In the last few years, companies have been transforming their performance management models and redefining how goals are set and performance is evaluated. Traditional ranking systems have been disappearing, and in its place have entered models designed to be tools for greater employee engagement. Why all the reinventing?

Forced Ranking: A thing of the past?

The traditional forced ranking system is a performance management model in which intense yearly evaluations are used to identify and rank a company’s employees by comparing their performance. Top-performing employees receive rewards such as higher pay, while the lowest performers are instructed to improve their performance, and in some models are at risk of losing their jobs. This method’s intention is to motivate employees to work harder, but it has become a controversial method due to its negative effects. Ranking systems have been found to:

• Decrease morale
• Place more emphasis on individual performance, resulting in decreased teamwork and less willingness to help others
• Promote competition among employees

This system has been in use for many years, but is being used less now with the increased emphasis on company culture. Most companies are moving away from this culture and creating performance management systems that improve employee engagement and drive business results.

The new trends

In 2015, research by Deloitte University Press showed that 89% of respondents recently changed their performance management process or planned to change it within 18 months. Why? Because companies are coming to realize that the performance management process affects leadership, engagement, and capability challenges, and the “up or out” strategy only worsens those issues. Therefore, the way employees are evaluated needed to be strategically modified to achieve better results and better company culture.

Changes are being made to drive empowerment and innovation into organizations. Some redesigned processes include year-end ratings and others don’t, but overall this forward-looking style of performance management shifts the focus from individualism to collectivism, and from competition to teamwork. Consider some of these strategic changes companies are making:

• Put less emphasis on evaluation and more focus on goal setting, regular feedback, coaching, and development. Train managers to coach their employees to succeed rather than just evaluate and grade. Employees nowadays want regular feedback so they can progress in their careers. Gather feedback from employees to help managers improve as well so both leaders’ and teams’ performance constantly improve.
• In the OKR (Objectives and Key Results) method, the company, teams and individuals have objectives to be achieved. Key results are then used to measure whether or not the objectives were accomplished. OKRs are kept public, and this transparency ensures that everyone knows what is expected of them and encourages teams to move in one direction. OKRs were invented at Intel but are used at companies like Google, LinkedIn, Twitter, and more.
• Weaken the link between performance management and compensation. Performance ratings decrease morale and are even more stressful and threatening when they are directly linked to raises. Many companies are expanding the compensation process by considering not only ratings, but employees’ competitive value and real-market conditions.
• Emphasize team goals in order to improve collaboration and group performance.
• Ratings-based management systems have been found to decrease employee engagement, undermine self-confidence, and negatively impact company culture. Therefore, many companies, such as Adobe and Microsoft, have reduced the impact of ratings.
• Manage to strengths, not weaknesses. Move people into roles that play to their strengths in order to see their best performance and maximize their chances of success.

Deloitte calls performance management the “secret ingredient” to building a highly engaged culture because of its power to boost employee morale, engagement, performance, and teamwork. Employers are gaining a more positive view of performance management due to the effectiveness of these new models. When done well, a good system can inspire employees and drive performance improvements and results. Evaluate how your company is doing in this area, make needed changes, and fully utilize performance management for the powerful tool that it can be.