Performance without Appraisal

The idea of a 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 themself forward or tries to, for their own good, on their own life preserver. The organization is the loser. Merit rating rewards people who do well within the system. It does not reward attempts to improve the system.

In a previous column, I suggested that scrum masters should steer clear of annual performance reviews. Rating and ranking individuals interferes with a scrum master’s responsibilities as a coach in service to the team. In fact, I went further than that: I suggested that managers and the rest of us steer clear of performance reviews, as well.

My suggestion does run counter to widespread practice. But I’m not alone in questioning performance evaluations and rankings.

W. Edwards Deming identified performance appraisal as one of the Seven Deadly Diseases of Management. Deming is clear and concise in stating the negative effects of performance appraisals and merit ratings: “It nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, nourishes rivalry and politics.” [Deming p. 102] More recently, Stanford University professors Robert Sutton and Jeffrey Pfeffer combed through data and studies related to widespread management practices. They reference a survey of 200 human resource professionals which reports that forced ranking — a common component of performance appraisal programs — results in “lower productivity, inequity and skepticism, negative effects on employee engagement, reduced collaboration, and damage to morale and mistrust of leadership.” [Pfeffer and Sutton, p. 107] They go on to describe the damage done by merit pay plans.

In short, the evidence supporting the benefits of rating, ranking, and then tying pay to the rating — the stuff of performance evaluations — is thin to none. Deming had it right.

My readers did raise legitimate concerns: Without performance appraisals….

• How do we determine how much to pay people?
• How do we know who to promote or fire?
• How do people know they need to improve?

Organizations do need answers to these questions. Performance appraisals and pay-for-performance (PFP) aren’t the only way to answer those questions or even the best way. In this column, I’ll walk through some alternatives to the prevailing practice.

How do we determine how much to pay people?

One reader pointed out, “people get their salaries on an individual basis.” True. Tying annual salary actions to ratings and rankings is just one way to determine what those actions should be. There are other rational and non-capricious ways to adjust individual salaries:

• Adjust based on the cost of living so that the buying power of salaries keeps pace with economic conditions.
• Allow all employees to share in the company’s success through profit sharing.
• Adjust salaries based on the current market rate for skills and roles.

Another reader posed the rhetorical question, “So all certified scrum masters earn the same amount?”

Performance is a function of the person and the environment. Systems thinking and lean production at Toyota tell us that gains in productivity come from inspecting and adapting the system, not from focusing on individual performance. An improvement mindset, thinking for the long term, eliminating waste, respect for people, and removing impediments bring high performance.

Still, there are people who are clearly outstanding performers (both outstandingly good and outstandingly poor), who outperform the limits of the system. Once again, pay increases based on performance ratings is only one way to accomplish the goal of recognizing outstanding individuals.

People — and their jobs — evolve over time. A scrum master may start off coaching a team on the basics of scrum, and over time, take a bigger role working on systemic issues that hinder the team. Or they may develop exceptional coaching skills. If someone is truly performing above others within the same job, it may be time to promote them or reclassify their job so that it’s at a higher pay level.

How do we know who to promote or fire?

Other readers asked, “Without yearly ratings, how will we know who to promote?” Looking at how a person has evolved in their job and the level of responsibilities is one way. Another option is to treat promotions as seriously as hiring: create a rigorous internal application process that involves interviews and auditions.

The truth is that many outstanding performers aren’t doing it for the money. They stay for love of their work and are most rewarded by new and challenging assignments.

The reverse question came up, too: “How will we know who to fire?”

It doesn’t take a rating to fire someone. If someone isn’t doing their job, there’s no reason to keep them on the payroll until the annual review cycle comes around. A scrum master will know when someone isn’t doing their job or is making it harder for other people to do their jobs. They can coach the person, or if coaching is not or is no longer an option, work with a functional manager to move the person off the team. (Some teams manage their own team membership, and people who need to go move off the team, without a manager’s involvement.) And, poor performers will hang onto a job even if they aren’t receiving raises. They won’t be improving, though. They’ll be harboring resentment and telling themselves that they really are above average.

As with identifying outstanding good performers, consider the environment, as well as individual skills. Ask whether someone is truly underperforming, or whether the system is limiting his performance.

I spoke with a new agile coach recently who was beginning to doubt he was in the right role. “I just can’t get this group moving in the right direction,” he said. “Maybe I should go back to being a developer.”

When he described the situation to me in detail, I began to wonder if any new coach could move this group in the right direction. The project has several stakeholders who disagree about the direction of the product. The team is split into three factions, which swirl around a long-standing conflict between two team members. One member of the team is skeptical of agile methods and baits the coach at every opportunity. When he’s not baiting the coach, he’s working to bring other team members to his point of view. The new coach is struggling in his job. The person who is supposed to mentor him is missing in action. I don’t think firing him — or giving him a low rating — is the answer.

It would be more fruitful (and more difficult) to look at the system that assigned a brand new coach to this project and failed to provide support.

How do people know they need to improve?

How will people know they need to improve if they don’t have an annual review? The answer to this question is simple (though not easy): their scrum master will tell them.

A letter or number rating or ranking is an evaluation. It may tell someone they need to improve, but it doesn’t tell them what specifically they need to do differently. In order to improve, people need clear behavioral descriptions and they need to understand the impact of behavior or results. Some managers provide specific examples along with the letter or number evaluation grade. However, most humans resist labels, so they may be busy with the emotional response to the rating, and not ready to fully listen as the manager gives examples.

Scrum runs on frequent feedback loops. That includes feedback to people on their work interactions and work results. Feedback on an annual cycle is worse than useless and is totally out of congruence with agile methods.

When organizations adopt scrum, sooner or later they bump up against the problems caused by asking people to work collaboratively and then measuring and rewarding them for individual effort. But scrum is all about making issues visible, so we can inspect and adapt. The time has come to look at the evidence about pay and appraisal systems. We may want to succumb to the allure of the “merit pay” words, but performance appraisals are a barrier to delivering valuable software; it’s time for them to go.

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About the Author

Esther Derby started her career as a programmer. Over the years, she’s worn many hats, including business owner, internal consultant and manager. From all these perspectives, one thing was clear to her: individual, team, and even organizational success depends greatly on the work environment and organizational dynamics. As a result, Esther has spent the last 25 years helping companies shape their environment for optimum success.