Performance Evaluations, Business Strategy, and Agile Methodologies

It is performance evaluation time in many companies. This can be stressful, both to the people being evaluated, and the people doing the evaluation.

In companies adopting agile software development methods, the tension can be extraordinary. Individual performance evaluations run counter to agile philosophy, which emphasizes team performance over individual performance.

However, managers and corporate leaders need to take a few steps back, and consider the impact performance evaluations have on the organization as a whole. Especially now, in the midst of a recession, it is important to look at a companies current policies to see if they can be improved, or if they are actually holding the company back.

So, how can a manager evaluate policy? Performance evaluation policies can serve as an excellent example. I'll confine myself to discussing the so-called ‘rank and yank’ methods. These are performance reviews were employees are ranked using a forced ranking system. It usually looks something like this:

20% of employees will be considered top performers.

70% of employees will be considered adequate performers.

10% of employees will be considered inadequate performers.

Depending on the company doing the ranking, the inadequate performers will either get extra coaching and training, or get fired.

There is a quick and simple way to determine whether a policy or strategy like this is likely to do good or harm. It is called the Interaction/Isolation test. The test is based on the nature of business strategy:

Business strategy is a game of interaction and isolation. At its most fundamental level, the job of a manager is to strengthen interactions between the company and its customers, allies, and society (environment). To accomplish this, it is necessary to strengthen interactions between people in the company itself. Conversely, a company can isolate its enemies in order to reduce their power.

This sounds pretty abstract, but we will turn it to practical use in a moment. Here is an Interaction/Isolation matrix:

The matrix has four areas: We-Interaction, We-Isolation, They-Interaction, They-Isolation. You can evaluate a policy or strategy by figuring out in which quadrant it fits. You will find that successful policies and strategies almost always are in the We-Interaction or They-Isolation quadrants. If a policy or strategy fits in the We-Isolation or They-Interaction quadrants, you should at least investigate thoroughly. It is likely that the policy hurts your organization.

A performance evaluation is used to classify employees. It creates an incentive for people to compete against each other. People who compete with each other are less likely to share information. Performance evaluations can also create social cliques. These cliques also tend to isolate themselves from each other.

Performance evaluations also create uncertainty. What does management intend to do with the evaluation? Fire the low performers? Whether this is true or not, the suspicion, breeds distrust, which isolates managers and employees from each other.

Using the Interaction/Isolation test, performance evaluations end up squarely in the We-Isolation quadrant:

We should not rely exclusively on one simple test, but we do have a strong indication that further investigation is warranted. Let's do that.

What do well known management experts say about performance evaluations?

As is usually the case, there are people who are for performance evaluations, and those who are against it. Let's begin with a proponent, Jack Welch, General Electric CEO 1981-2001.

Welch is famous for initiating and consistently supporting a very successful Six Sigma program at GE. He is also famous for firing the lowest performing 10% of his employees each year.

On the other hand... GE also had the Six Sigma program. It is entirely possible that the Six Sigma program was the main cause of GE's success. The performance reviews might have had very little to do with it, or they might even have been detrimental.

Enron had a performance appraisal system, and it may have contributed to the company's downfall. You don't want your company to be the next Enron, do you?

Looking at the reasoning of performance appraisal advocates like Dick Grote, one thing is clear: The reasoning simplistic. Rank everyone, then yank the worst performers. There is little or no consideration of effects other than the desired ones.

For example, if you have good performers to start with, and yank the bottom 10%, the replacements you get will, on average, be worse than the people you fired.

Another problem is keeping the system honest. Welch has emphasized that the system must be honest to work, but how do you do that? For example, a manager can easily downgrade a strong performer in order to eliminate a future competitor. Employees have a strong incentive to sabotage each other.

A third problem, one I have mentioned already, is that information becomes something to withhold, rather than share. You don't want anyone else to get ahead if your continued employment depends on you outperforming them.

Let's see what some other well known experts say about performance appraisals.

Let's begin with one of the world's most successful entrepreneurs, Sir Richard Branson. Here is an excerpt from Business Stripped Bare:

Looking back over the personal notebooks I have kept for more than thirty-five years, I don't think there has ever been a letter from my office which criticises the staff or an individual. Now and again I've disagreed with something and suggested changes in behavior. But the Virgin group has always tried to look for the best in people. That way, you get the best back.

Branson writes a bit about Jack Welch, Alan Sugar, and Donald Trump, then continues:

There's a machismo about the way some managers talk about hiring and firing that I find downright repugnant. A senior person at Apple rather proudly says in his speeches about firing people that ‘I´d rather have a hole than an asshole.’ My philosophy is very different. I think that you should only fire someone as an act of last resort.

Branson's philosophy seems to work. The Virgin Group has about 60,000 employees. It's network structure makes it one of the most (crisis) resilient business organizations in the world.

Examples and counter-examples do not really prove anything, except that

A company that uses rank and yank can be successful. (GE)

A company that does not use rank and yank can be successful. (Virgin Group)

A company that uses rank and yank can fail. (Enron)

A company that does not use rank and yank can fail. (I'll leave it to you to find an example.)

Jeffrey Pfeffer and Robert Sutton are famous. They have written several highly regarded management books. Both are academics, but they also work with large corporations, and have a lot of experience. Here is an excerpt from their book Hard Facts, Dangerous Half-Truths & Total Nonsense:

A couple years ago, one of us gave a speech at a renowned (but declining) high-technology firm that used a forced-ranking system. They called it a stacking system. Managers were required to rank 20 percent of employees as A players, 70 percent as B's, and 10 percent as C's. Just as The War For Talent advises, they gave the lion's share of rewards to A's, modest rewards to B's, and fired the C's. But in an anonymous poll, the firm's top 100 or so executives were asked which company practices made it difficult to turn knowledge into action. The stacking system was voted the worst culprit. This is not just one company's experience. A survey of more than 200 human resource professionals from companies employing more than 2,500 people by the Novations Group found that even though more than half of the companies used forced ranking, the respondents reported that forced ranking resulted in lower productivity, inequity, and skepticism, negative effects on employee engagement, reduced collaboration, and damage to morale and mistrust in leadership.

According to Pfeffer and Sutton there is no evidence at all that rank and yank systems bring any benefits to the companies that use them.

Leslie Bracksick, executive coach and doctor of behavioral science concludes the same thing in her book Unlock Behavior, Unleash Profits:

Sadly, performance evaluations have relatively little influence over the day-to-day activities of employees. They are simply too far removed from where and when things happen.

Finally, let's turn to W. Edwards Deming, perhaps the most influential management expert of the twentieth century. Deming is often credited with being a major influence on the post WWII Japanese economic miracle.

In his book Out Of the Crisis, Deming does not mince words. He lists ‘evaluation of performance, merit rating, or annual review’ as one of the seven Deadly Diseases of Western management:

The idea of merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good.

The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or ties to, for his own good, on his own life preserver. The organization is the loser.

Merit rating rewards people who do well in the system. It does not reward attempts to improve the system. Don't rock the boat.

This is exactly why agile coaches and other agile change agents are so much against personnel reviews. Improving the system is exactly what the organization tells them to do, then the organization turns around and stabs the agile change initiative in the back with an outdated, ineffective, counterproductive, personnel appraisal system.

Well, if rank and yank is so bad, why do so many organizations do it?

According to Pfeffer and Sutton there is a very simple reason for why dysfunctional management practices continue to be used for very long periods of time:

When people have strongly held but unexamined beliefs, they act on those beliefs without ever surfacing the underlying assumptions and asking if, indeed their beliefs are logical and empirically sound.

From The Knowing-Doing Gap

Like Pfeffer and Sutton, I believe this is part of the answer. Another part is that many managers do realize that the personnel evaluation systems they use hurt both employees and the company itself.

They also realize that if they rock the boat and do speak out against a detrimental policy, they may very well get a poor performance review themselves.

Deming was right, merit ratings do not award people who try to improve the system.