review guidelines and forms, indicating it is now time for that annual exercise. They will typically pass out the criteria to be used and also give a target date when the forms should be completed. In many organizations I have worked with in a consulting mode, what I find is that HR is really not disciplined with respect to this task. They don’t require the forms be signed by both parties and collected by HR. In fact, in many cases, the performance appraisals just never happen.
The reason why they don’t happen is it’s hard to give a performance appraisal. No one wants to do it. The supervisor doesn’t want to do it because it’s somewhat unnatural and uncomfortable to describe the shortcomings of other individuals. The subordinate doesn’t want the performance appraisal because even if they are a strong performer, the boss will find something to complain about. If they are an average-to-weak performer, they don’t want to sit there and dwell on their problems and shortcomings. That’s no fun. The typical attitude of both the subordinate and the supervisor is: let’s just ignore the whole thing. That’s why in most cases, performance appraisals never happen.
Conclusion
In any organization, getting great results is totally dependent on great talent. The only way to nurture great talent is to deal with performance very objectively and concretely. My forty years of experience in industry suggests this is hard to do and that you need a disciplined, standardized system that is well-executed by HR in order to successfully grow people which will enable you to successfully grow the impact of your organization.
One way to stimulate creative thinking is to make a particular group responsible for an unfamiliar (to them) project, product, or service area. Deep experience in a business area is massively overvalued. Most smart people need just two or three months to grasp their responsibilities and generate great new ideas. Another way to foster creative thinking is to remove the “layers of wisdom” a good idea must go through to get implemented. When the boss and the boss’s boss insist on approving every idea, they tinker with the idea and change it. They often eliminate the distinctiveness of the idea, and frustrate the person who thought up the idea. The individual then wonders, “Why should I bother?”
Robert J. Herbold, the retired chief operating officer of Microsoft Corporation, is the Managing Director of The Herbold Group, LLC, a consulting business focused on profitability. Prior to Microsoft, he spent 26 years at The Procter & Gamble Company, serving as senior vice president of marketing during the last 5 years. He is the author of the recently published book: Seduced by Success; How the Best Companies Survive the 9 Traps of Winning.
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