Of all the nerve-racking, stomach-churning days of the work year, only one is scheduled in advance: performance review day. The consolation used to be that it didn't matter much. If your boss checked "exceeds expectations," you might get a 6 percent raise. "Needs improvement" might get you just 2 percent. No big deal.
Grab your antacid: It's a big deal now. Companies, desperate to eke out ever more returns on their human capital, are using computers to turn every day into rating day. And they are turning every customer, subordinate, and peer into a rater. Most important, the companies have raised the stakes in a go-slow economy. Increasingly, top ratings are rewarded with eye-opening goodies like 30 percent bonuses. And in nearly two thirds of all companies, a subpar rating can mean a pink slip.
Biased? These changes are turning what was once a mild annoyance into one of the hottest workplace controversies. Some researchers and disillusioned executives say some of the newest appraisal methods aren't returning the promised profits. And some workers claim the new systems are biased. A corporate Who's Who --including Ford, Goodyear, General Electric, and Capital One--have been sued for adopting tough new systems that, workers allege, are designed to weed out workers of a specific race, age, or gender rather than just poor performers.
But the controversy isn't likely to curb the trend toward new and different appraisal systems. If anything, companies will tinker even more, says University of Wisconsin management Prof. Ken De Meuse. "When times were good, companies could retain fat more than they can today," he says.
One of the biggest and most controversial trends: changing who does the ratings. The traditional method of having only a boss rate an employee has been criticized for almost 2,000 years. A third-century Chinese philosopher complained that one civil service evaluator "seldom rates men according to their merits but always according to his likes and dislikes." And modern-day research confirms what every employee knows: A boss who happens to be in a bad mood gives employees harsher ratings. Studies also show that managers' subconscious stereotypes about race, age, physical attractiveness, and other characteristics affect their ratings.
In an attempt at greater fairness, companies began trying out "360 degree" appraisals in the 1990s. Today, one fifth of all employers build such well-rounded appraisals with comments from customers, subordinates, and peers as well as bosses. Michael Lieberman, vice president of marketing for Synygy, a Philadelphia-area firm that sells rating systems to other companies, likes what 360-degree appraisals do for his firm. At previous employers, he noticed lots of office politics as workers tried to ingratiate themselves with the one or two managers who controlled their careers. "But there is very little politicking here," he says, "You had better treat people with respect," because anyone can submit a rating on any employee.
Despite their logic and rising popularity, 360s have drawn plenty of flak. A 2002 study by the Watson Wyatt consulting firm found that companies using 360s returned, on average, 10.6 percent less to shareholders than did companies using more-traditional reviews. Watson Wyatt theorized that while the 360 idea is sound, it's time consuming, and too many companies stint on training needed to make sure raters give constructive criticism. De Meuse says anyone who watched the Survivor TV show knows the problems of badly run 360s. "One way to make me look better is to make you look bad," he says. "And people make alliances."
Companies are also changing how frequently they rate workers. The old once-a-year rating often really only covered the previous three months, since studies have found most people tend to forget events further back in time. But now, using computer programs similar to those that track telephone operators' minute-to-minute performance, companies are reviewing performance of all kinds of workers much more frequently. Health insurers and retailers are experimenting with monitoring systems that can appraise claims processors' and salespeople's daily performance, and hand out bonuses or warnings as often as every month. And Seagate Technology last year started requiring high-level executives and engineers to fill out computer forms reporting on their progress toward company goals each week.
Top to bottom. The most controversial change, though, dates to when Jack Welch took over as CEO of General Electric in 1981. Welch was intent on breaking up GE's legendary bureaucracy. His idea: Instead of following a traditional system, in which bosses could--and often did--rate all their employees as "above average," Welch had executives identify the top 20 percent of managers and mark them for advancement. They also had to identify the bottom 10 percent, who would then either have to improve or leave. As GE's profits soared, legions of executives copied that "forced ranking" system.
Today, one third of all employers use such rankings on at least some of their staff, more than double the 1997 level. And fully two thirds of all U.S. companies use performance as at least one factor when deciding whom to lay off. Dick Grote, a former GE executive who has helped dozens of companies install forced ranking systems, says executives like them because they are the fairest and easiest way to downsize. "The alternative is retaining people who are less competent" and promoting people who aren't stars, he says.
But in a slew of class action lawsuits, workers who have been given low ranks say that it is the companies that deserve the flunking grade in meritocracy. Until 2001, Jack McGilvrey, 59, got good ratings throughout his 36 years as a chemist for Goodyear. Then, executives at the Akron, Ohio, tire company said they would try to boost profits by insisting that 10 percent of the staff be rated as "A performers" and tagged for promotion, and 10 percent rated C and tagged for improvement or eventual dismissal.
In a complaint filed in federal court last fall, McGilvrey and seven other workers say that it was older employees like them and not the poor performers who got the C's. After McGilvrey received a second C rating in May of 2002, he says he was terminated. Just a few days after he was forced out, he received a patent for a new kind of aircraft tire. "It is very unfair to start out with the assumption that a certain percentage of your employees are unsatisfactory, " McGilvrey says. "It was very subjective and designed to weed out the older people."
Goodyear, which scrapped the forced ranking system shortly before McGilvrey's lawsuit was filed, is fighting the case, saying the appraisals weren't biased. Forced rankings "worked wonderfully for GE," says Goodyear spokesman Keith Price. But internal confusion over what the letter grades meant was distracting Goodyear employees from the goal of improving company performance, he says. Goodyear is now pinning its hopes on a revamped appraisal system. Managers are taking a one-day training course on how to give ratings such as "exceeds expectations" based on progress toward clearly stated and pragmatic company goals such as meeting delivery deadlines.
The flurry of lawsuits is prompting many other companies to make similar changes. After settling an age discrimination suit of its own, Ford last year also scrapped rankings. And a growing number of other employers are newly unhappy with the GE system. In a fall 2002 survey by DDI, only 39 percent of companies using forced rankings found them to be even "moderately effective." The lawsuits aren't slowing down the rate of change, however. Instead, employers are making more changes to jury-proof their appraisals by backing up ratings with evidence and objective data. "The use of data really helps avoid litigation," says Linda Martin, a Seattle-based appraisal expert for Towers, Perrin. She says clients are increasingly asking for help "calibrating" ratings across departments so that employees who might be rated A in one department aren't given C's in another. These kinds of changes not only prevent lawsuits but also make appraisals fairer and more accurate, she says. Nobody likes litigation, of course. But the result, in this case, could be a little more fairness and a little less stress in the workplace.
