The performance management process — and conducting performance reviews in particular — is often a source of frustration for leaders. And in a hybrid working environment, where it’s more challenging for leaders to directly observe their employees’ working habits and team interactions, the issue of how best to set and assess performance has taken on a new degree of urgency.
Most organisations believe a rigorous performance management system—whether via balanced scorecard of KPIs or the more recent “OKR”* approach, allows leaders to:
- measure an employee’s performance against the goals they set
- provide feedback on what they’re doing well and where to improve
- determine rewards — bonuses, salary increases, promotions, etc.
- communicate rewards in a way that the employee will accept as fair.
In practice, both leaders and employees often find these processes time consuming, overly bureaucratic, and unsatisfying in the way they support development conversations and link performance and reward.
What follows is an approach I developed through trial and error over the years that works well in addressing these concerns.
The keys to this approach are to:
1. Set a small number of objective and subjective goals.
2. Have the employee conduct their own initial self-assessment.
3. Separate the rating and remuneration discussions.
- Set A Small Number of Objective and Subjective Goals
The right number of goals for each role depends on both its scope and the current business situation. In a steady-state, well-performing business, a narrow role in sales, service or operations might have three to four key performance areas, with two to three component metrics in each. Example measures could include:# sales: specific revenue or volume growth across 2 to 3 major products
# service: customer satisfaction and retention scores
# financial: cost reduction and cash flow metrics
# operational: processing volume and quality/error rates
# project delivery: milestone completion and cost/benefit achievement
# people management: health and safety, staff turnover, engagement scores.
These measures should be clear and quantifiable, and ideally distinguish between “good” and “great” performance. “Good” performance is the level that allows the team to meet its overall targets and is consistent with reasonable expectations for an employee at this level. “Great” performance is best identified by the employee themselves, along the lines of “what goal, if you achieved it, would make you immensely proud?” I find that this formulation helps fire up intrinsic motivation, and taps into the subconscious to find creative ways to lift performance.
More senior or large people leadership roles will typically be measured across a broader range of five to six categories. In addition to macro-level measures in the categories just listed (e.g., overall profitability or customer ‘Net Promoter Scores’), such roles might be measured against more subjective areas such as:
# strategic change: e.g., development of new business strategies; merger/acquisitions/partnership development; business reengineering and restructuring; new product development; technology investments
# people leadership: e.g., talent acquisition/retention; training and development; industrial relations outcomes; staff engagement strategies; communication and whistleblowing system effectiveness; diversity and inclusion; employee wellbeing
# risk management: e.g., improvement in risk/compliance outcomes; reduction in high risk/low return activities; reduced inventory shrinkage; contingency and business continuity planning
# community engagement: e.g., reputation-building activities and partnerships; environmental performance; political/regulatory relationship management; sponsorship and brand effectiveness.
Where possible, these areas should seek to include quantifiable outcomes — new products launched, safety scores achieved, audit ratings improvements, etc. At a minimum, however, leaders should clearly articulate the desired target state for both ‘good’ and ‘great’ performance.
Objective versus subjective measurement
To my mind, the measure of a good performance scorecard is that it is clear enough that the individual can largely perform their own review. The exception is the inclusion of a few subjective ratings that the leader determines.
For example, each of my direct reports invariably has a people leadership goal that reads ‘Improve management bench strength’ — with the specific target described as ‘Leader to assess’. Another such measure is ‘Demonstrate improved use of data-driven decision making’.
To assess these, I would ask the individual to explain to me what specific steps they had taken and show what outcomes had been achieved. Based on this explanation and evidence, I would then make a judgement as to whether this reflected ‘expected’, ‘high’ or ‘below-par’ performance in the circumstances.
The same approach applies to the behavior assessment: each employee’s behavior is rated against each of the organization’s values on an A (‘role model’), B (‘lives the values’), or C (‘issues to discuss’) scale.
In short, don’t be afraid to explicitly embed judgement in your performance assessments. Judgement is always present when leaders think about employee performance — calling it out explicitly forces us to think carefully about the judgements we make, and articulating that judgement helps employees develop and grow
- Have the employee conduct their own initial self-assessment
From a development perspective, I believe it’s important to have the employee complete their own draft performance assessment. This is because it helps them take ownership of their results — whether good, great or below par — and helps boost their self-awareness as they consider how their boss will assess the judgmental components of their review.On page one, this should be relatively straightforward as they simply mark or circle the actual performance result against each target (assuming the data is available). For judgmental areas, they need to identify what evidence they can provide to justify their rating.
On page two, I ask employees to rate themselves A (‘role model’), B (‘lives the values’), or C (‘issues to discuss’) against each of the organization’s values, and to note examples to justify their rating. While some people find it challenging to assess themselves as either ‘role models’ or having ‘issues’, the process forces them to think about their behavior and what examples they — and their leader — can use to justify their assessment.
For both the performance and the behavior pages, this process of self-evaluation against relatively objective standards helps reinforce self-awareness and puts the employee in a better frame of mind for the subsequent performance discussions with their leader.
- Separate the rating and remuneration discussions
Having two separate conversations — one to discuss performance against the agreed standards, and the second to discuss remuneration outcomes — is critical to making both conversations constructive.When the two conversations are the same — ‘Here’s your performance rating, and here’s the bonus/raise you’re getting as a result’ — the employee’s focus naturally tends to be on the second part of the conversation, and they’ll feel relatively good or bad depending on the result.
In addition, combining the two conversation means that leaders often feel the need to reverse-engineer the performance rating in order to justify the financial outcomes that the employee is going to receive. This can often lead to the conversation devolving into arguments about specific targets and whether or not the remuneration outcomes are ‘fair’ given what was achieved against the targets.
In my approach, the first conversation — what I call the ‘rating’ conversation — focuses exclusively on performance against the goals and standards that were set at the start of the period.
You may want to start the rating discussion with behavior, since this helps reinforce that values and behavior are taken seriously — values are made manifest by behavior, and focusing on this page shows that you expect your leaders to be role models for the values.
Regarding performance, the discussion is along the lines of ‘I asked you to do X, and you achieved it’. You acknowledge and praise the employee for what was achieved against the targets and provide your perspective on areas where the employee fell short or needs to improve. This helps the employee feel acknowledged and proud of what they’ve achieved, and to be more open-minded and accepting of constructive feedback.
For judgmental areas, I will typically ask the employee to explain what rating they think they should get, and then use differences between their assessment and my judgement as the basis for a constructive development conversation. It’s important that this is a two-way conversation, and the employee’s perspectives on what they did well and where they could have done better is important input to an ultimate judgement on pay and promotions.
In the second conversation, the task is to explain remuneration outcomes in the context of relative performance. In this framework, the performance rating is an input, but the ultimate outcome needs to be adjusted based on the leader’s judgement about:
- degree of difficulty in hitting the targets
- relative performance of others in the team
- relative value of the individual’s contribution to the overall result
- changes in market conditions during the period (i.e., headwinds and tailwinds)
- changes in business priorities during the period
- incremental value delivered beyond the scope of the performance document
- appropriate consequences for negative behavior, risk or compliance incidents.
This conversation is typically along the lines of:
“In our last conversation we talked about how your performance rating was strong versus the targets that we set. In thinking about the right pay outcomes this year, I have recognized that you were without half your team for three months but also that the drop in our supply prices gave your division a big head start on margins. Plus, the middle market division had a particularly strong six months. Also, in my judgement you haven’t done as much as you promised you would do to fix the relationship issues between your team and operations. So, on balance your outcome is a bit lower than it otherwise would have been . . .”
While the employee may still not be satisfied with the outcome, being explicit about how they performed against their targets, and the various factors that play into your judgement on pay and promotions, helps people save face and appreciate the fairness with which you are approaching the issue.
* * *
If you find performance reviews frustrating, I highly recommend trying this two-step approach: it turns the performance conversation from an adversarial one into a more constructive, development-oriented conversation, thereby reinforcing your commitment to them and their personal growth.
Written by Brian Hartzer, former CEO of Westpac Banking Group. This article is adapted from THE LEADERSHIP STAR.
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