Appraising Performance Appraisals

How the best companies assess employee performance—and what you can learn from them.

January 22 2013 by Russ Banham


Providing employees with consistent, effective feedback is what often distinguishes good from great CEOs. Appraisals may, in fact, be a CEO’s most potent tool in aligning people and improving effectiveness. So why do most CEOs hate doing it and why is it done so poorly by so many of us?

We broke the process down and spoke with top-performing CEOs and companies of various sizes, including two of Chief Executive magazine’s CEOs of the Year, to help you improve your appraisal process and become an effective coach.

Our research yielded a wide array of different ways of conducting evaluations, describing goals, rating employees, discerning areas of talent improvement and linking it all to incentive pay.Some organizations conduct the appraisals semiannually; others do so once a year. Several promote 360-degree feedback from supervisors, peers and even subordinates; others find little utility in this process. Many hew to General Electric’s Forced Ranking performance-management system, whereby the bottom 10 percent of employees is given the boot each year. Others disdain this method as barbaric.

Ultimately, we found that there is no such thing as a one-size–fits-all performance appraisal—nor should there be—given each entity’s unique talent considerations. Well-designed appraisals also share certain elements, chiefly the need for the chief executive to be a champion of the process and a participant. (See Sidebar:Targeting Top-Down Employee Performance) Finally, all the CEOs concurred that employee-performance management is crucial, and the best way to make good on it is through routine appraisals.

“Hiring the right people is vital, but the only way for a company to acquire long-term knowledge is through employees’ long-term tenure,” says Shivan S. Subramaniam, chairman and CEO of FM Global, a large, mutual property insurer with specialized risk management and loss engineering expertise. “By regularly assessing employees’ skills and whether or not they’re delivering on strategic goals, you can provide training where needed to build knowledge. Also, you may learn that someone would be better suited to a different task in the organization.”

He adds, “This is really all about employee development.”

Establishing Responsibilities

Appraisals should be driven by a desire to improve employees’ performance, not to stress them out, agrees Ed Lawler, distinguished professor of management and business at USC’s Marshall School of Business. “There is some truth that appraisals can be destructive and not constructive; and if they’re poorly designed, you’re probably better off not doing them at all,”says Lawler, who has written extensively on the subject. “The right answer is to do them correctly. And in my experience, doing them correctly starts at the top.”

All too often, he explains, the C-level suite and other senior executives are not appraised by the board, much less peers and subordinates. Rather, the appraisal system is relegated to middle management and the rank and file, which sets up a negative dynamic that diminishes the importance of the exercise, spreads anxiety and undermines collaborative teamwork. The solution, Lawler maintains, is to task the board with appraising the CEO and then have this process cascade down through the organization.

Before a top-down appraisal process can occur, clear performance goals that provide direction on supporting the business strategy must be articulated. At Edward Jones, the large investment firm’slong-term corporate objectives are a North Star for its 30,000 associates—including 12,000 financial advisors—across the country. “By communicating our goals, it allows our associates to link their work to the firm’s work,” says Jim Weddle, CEO of the St. Louis-based company.

Strategy is set at the top of the firm, with very measurable objectives. Each employee is then held accountable for performing towards these objectives. “Rather than issue job descriptions, we’ve created responsibility statements,” Weddle explains. Each employee is given clearly defined responsibilities that guide the work he or she does, and these responsibilities are tightly linked to the measurable objectives. “Performance reviews are straightforward if there is clarity on the responsibilities and the expected outcomes,” he notes.

Clarity and accountability are crucial, Lawler agrees. “The performance goals must be mutually agreed to by the person doing the appraisal and the person being appraised,” he says.

If employees know what is expected of them, they have a target at which to aim.Human nature being what it is, a target can be a great motivator. “We’re big believers that people not only want to give their best, they want to get better along the way,” says Bryan J. Hogan, CEO of Afidence, a Cincinnati-based technology consultancy. “And the way to do that is to be crystal clear on expectations.”

Afidence appraises its employees—from Hogan to the rank and file—based on eight core competencies: client focus, business proficiency, process orientation, sense of urgency, professionalism, technology expertise, communications skills and team contribution. “Each employee must have these skills to accomplish his or her job, which then form objective measures to evaluate individual performance,” Hogan says.“Everyone knows what they’re going to be measured on, and knows this is going to occur in March of the year.” Conducting these measurements is a broad group of peers, supervisors, subordinates, and even clients—the aforementioned 360-degree feedback process. (See Sidebar, Human Capital, Human Feedback, p. tk.)

Stroll, a Philadelphia-based education e-commerce platform that specializes in teaching foreign languages, adheres to a 360-degree feedback process and also requires its 170 employees to appraise themselves. “They’re rated on our values, including strategy-mindedness, mental toughness, results orientation, ownership thinking and being the best,” says Dan Roitman, founder and CEO. “Then, we ask them to appraise their behaviors—the evidence that they have pursued these values. For instance, in the area of strategy-mindedness, someone may indicate that they attended meetings outside their particular area of expertise, which shows that they are thinking outside the box toward our strategic benefit.”

Similarly, BB&T Insurance Services appraises its 4,500 employees for basic core values,such ashonesty, integrity and judgment, as well as organizational behaviors like leadership, independent thinking, negotiating ability andparticipatory behavior.It also rates employees on agreed-upon goals that are established by the supervisor and employee. “What we’re trying to determine is long-term career development potential,” says H. Wade Reece, chairman and CEO of the Raleigh, North Carolina-based reinsurance intermediary, with $1.1 billion in 2011 revenue. “Appraising employees twice a year on a formal basis lets us know if someone needs training or should be in a different job.”

Career Development

The actual measurements seem to be less important than for what employees are being appraised. Some companies favor a numerical scoring system—from 1 to 10, with 10 denoting superior performance. Others prefer a qualitative system, rating employees poor, good or superior, with gradations in between. FM Global, for instance, grades on the following basis: Outstanding, Exceeds Expectations, Meets Expectations and, finally, Unacceptable. Says Subramanian, “How you grade is not as critical as what you’re grading for.”

Like other companies, Acorda Therapeutics links business strategy to core competencies and measurable outcomes. “Once we rate employees, we are able to know where they need improvement,” says Ron Cohen, MD, president and CEO of the Ardsley, New York-based biopharmaceutical company, with $210 million in 2011 revenue. “That’s where our training program comes into play.”Acorda provides employees internal and external training, depending on the areas needing improvement. It also has anin-house mentoring and coaching program. “We put a premium on training,” Cohen says.

Sodoes Edward Jones. “We view training as an investment, not as an expense,” says Weddle. “It is an investment in our people and their ability to do the work required to help our long-term investors reach their financial goals.”

Hogan from Afidence offers an example of his company’s approach to training. “We had a client in our 360-degree feedback appraisal point out that a particular employee was lacking in communications skills,” he explains. “We sat down with this employee and developed a training agenda to help him. At the next feedback session, the client noted discernible improvement. Since we’re a consultancy looking for sticky client relationships, such routine feedback is strategically vital.”

FM Global also affirms the use of appraisals to discern skill gaps and overcoming them with specific training.In its case, this guidance is accomplished at a state-of-the-art, 12,000 square-foot experiential training facility, where its loss prevention engineers can touch, feel and examine the types of property hazards the company’s clients can expect to encounter, from fires to major hurricanes. “Once we discern the kinds of training an employee needs, we develop a training program particular to that person,” Subramaniam says. “Managers are required to make time for the individual to take the relevant classes.”

A well-executed performance appraisal will reveal not only the employees who are constantly improving to meet the tasks at hand but also those who cannot cut the mustard. “Someone excelling could dictate a job promotion,” says Cohen. “Conversely, you may learn that despite best attempts, someone has to be let go.”

He adds, “You just hope that you’ve got the right people in the first place.”

TARGETING TOP-DOWN EMPLOYEE PERFORMANCE

In his long tenure as chairman and CEO of Target Corporation, Bob Ulrich (Chief Executive 2007 CEO of the Year), put a premium on the retailer’ssemiannual employee performance appraisals, an effort that consumed quite a bit of his time. “Just like the board appraised my work, I was responsible for appraising several hundred people right below me,” Ulrich explains. “And I ensured that every one of them evaluated the people below them the same way.”

Consistency in evaluations is considered a best practice. However, this doesn’t necessarily meanappraising every employee on the same skills. Employees in the warehouse, for instance, were evaluated for operational efficiency, whereas those on the sales floor were appraised for guest service, among others in both cases. Certaincompetencies, such as enthusiasm, reliability and drive for excellencewere on the scorecards of all employees.

Target espouses 360-degree feedback from supervisors and peers and also promotes employee self-appraisals. “We found it important for employees to have a chance to say how they thought they were doing and the ability to compare this to what their peers thought,” Ulrich says.

When an inferior performance was registered, appropriate training and consultation were provided. “After a couple reviews, we may find that a particular person needs to find someplace else to work,” Ulrich concedes. “We never like this, but it would be unfair to the person’s team members and the organization as a whole to keep them on. This is why we put such emphasis on hiring people that fit our culture, people with a positive attitude who take pride in giving a great experience.”

He adds, “You want to get it right at the beginning.”

HUMAN CAPITAL, HUMAN FEEDBACK

A.G. Lafley is widely credited with making Procter & Gamble what it is today. The former chairman and CEO doubled the company’ssales and market capitalization, expanded its portfolio of billion-dollar brands from 10 to 24 and grew earnings per share12 percent annually from 2001 to 2010, when he retired.

A big part of this successwas the premium put on criticism as a way to nurture talent. “If employees believe that feedback is something positive for them in terms of growing their careers, it can have an amazing effect on their performance,” says Lafley, Chief Executive’s 2006 CEO of the Year. “The key is to make sure the feedback is clear and constructive.”

Such clarity was achieved through the annual performance work plan given individual P&G employees. Each was then appraised on personal behaviors that correlated with the work plan, such as leadership skills and management capabilities. At more senior levels of the company—the 150 general managers under Lafley—a 360-degree feedback process was pursued.“On a one-page piece of paper, we’d ask questions like, what would you like this person to continue to do because you believe it is effective, and what would you like this person to stop doing because it is not effective?” he says.

The goal was to offer managers wide-ranging feedback, not just the perspective of direct supervisors. “We were interested in what colleagues and subordinates had to say,” Lafley commented. “We’d then rank their performance as outstanding, less than outstanding and so on. Then, we’d engage them in a personal and constructive way on how to improve performance.”

More than 85 percent of P&G’s managers routinely met or exceeded expectations, and only about 5 percent to 10 percent failed the test. “I’d say our success was mixed in trying to correct performance behavior in a meaningful way,” says Lafley, “but we always gave everyone a shot at turning it around.”