What should I replace my performance management system with?

Need to improve your business performance? The answer isn’t appraisals, it’s coaching, says Alistair Shepherd.

Reading time: 6 minutes.

If your company is anything like most then you operate an annual appraisal and performance review cycle whereby the performance of employees is graded, ranked and then force distributed on a (usually five point) scale. The best employees get a five, the worst get a one or two and the majority get a three. It’s an unpopular system for both the raters and the rated.
Despite being universally disliked, it’s natural that such a system exists. People are expensive for a business and so should be managed. People also create the value a business sells and so should be managed. Finding a system that can simultaneously reduce cost and increase value is difficult – particularly when the system directly impacts people.

The problem lies in trying to do the two simultaneously.

Perhaps the first step to replacing your performance management system is to keep it. Or at least keep the annual pay review part intact to begin with. Compensation needs to be set fairly across an organisation.

Basing it on performance makes intuitive sense but it’s an opaque system and force distributing performance scores raises more questions than it answers. Perhaps the biggest problem with basing pay on performance is not the inequity but the outcome.

Reviewing performance annually makes no sense. Any attempt to summarise a year’s worth of effort becomes vague to the point of meaningless. 

Dan Pink’s now famous study calls into question the idea that if you reward a behaviour you get more of it. He and a group of economists found that where a task requires even rudimentary cognitive skill, paying people more led to worse performance. It’s fair to say that a large portion of work requires more than rudimentary cognitive ability.

One measure of skill and one measure of responsibility

They found that instead of using money as a motivator it should be used to quell economic distractions but no more. Meaning you need to pay people enough for them not to have to worry about money but beyond that threshold paying them more leads to worse performance.

So instead of setting pay based on performance, benchmark the employee’s role against the market using one measure of skill and one measure of responsibility. An increase in either or both should be reflected by an increase in compensation.
Once you’ve taken care of how people get paid, we can move on to the more challenging question of how to engage the workforce and raise performance. First off, reviewing performance annually makes no sense. Any attempt to summarise a year’s worth of effort becomes vague to the point of meaningless.

Secondly it doesn’t allow for an effective learning cycle. One where an employee can try something, fail, receive help, try again, improve. To be effective, these cycles need to happen over short periods of time and happen in an environment where it’s safe to fail.

Regular coaching conversations

It makes sense then for managers to turn an annual performance review into a regular coaching conversation. When Google set out to figure out what makes a great team they found five indicators consistently predicted performance: psychological safety, dependability, structure and clarity, meaning, impact. As a manager, you can affect each of these in a regular coaching conversation.


Start with psychological safety. As Amy Edmonson describes, it’s the ability for team members to feel comfortable to admit mistakes. A big part of feeling socially safe is knowing and trusting your colleagues. So start by getting to know each other.

This happens naturally over time but it can be accelerated by using a values assessment and shared using your own personal profile (there’s a handy PDF template here). By knowing each other better you can start to understand their way of thinking, what drives them and what they’re comfortable with.

It can be a bit daunting to begin with so start by focussing on each other’s strengths. Research says that people who focus on their strengths every day are six times more likely to be engaged in their jobs, more productive and more likely to say they have an excellent quality of life.

Perhaps employees who naturally dwell on their strengths are naturally happier and therefore more likely to poll favourably when asked about work? A good argument. But there’s a growing body of research to suggest that happiness can be coached, and in doing so performance reliably improves.

The best place to have this conversation is in your usual one-to-one meeting. 

Praise in public and criticise in private?

Next up you’ll need to hold employees accountable for their work. The theory goes that you should praise in public and criticise in private. But if the team have to work together to achieve goals then they need to be accountable to each other, not just to the team leader.

This is the perfect opportunity to have a coaching conversation with the whole team. Think about it like the half time talk in a football match. Yes, you coach the players as individuals but you also need to coach them as a team.

As organisational psychologist Howard Schwarz puts it, “If you’re like most leaders, you believe in the adage ‘praise in public and criticise in private.’ So when a team member does something that negatively affects the team, you usually talk to the team member in private.

“But this can be a dangerous adage to follow because it significantly reduces accountability, the quality of team decisions and your team’s ability to manage itself.”
Once the team feel safe with each other and can depend on each other to get things done, you can start to aggressively pursue objectives. Structure and clarity is really about setting short term (~3 month) goals which have measurable results.

Couple this with a clear sense of the roles and responsibilities each employee has in hitting these goals and you’re set. We all know that traditional goals are out of date before they even make it into the annual plan.

So if you want a good model for setting objectives and key results which is compatible with dynamic coaching conversations then look no further than Google’s free guide to setting objectives and key results (OKRs).

A great way to introduce autonomy is by including the team in the process of setting team goals. 

If we go back to Pink’s research mentioned earlier, he shows that if employees have autonomy over their work, they’re radically more engaged. A great way to introduce autonomy is by including the team in the process of setting team goals.

We’re not talking complete autonomy here because, as Valve demonstrate, that can lead to detrimental a lack of focus. Simply allowing them to set their own objectives in line with the team’s objectives.
Many companies are starting to talk about being ‘agile.’ Agile is not working from home on a Friday, agile is the process of continually evaluating if the objectives the team are aiming toward are still the right ones and assessing if they’re on track to meet the objectives.

The best coaching conversation for this is a ‘retrospective.’ Get the team together every week or two and ask three simple questions. Given our objectives, what should we start, stop and keep doing over the next two weeks to give ourselves the best chance of hitting them?

When the team feel safe and accountable to each other, not just to the team leader, that’s where true performance starts to take off. They set collective goals, define their roles and responsibilities, regularly review their performance, make adjustments and go again.

That’s true performance and it hardly needs managing.


About the author

Alistair Shepherd is founder and president at Saberr.


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