Why we all need performance ratings on a regular basis

McKinsey research shows that the majority of CEOs don’t find the performance management process helpful in identifying top performers. Over half of individuals surveyed think their managers don’t get the performance review right. When neither of these parties finds the process beneficial, it’s no wonder some organizations have done away with annual performance ratings altogether.

In working with these clients, however, we noticed an interesting trend. When these organizations scrapped the performance ratings, they found a need for a form of annual documented administrative evaluation to make employment decisions, such as promotions and raises. To address this need, these organizations often implemented “ghost” ratings — a system of evaluation that is, ultimately, just another annual performance rating.

Our experience suggests that, uncomfortable conversations aside, humans like knowing how they’re doing. It gives employees something to celebrate, or to focus on for improvement. And fewer touchpoints — i.e., getting rid of annual performance ratings — is not the answer.

Our experience suggests that, uncomfortable conversations aside, humans like knowing how they’re doing. It gives employees something to celebrate, or to focus on for improvement.

We recommend increased touchpoints with greater attention toward making the process as fair as possible. The following are key learnings, gathered through our client work, to help your organization manage employee performance more successfully.

  • Coach employees on a regular basis. While the annual performance review has value, there is no substitute for the direct feedback and direct coaching that happens day in and day out, not just annually.
  • Ensure the process is perceived as fair. Key to this is emphasizing how employees’ work fits into the organization’s bigger picture and ensuring that these conversations have an ongoing component. The additional suggestions below can also help improve perceptions of fairness.
  • Leverage data and analytics. Data and analytics can support performance reviews by giving managers objective feedback about whether employees are performing well or not.
  • Empower managers to give better feedback. Ensure touchpoints are built into their schedules, and make sure they have absolute clarity about their role as managers. Also, provide them with the proper training to give constructive, strength-based feedback and encourage discussions that make their colleagues feel valued.
  • Understand the power of differentiation. A core finding of our work is that compensation differentiation matters in both directions: Employees should not receive merit increases just for showing up each day; they should be compensated for achieving their goals. Also, merit increases must be significant (15 percent or more) in order to make a difference in fairness perceptions.
  • Encourage peer-based feedback. As organizations become flatter, employees are naturally working with more people. Using technology to gather peer-based feedback from a large sample can help eliminate biases and provide a more accurate, comprehensive perspective on performance.

Improving performance management requires putting the manager back into the process, emphasizing constructive, ongoing conversations with employees in addition to the annual review. Doing so creates a better experience for all parties involved, providing the administrative information required to reward, while establishing and underscoring fairness throughout the process.

For more insights on this topic, listen to our McKinsey Podcast episode, “Straight talk about employee evaluation and performance management.”

Learn more about our People & Organizational Performance Practice