Category Archives: Performance Appraisal

Performance Appraisals are Worse Than a Waste of Time

Appraisals are a waste of Time

Most British workers will certainly leave their appraisal fired up and motivated, but only to look for a new job, new research from workplace and HR body Investors in People has concluded. Nearly half of those who had an appraisal did not trust their managers to be honest during it, with a third dismissing the annual chat as a waste of time and a fifth leaving it feeling they had been unfairly treated.

The poll of nearly 3,000 workers also found a quarter who had had an appraisal suspected their managers simply saw the annual review as a “tick-box” exercise. And a fifth complained managers rarely prepared for the meeting in advance – a key bit of advice you’ll always get in appraisal training – and did not even think about it until they were actually sat down in the room.

That is just a start on the problems with annual rating of people. On page 101 of Out of the Crisis Dr. W. Edwards Deming states the following as one of the seven deadly diseases:

Evaluation of performance, merit rating, or annual review… 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.

Related: Dr. Deming on performance appraisalContinuous, Constructive FeedbackPerformance without AppraisalRighter Performance AppraisalThe Leader’s Handbook

Getting and Keeping Great Employees

I am not convinced of the premise of The new war for talent: that there will be a great shortage of talent soon. But the article makes some interesting points.

The Conference Board CEO Challenge of 2007 points out that “Cracking the U.S. Top 10 this year is finding qualified managerial talent and top management succession.”

If we neglect to engage our own employees, those who are frustrated can surf hundreds of job boards to see what other opportunities await

A cumbersome and complex ERP system will not suit the masses of young talent joining today’s workforce.

I think the main thing to do is to respect employees (and have that visible in the management decisions made in the organization). Stopping the demotivation would be a big step for many organizations. And to manage your organization with the understanding that the organization’s purpose should be to benefit the various stakeholders (shareholders, customer… and employees).

Related: People are Our Most Important AssetHow to ImproveWhat is Wrong with MBA’ssoul crushing work (comic)

The Problem with Targets

Targets can seriously damage your health by Simon Caulkin

Targets, claim their defenders, are simple, they provide focus, and they work. Yes, they do. Unfortunately, these are also their fatal flaws. The simplicity is a delusion. As Russ Ackoff put it: ‘The only problems that have simple solutions are simple problems. The only managers with simple problems are those with simple minds. Problems that arise in organisations are almost always the product of interactions of parts, never the action of a simple part.’

To focus on the individual parts and ignore the whole always makes things function worse at a system-wide level. Thus, to meet financial and waiting-time targets, Maidstone drove up bed occupancy rates. But that compromised cleaning. At the system-wide level, the cost was making the hospital more dangerous to patients than staying at home.

And if enough pressure is applied, people will meet targets – even if they destroy the organisation in doing so. As quality guru W Edwards Deming put it: ‘What do “targets” accomplish? Nothing. Wrong: their accomplishment is negative.’

These are systemic faults, which is why such regimes can’t be refined by setting ‘better’ or fewer targets. Deming added: ‘Management by numerical goal is an attempt to manage without knowledge of what to do’. This is what makes it so attractive to bad managers. Unfortunately, in absolving them from the effort of thought, it is also junk management

Great insight on the problem of targets. Brian Joiner provides another reason why targets are harmful: there are “3 ways to improve the figures: distort the data, distort the system and improve the system. Improving the system is the most difficult.” And so most often targets results in distortion of the data (faulty data) or distortion of the system (meet target by shifting resources and effort from other parts of the system). Both of those actions are harmful to the system.

Related: Be Careful What You MeasureMeasuring and Managing Performance in OrganizationsTargets Distorting the System

CEO’s Given Lottery Sized Payouts

Comment on: Fun With Statistics, CEO Life Edition

In the US, CEO’s tend to be fairly interchangeable these days and it is rare for their tenure to exceed five years. There are some notable exceptions such as chain-saw Al and Neutron Jack, but in general a change of CEO doesn’t seem to do much over the long term. This is one of the criticisms of American CEO’s they seem to be more interested in feathering their nest and getting out quickly rather than running the firm for the long-term benefit of all the stakeholders.

Another useful comparison would be with Japan where top decisions tend to be much more based upon consensus and not as dependent on the American Superstar model.

Wouldn’t being “less and less critical to the long-term success of the organization” make it more and more difficult to justify salaries that would make a King jealous? If the USA CEO’s are less critical why are the USA CEO’s paid the highest (and most unbelievable crazy) amounts? I have thought for years CEO pay in the USA has nothing to do with their “worth,” this seems one more piece of evidence for that belief.

Today, in the USA, CEOs are basically win the lottery when they start and then either win some more and stay or don’t win and are let go. The lottery performance appraisal aspect Deming talked about (rewarding whoever random variation or macro economic and micro economic trends smiled upon during the period). So if a market (housing, oil, steel, investment banking, microchip, hotel…) is booming why give all the CEO’s in that market huge payoffs? What do they have to do with the economic boom in the entire market? Why pay them a lottery sized payout when a boom occurs? Occasionally a CEO may help make decisions that position the company to take advantage of a predicted boom particularly well (such a case could at least trigger a discussion on the worth of that action).

We also have to recalibrate Deming’s comments to say regular performance appraisal raffle winners. CEO’s are now actually getting $40,000,000 – lottery sized – annual pay so using the term lottery is a bit misleading for everyone else. The same issue hold though rewarding people for what is often just micro factors similar to the macro factors listed above for CEOs.

Warren Buffett on overpaid CEO’s:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.

Related: Deming on performance appraisalExcessive Executive PayObscene CEO PayNo Excessive Senior Executive Pay at Toyota

Seven Fatal Flaws of Performance Measurement

The Seven Fatal Flaws of Performance Measurement by Joseph F. Castellano, Saul Young, and Harper A. Roehm

Performance measurement systems are used to establish specific goals, align employee behavior, and increase accountability. Organizations often use these systems to set targets for component units (e.g., individuals, profit centers, divisions, plants). Each unit is expected to develop its own goals consistent with overall targets. This process, sometimes called a “roll-up,” reflects the premise that if all units achieve their targets then the overall goals will be met. The methods used by most companies to establish these numerical targets often involve the use of stretch targets or benchmarking best practices.

Once the targets are established, most organizations measure the performance of component units by comparing targets to actual performance for certain time periods. Variances from expected results are noted and explanations are required. The popular business press trumpets the efficacy of the above approach, but this methodology has serious flaws. In fact, the design and use of performance measurement systems in most organizations suffer from a number of fatal flaws that can undermine an organization’s ability to use its measurement system to improve processes and make better decisions.

The proper role of measurements should be seen in the context of helping employees connect with the overall aim of the organization. Management must gather and analyze information that will help employees become better contributors to the firm’s purpose.

The articles does an excellent job of explaining the flaws in how performance measurement is applied (both in Management by Objective (MBO) and performance appraisals).

Related: Performance Without AppraisalJeffrey Pfeffer on Evidence-Based PracticesProblems Caused by Performance AppraisalThe Danger of Forgetting the Proxy Nature of Data

Hiring – Does College Matter?

Another essay by Paul Graham packed with great thoughts – this one on hiring, colleges, measuring performance of people, etc..

Practically everyone thinks that someone who went to MIT or Harvard or Stanford must be smart. Even people who hate you for it believe it. But when you think about what it means to have gone to an elite college, how could this be true? We’re talking about a decision made by admissions officers—basically, HR people—based on a cursory examination of a huge pile of depressingly similar applications submitted by seventeen year olds.

No one ever measures recruiters by the later performance of people they turn down.

There’s a lot of randomness in how colleges select people, and what they learn there depends much more on them than the college. Between these two sources of variation, the college someone went to doesn’t mean a lot. It is to some degree a predictor of ability, but so weak that we regard it mainly as a source of error and try consciously to ignore it.

Related: Hiring the Right WorkersMalcolm Gladwell, Synchronicity, College Admissions…Google and Paul Graham’s Latest EssayInterviewing and Hiring ProgrammersWhat Business Can Learn from Open SourceGoogle’s Answer to Filling Jobs Is an AlgorithmHiring: Silicon Valley StyleCurious Cat Management Improvement Career Connections

Google Exceeded Planned Spending on Personnel

Often people have trouble understanding Dr. Deming’s disapproval of arbitrary numerical targets. What he was trying to prevent is what many see every day, such as managing to quarterly earnings targets. There are several problems with numerical goals but in here lets focus on one. The change from managing for what is best for the business to managing to hit a target. Google Profit Trails Analyst Estimates; Shares Slide:

The company hired more people than expected last quarter, Chief Executive Officer Eric Schmidt said on a conference call. Google added 1,548 jobs, mostly in sales, marketing and engineering, bringing its total to 13,786. “We overspent against our own plan on headcount,” he said. “We decided it was not a mistake. The kind of people we brought in were so good that we’re glad we did this.”

Great statement. And if more people could manage that way, one of the problems with numerical goals would be eliminated. But with so many organizations tying huge bonuses to meeting arbitrary numerical targets you will have a great deal of difficulty getting managers to hire 3 extra people this quarter, who will help the business, but will ruin their chance at a bonus. Or even if they just take a hit on their performance appraisal compared to the other managers that meet the headcount target – even if it meant turning away talent the organization could have benefited from greatly – and then the manager that missed their target loses out in the next promotion opportunity.

I am happy to own a tiny portion of Google and glad they are making decisions like this. Now just because I think there is a good case to be made for exceeding the targets that doesn’t mean that hiring more people is necessarily good. It is perfectly possible Google is hiring too many people and making a bad prediction about how these people will benefit Google in the long run. I am just saying I strongly support not tying yourself to short term numerical targets, if you predict a better decision requires taking actions that will cause the target to be missed.

Google increased profit by 28%, from the second quarter last year, to $925 million (and down from $1.0 billion in the first quarter of 2007). Lest you think personnel can’t really cost Google that much can it, just the stock based compensation in the second quarter reduced earning by $242 million in the quarter (an “expense” that wasn’t reported just a few years ago). Google had 13,786 full-time employees as of June 30, 2007 (up 1,548 in the quarter) – so that is over $17,500 per full time employee. If anyone at Google wants to talk I am open to considering an employment offer.

How to Get Ahead

Deep Thinkers Need Not Apply: How To Get Ahead In the Modern Business World [the broken link has been removed – when will sites be managed with the known wise practices from 1998 (web addresses need to live forever)?]:

Fast forward to my first real job out of college. It didn’t take long for me to realize that management’s perception of who should be promoted was heavily biased by who they liked. There was one engineer in particular who was highly skilled and detail oriented, but was one of the last to be promoted to the next level. Why? Because he was always working instead of schmoozing. As a result, it was thought that he “didn’t have good people skills,” when really, he was an excellent communicator, but simply didn’t waste time with frivolous talk and schmoozing.

This is something to be very careful of when managing people. I find that who says something is usually more important in predicting how people will react than what is said. As I have tested this myself I have learned how biased people are by who is talking; and I have tried to correct the judgments I reach (I know I don’t do it all the time but I try to especially for important things).

Fast forward to today. I sit in meetings with strangers and say things that are deep and insightful (at least, I think they are), but no one pays attention. A friend of mine in the group says “Rob has a popular business blog…” and suddenly I can say nothing wrong. My ideas are the same, but five minutes earlier, no one cared. Now I’m perceived as popular. Now my ideas matter.

I haven’t managed to have that reaction yet 🙁 Ok, maybe I am not suppose to wish that people would use poor reasoning to listen to me but I am in favor of any reason that makes them listen 🙂

Related: Management is PredictionProblems Caused by Performance Appraisalposts related to psychologyCurious Cat Management Improvement Jobs

People are Our Most Important Asset

One of the beliefs I try and get the organizations I work for to adopt is to truly value excellent people. The costs are challenges of hiring great people, to me, makes it critical to do what you can to keep your exceptional people. I probably haven’t written about this because it can conflict with my advice against performance appraisals. I do actually believe it is possible to know certain people are great and contribute greatly to the success of your organization. I also believe many (a majority) organizations do such a bad job of identifying those people they shouldn’t even try. But if you can identify some people that seem to be positive special causes of success there is a good argument for making sure they are happy.

I don’t believe you should try to pay these special employees fairly. Overpay them. I would much rather waste (10-20% on extra pay) than pay them fairly and make it easier for them to switch to another job. Talk to them and make sure they are doing what they want and making the progress they want. I find (I don’t have enough data to know if this is generally true) that the best people complain the least and so you need to make extra efforts to find out what they might like to see improved. Include these provisions during your human resource planning, make it a point to get the most qualified people to want to work for you.

Don’t focus all of your energy on putting out fires and expect those that keep their areas of responsibility in decent shape without your intervention to just cope on their own. Since many managers adopt this “only dealing with the squeaky wheel” strategy (without saying that is what they do, of course), force yourself to spend time coaching, learning, helping… the most successful – as well as others. I want to have employees delighted (all of them ideally, but at least those that are most critical). As Deming said it is easy for competitors to take away satisfied customers – it is not easy for a competitor to take away delighted customers. The same holds for employees.
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Tilting at Ludicrous CEO Pay

I continue to tilt at the robber barron CEO pay packages. Hopefully, at some point, the people approving these obscene pay packages can be shamed into stopping or replaced by people with some sense of decency. I was taught in the days of robber barrons the business world was seen as an amoral place (morality did not belong in this area of human endeavor) but that over time society decided that in fact morality did apply there. It is hard to reconcile that with the behavior of CEOs and board approving ludicrous pay packages. See previous post on the purpose of organizations. Half of S&P 500 CEOs Topped $8.3 Million

“It’s a complex subject and that’s really the question…Why is it so complex?” said Dominic Jones, Clarity’s president.

“Why is it that a CEO gets compensated in such a discombobulating fashion when the average worker gets a paycheck and can tell immediately what it’s about? … If you’re an investor and you get your (proxy) statement and it just goes on for pages and pages of the different methods used to pay the CEO, at some point you have to ask yourself why. ‘Why don’t I get all this?'”

Very good question. I would say they are intentionally trying and confuse the issue. Even as they spout defenses for such unjustifiably pay packages they know the pay is not defensible and so try to confuse the issue with byzantine explanations. Lets look at the CEO pay versus total earnings for several companies:

Company CEO Pay Earnings CEO %
Yahoo! Terry Semel $71,660,216 $751,000,000
XTO Energy Bob Simpson $59,489,924 $1,860,000,000
Goldman Sachs Lloyd Blankfein $54,300,000 $9,537,000,000
Occidental Petroleum Ray Irani $52,822,584 $4,182,000,000
Merrill Lynch E. Stanley O’Neal $46,375,347 $7,499,000,000
Danaher H. Lawrence Culp, Jr. $46,215,671 $1,122,000,000
Countrywide Financial Angelo Mozilo $42,994,306 $2,674,000,000
Morgan Stanley John Mack $41,400,000 $7,472,000,000
Ford Alan Mulally $39,128,100 $1,540,000
Apollo Group Todd Nelson $32,626,442 $415,000,000
AT&T Edward Whitacre $31,765,761 $7,356,000,000

Data via: Best-paid CEOS (only those with fiscal years ending after December 15th – more pay data) – for 2006 according to an Associated Press analysis that covered nearly 400 of the nation’s 500 biggest public companies and Google Finance. I realize this chart could be improved by spending more time (especially looking out over several years for both pay and earnings…) but this is what I could do relatively quickly.
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