Appraisal is not the system that drives pay, careers, and status; it is an incidental effect of those dynamic systems. Appraisal is primarily the paper-shuffling that sanctifies decisions already made. –Tom Coens and Mary Jenkins, Abolishing Performance Appraisals

Human capital determines the performance capacity of any organization. Today’s knowledge workers, unlike the factory workers of the Industrial Revolution, own the means of production. Ultimately, knowledge workers are volunteers, since whether they return to work is completely based on their volition.

Consequently, it is difficult to understand the continued reliance on the “annual agony" —the performance-appraisal apparatus. According to Tom Coens and Mary Jenkins, in their seminal book Abolishing Performance Appraisals: Why They Backfire and What to Do Instead, over 50 years of academic studies reveal scant empirical evidence of the effectiveness of performance appraisals at actually improving performance.

Despite these facts, organizations cling to it in an uninformed belief that there is no suitable replacement. Where did this ritual come from?

The Origins of Performance Appraisals

The modern antecedent of the appraisal process was explained by Peter Drucker in his book, The Effective Executive:

Appraisals, as they are now being used in the great majority of organizations, were designed by the clinical and abnormal psychologists for their own purposes. He is legitimately concerned with what is wrong, rather than with what is right with the patient. The clinical psychologist or the abnormal psychologist, therefore, very properly looks upon appraisals as a process of diagnosing the weaknesses of a man.

The appraisal tends to focus on weaknesses, not strengths—what psychologists call the “presenting problem.” But good leaders—like good coaches—design performance processes and tasks around a person’s strengths, and ignore—or make irrelevant—their weaknesses.

What about the Law?

Two primary defenses for maintaining performance appraisals are that they are required by law, and that they are required documentation to terminate an employee. Both assertions are false. Most workers in the United States are employees at will; they can be fired for any reason, or no reason at all, with or without warning. There are exceptions to this doctrine, and they have grown over the years, yet there is no explicit legal reason to perform performance appraisals.

Tom Coens, coauthor of the definitive book, Abolishing Performance Appraisals, is a labor and employment lawyer with thirty years of experience. He dispels the myths surrounding the effectiveness of performance appraisals from a legal perspective.

Jay Shepherd is another unapologetic management-side lawyer who practiced for 17 years. In his indispensable book, Firing at Will: A Manager's Guide, Jay explains why he, too, is a critic of performance appraisals, labeling them “the dumbest managerial tool,” and explains how they can actually hurt your chances in court.

Deleterious Effects of Performance Appraisals

Performance appraisals have become, to borrow a term from the medical profession, an iatrogenic illness—that is, a disease caused by the doctor. An estimated ten percent of all hospital patients suffer from this type of disease. We need to apply the Hippocratic principle of primum non nocere (“first, do no harm”) to the performance appraisal process.

The following are some of the more serious negative effects of the performance appraisal (PA):

PAs are counterproductive to “driving out fear,” the one emotion that Dr. Edwards Deming believed needed to be eliminated to improve human performance;
PAs focus on the weaknesses of the worker rather than his or her strengths;
Learning is overshadowed by the evaluation and judgment inherent in the PA;
Even if PAs convey both strengths and weaknesses, it is human nature for negative feedback to drown out positive feedback;
Effective feedback should occur as needed, not on an arbitrary date on a calendar;
PAs are a symbol of a paternalistic boss-subordinate relationship based on command and control rather than the knowledge worker being responsible for his or her own development;
PAs impose a one-size-fits-all approach that impedes relevant, authentic feedback to different individuals;
Too much “noise” surrounds the PA process: discipline or termination, pay raises, bonuses, promotions, and the like, lessening the focus on performance improvement;
Ranking people against each other does not help them do a better job. Ranking people, also, by definition, creates “bottom performers,” regardless of the absolute value of their work;
PAs devote far too much scarce leadership attention to underperforming employees rather than top performers;
PAs are extremely costly to administer relative to their meager benefits;
PAs provide no effective method for holding people accountable for future results, since they focus on the past;
Any self-acknowledged weakness by a team member can be used against them, deterring learning and self-development;
PAs confuse delivering effective feedback with filling out bureaucratic forms and check-the-box administrative activities that have no connection to strategic purpose or value creation;
PAs reinforce a requirement for human-resources departments to keep KGB-like dossiers on team members;
PAs create a false impression that a scientific and objective process is being applied to measure individual performance. Yet all PAs, in the final analysis, are subjective and based on judgment;
PAs obscure the fact that a firm is an interdependent system, and what matters is the performance of the whole, which is not merely the sum of its components;
PAs provide the illusion of protection from lawsuits and allegations of wrongful termination, when in fact they rarely offer that protection—and often backfire in litigation.
According to author Daniel Pink in “Think Tank: Fix the workplace, not the workers” (November 6, 2010), “Performance reviews are rarely authentic conversations. More often, they are the West’s form of kabuki theatre—highly stylized rituals in which people recite predictable lines in a formulaic way and hope the experience ends very quickly.”

Replacing the Performance Appraisal

It is time to move to a model where courage is valued over caution, and command and control is replaced with connect and cultivate. Ultimately, it is the intensity of interactions with intelligent people, along with great ideas, that attracts and develops talent—not the efficiency of a firm’s administrative processes.

Three strategic resources replace the performance appraisal system:

Key Predictive Indicators for Knowledge Workers
The Manager’s Letter
After-Action Reviews

Key Predictive Indicators for Knowledge Workers

A critical distinction is being made between a key performance indicator and a key predictive indicator. The former is merely a measurement—such as the number of patents filed, or new clients—but lacks a falsifiable theory. The latter, by contrast, is a measurement, or judgment, guided by a theory, which can be tested and refined, in order to explain, prescribe, or predict. It is the search for cause and effect.

Knowledge work is not defined by quantity, but quality; not by its costs, but results. The traditional tools of measurement need to be replaced by judgment. And there is a difference between a measurement and a judgment: a measurement requires only a scale; a judgment requires wisdom.

So many firm leaders worry that if they get rid of objective measures, they will introduce subjective bias into the decision-making process. So what? To get rid of bias we would have to give up emotions and discernment, which is too high a price to pay. Neurologist Antonio Damasio has studied brain-damaged patients, demonstrating that without emotion it is impossible to make decisions.

Admittedly, the following KPIs raise rather than answer questions, but at least they raise the right questions. Better to be approximately relevant rather than precisely irrelevant. Enlightened organizations allow their team members to decide which of the following KPIs are most important to track and develop.

Client Feedback - What are the customers saying—good and bad—about the team member? Would you trade some efficiency for a team member who was absolutely loved by your customers? How does the firm solicit feedback from its customers on team-member performance?
Effective Listening and Communication Skills - It is easier to teach reading and writing, which are solitary undertakings, than to teach listening and speaking, which always involve human interactions. But how do you measure listening and communication skills?
Risk Taking, Innovation, and Creativity - How often do employees take risks or innovate new ways of doing things for customers or the company? Do they engage in creative thinking in approaching their work?
Knowledge Elicitation - Aristotle said, “Teaching is the highest form of understanding.” Knowledge elicitation is the process of assisting others to generate their own knowledge. Note that this encompasses more than simply learning new things; it involves educating others so that they are able to generate their own knowledge. One of the most effective techniques for knowledge workers to learn any subject—especially at a very deep level—is to teach it. How often do the team members facilitate a “lunch and learn” about an article or book they have read or seminar they have attended? How good are they at educating their customers and colleagues?
Continuous Learning - What do team members know this year that they did not know last year that makes them more valuable? This is more than simply logging hours in educational courses; it would actually require an attempt to judge what they learned. How many books have they read this year? More important, what did they learn from them? One of the objections we hear to investing more in people’s education is “they will leave, and possibly become an even stronger competitor.” This is no doubt true, although a company faces the risk of their leaving anyway. But what if you do not invest in their education and they stay?
Effective Delegator - Peter Drucker believed that up to one-quarter of the demands on an executive’s time could be consigned to the wastebasket without anyone noticing. Does your organization encourage its knowledge workers to become effective delegators?
Pride, Passion, Attitude, and Commitment - If you thought some of these other KPIs were hard to measure, how would you measure pride? Although not a substitute for actual talent, pride in one’s work, customers, colleagues, employer, and values are critical to operate with passion and commitment.
High-Satisfaction Day - I am indebted to John Heymann, CEO, and his Team at NewLevel Group, a consulting firm located in Napa, California, for this KPI. An HSD is one of those days that convinces you, beyond doubt, why you do what you do. It could mean landing a new customer, achieving a breakthrough on an existing project, or receiving a heartfelt thank-you from a customer. Sound touchy-feely? John admits that it is. But he also says that the number of HSDs logged into the firm’s calendar is a leading indicator—and a barometer—of his firm’s morale, culture, and profitability.

We can’t measure a doctor’s beside manner—it has to be experienced. Efficiency metrics cannot count all the energy, enthusiasm, and commitment that employees decide not to contribute.

The Manager’s Letter

Another practical suggestion to hold people accountable for their future contribution is what Peter Drucker called the manager’s letter, as explained in John Flaherty’s book, Peter Drucker: Shaping the Managerial Mind:

[Setting objectives] is so important that some of the most effective managers I know go one step further. They have each of their subordinates write a “manager’s letter” twice a year. In this letter to his superior, each manager first defines the objectives of his superior’s job and of his own job as he sees them. He then sets down the performance standards that he believes are being applied to him. Next, he lists the things he must do himself to attain these goals––and the things within his own unit he considers the major obstacles. He lists the things his superior and the company do that help him and the things that hamper him. Finally, he outlines what he proposes to do during the next year to reach his goals. If his superior accepts this statement, the “manager’s letter” becomes the charter under which the manager operates.

Procter & Gamble utilizes what it calls the Work and Development Plan, in lieu of performance appraisals, which lays out the work to be achieved in the upcoming year, how it links to the business plan, the measures and timing for success, and expected results.

What makes the manager’s letter so valuable is its focus on opportunities, results, output, and value, rather than problems, inputs, costs, and activities. Performance appraisals can only report on the past, revealing problems, never opportunities.

After-Action Reviews (AARs)

The U.S. Army’s use of AARs began in 1973, not as a knowledge-management tool but as a method to restore the values, integrity, and accountability that had diminished during the Vietnam War.

Reflection without action is passive, but action without reflection is thoughtlessness. Combine experience with reflection, and learning that lasts is the result. What percent of your firm’s time is devoted to improving the work, not just doing the work?

The objective is not just to correct things, but to correct thinking, as the Army has learned that flawed assumptions are the largest factor in flawed execution.

But perfectionist cultures, however, resist this type of candid introspection, as they tend to be intolerant of errors, and they associate mistakes with career risk, not continuous learning. The medical world has an appropriate axiom for mistakes made: forgive and remember. AARs should not be used for promotions, salary increases, or performance appraisals.

For more information on AARs, the book Hope is Not a Methodby Gordon R. Sullivan and Michael V. Harper, is an excellent resource.

Confronting People with Their Freedom

You can’t keep on doing things the old way and still get the benefits of the new way.

––Thomas Sowell

Because knowledge workers are volunteers, we could learn a lot from the not-for-profit sector. They know how to leverage people’s gifts, whereas performance appraisals are more concerned with people’s weaknesses.

Management thinker Charles Handy has spent his career arguing that organizations are living communities of individuals, not machines. He offers a splendid metaphor in his autobiography, Myself and Other More Important Matters, which I believe is applicable to knowledge workers and the performance appraisal process: the theater.

“There’s no talk of “human resources,” everyone is listed on the playbill, and managers are for things (stage, lighting, etc.), not people. The talent is directed, not managed, by someone who departs after the project commences. The audience feedback is immediate, not one year after the performance.”

Author and consultant Peter Block says, “The real task of leadership is to confront people with their freedom.” Performance appraisals inhibit autonomy and responsibility; they are the buggy whip of the knowledge era—an example of yesterday holding tomorrow hostage. Do we have the courage to replace such an ineffective process?

Performance appraisals are, after all, an iatrogenic illness, which means: physician, heal thyself.