One of the most dreaded processes in business is the annual performance review. Rather you sit in the giving or receiving seat of the review, its usually a pretty uncomfortable process regardless of how well or poorly the employee has performed. The problem lies in the fact that most organizations (and subsequently managers) have very poor methods for gauging an employee’s performance. The review is often skewed toward two factors 1) how the employee has made the manager feel since the manager has become more conscious about the upcoming review (usually a few weeks) and 2) how the manager’s circle of work friends feel about the employee. In other words, performance reviews are often driven more by internal politics than by actual performance. This only contributes to diminishing the overall organization’s effectiveness where actual results have less and less internal value over time.
There is often a clear a mis-alignment between what the customer pays for and what employees are evaluated on during the performance review process. Most companies are very good at measuring what the customer pays for. For example, just about every company has metrics in place to manage quality, cost, and service levels. Other metrics may be used to drive business initiatives such as a Lean or Continuous Improvement implementation. These metrics might get tossed around during management meetings throughout the year but too often don’t weigh in to an individual’s actual performance review. In a perfect world, each individual would be measured based on the amount of value they contributed to the customer and no more. An individual’s political prowess should be evident in that person’s ability to drive sustained quantifiable business results. And fortunately, with a little creativity, all business results are quantifiable to some extent.
The politics-based performance review process is the by-product of they way employees are compensated. Employees generally don’t have much control over how much money they make on a day-to-day or week-to-week basis. Employee compensation is basically fixed aside from overtime, bonuses, or annual pay increases. These long-interval compensation management tactics are designed to convenience accountants and not to leverage human psychology, which would call for immediate and real-time feedback (including compensation). Long-interval compensation management creates a comfort-seeking and risk-averse culture that is counter to what really drives business growth and high performance. An employee would be paid the same if they came in to work and created tremendous value as they would if they showed up, put up mediocre numbers, and just avoided any conflict. This environment makes it too easy to be a prosperous – at par – performer.
Contrarily, leading organizations have developed more systematic approaches to performance reviews that do a better job at quantifying the expected value contribution of each employee in the organization. Its proven that real-time feedback is the most effective method for managing people. Managers simply can’t provide real-time feedback at the level needed to develop world-class talent. The most effective performance review comes directly from the customer (or the understood measure of value for the customer). If you follow the links in the value chain through the factory, you realize that an employee’s manager is not their true customer, yet the manager is usually providing the performance review. In an ideal state, employees would get frequent feedback automatically from the business system, which should be designed based on understood value for the customer. They would be able to quickly assess how much value they have created against the expected value created for the amount of time they have worked. In this type of system, it is impossible to hide poor performance or for someone to get credit for another person’s contributions. This works best when the supply chain is broken down to clearly defined suppliers and customers at each step in the process. Then value contribution and performance management can be set up in a pull system where each employee is measured in real-time using quantitative factors with input from their immediate downstream customer. This would replace the broken and wasteful push system where unfounded opinions, gross assumptions, and biased perceptions are used to gauge a person’s performance. The next step is to evolve to a real-time compensation model that matches value creation on short intervals, which will be covered in greater detail in a future blog post. This significantly reduces the need for artificial motivation and performance management tactics that are typically used in modern business. A manufacturing efficiency expert such as those at Manuficient can help develop data-driven performance evaluation systems to put your organization on the path to World-Class performance.
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