Financial Services Joins the Trend to Eliminate Performance Ratings

Close up of reading glasses on employee evaluation form

The financial services industry has been slow to join the emerging trend to re-engineer the performance management process.  To some extent, this makes sense.  A strong argument can be made that it’s prudent to allow other industries to blaze the trail in developing new methods to administer downstream practices such as pay, promotion and terminations.

But the days of holding back may be over.  In May, Goldman Sachs announced it would stop rating employees on a 1-9 numerical scale and instead focus on providing employees with constructive performance feedback that is future-focused rather than a look back at the prior year.  Goldman Sachs is, at least, partially motivated by the urgent need to attract younger employees who crave frequent and current feedback about their performance.

The developing trend in the workplace is to eliminate traditional numerical performance rating scales and rankings, a process that is almost universally derided by managers, employees and human resources professionals alike. Finally, executives are capitulating to overwhelming evidence that rating people not only fails to improve their performance, but also actually lowers productivity and destroys morale. An added benefit of embracing the trend will be improved mental health among employees as the rating practice can create unnecessary stress.

Author Garrison Keillor famously described his fictional hometown, Lake Woebegone, as “a place where all the women are strong, all the men are good looking and all the children are above average.” That description is not terribly different from the way American businesses and employees perceive themselves—above average. As a company recruiter, I always strove to attract and hire the “best of the best,” “A-players” and “superstars,” those who fit the company’s image as a place with only the very best employees.

And yet, the typical performance management system in America forces managers to rate employees on a scale of 1 to 5, and to suggest—strongly suggest in some companies—that those ratings be distributed on a bell curve. That means fully 70% of employees are rated simply “average.” The result? Conflict and stress. Many of the most emotionally charged conversations I’ve had with employees as an HR professional emerged from their distress over the numerical rating that their supervisors had assigned them during a performance review.

Rating people is fraught with stress for everyone involved. In their 2014 article in Strategy + Business, David Rock, Josh Davis and Beth Jones, researchers at the Neuroleadership Institute, explained that giving employees a numerical rating produces a “fight or flight” response in people, “the same type of ‘brain hijack’ that occurs when there is an imminent physical threat like a confrontation with a wild animal.” Not only is rating and ranking employees difficult, it’s expensive. An estimated $14 billion dollars are spent annually on leadership development, which includes training managers to assess and differentiate employees’ performance. Despite that investment, managers are notoriously bad at conducting performance reviews. In one study almost half of the employees surveyed stated they did not believe their managers were being honest during the performance review. One oft-quoted manager at Adobe called it “a soul crushing exercise.”

As business leaders seek to stop wasting time on a failed system, the trend to reengineer performance reviews is gaining momentum. The number of Fortune 1000 companies that have ditched ratings has risen from just 4% in 2012 to 12% in 2014, according to the Corporate Executive Board (CEB).  Goldman’s decision to revamp its process accelerates this momentum.

More frequent and informal conversations about improving future performance and achieving career aspirations are replacing annual review meetings that are focused on rating past performance.  And the use of technology is being deployed to facilitate feedback that can be practically continuous.

The goal of performance reviews, as it always has been, is to improve the company’s business results. Eliminating ratings will succeed on several fronts: save time and money, attract a new generation of workers to financial services, alleviate a key source of workplace stress, and in turn, improve company performance.