4 reasons companies are stopping performance ratings

Over the last several years, many companies have decided to ditch standard performance rating systems, such as evaluating employees on a performance curve, according to the Harvard Business Review.

By the start of 2015, around 30 large companies — representing more than 1.5 million employees — had gotten rid of their "forced ranking" performance ratings. They didn't forgo performance reviews altogether, however. Instead, they now emphasize ongoing, in-depth conversations between managers and their teams to constantly work on improving performance.

By the middle of the year, the trend began picking up pace, with companies including Deloitte, Accenture, Cigna and General Electric all changing their performance management systems. By the beginning of September, 51 large firms moved to no-ratings systems. Nearly 70 percent of companies are reconsidering their performance management strategy, according to research firm Bersin by Deloitte.

The NeuroLeadership Institute, which has been studying the trend of companies walking away from performance ratings since 2011, has pinpointed four main reasons companies are stopping performance ranking, according to HBR.

1. The nature of work has changed. Numerical performance management systems are inadequate for measuring an employee's true value to a company because the nature of many aspects of work cannot be quantified in the same ways as in the past. First, work is being tackled by teams more now than ever, and team members are often spread out in different locations around the country and even the world. Additionally, many workers set goals on a monthly or even weekly basis — not yearly. Standard once-annual performance reviews are therefore no longer relevant, according to the NeuroLeadership Institute.

2. Ranking systems inhibit much needed collaboration. After studying companies that have changed their performance review systems, the NeuroLeadership Institute saw a clear trend: Forced ranking systems prevent collaboration among employees, in effect making business less customer-focused and nimble. Top rankings held the promise of elevated status, promotions and raises, but it's not like in school where if you work hard enough, everyone can earn an "A" grade. When there is a performance curve in place, even hardworking, valuable team members will get low rankings. This causes competition among employees and reduces collaboration. According to the institute, when Microsoft removed its ranking system, employee collaboration increased dramatically.

3. Performance rating interferes with recruitment and talent retention. Many companies have removed their performance rating systems to encourage managers to talk to employees about their development more often than once or twice a year, according to the report. This is especially important to Millennials, who desire learning and career growth. Frequent communication is integral to employee engagement, development and fairer pay, as managers can attain a more comprehensive understanding of how well their employees are performing.

4. To develop employees faster. Early indications show companies that remove performance ratings appear to develop people faster across the board, according to the NeuroLeadership Institute. Faster development is the result of more frequent conversations, which also tend to be more honest and open when neither part has to worry about presenting a rating at the end of the year.

According to the report, when Deloitte analyzed their former process, they found employees and managers spent around two million hours each year on performance reviews. However, must of this time was spent discussing the ratings themselves. Once conversations shift to growth and development, both employees and organizations benefit.

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