The History of Performance Reviews

The annual performance review is built for a workplace that doesn’t exist anymore. Actually, it wasn’t even built for the workplace, it was built for the U.S. military. Let’s rewind.

The Age of Control

Back during World War I, a ‘merit-rating’ system was developed to identify poor performers that were then either discharged or transferred. Fast forward to post World War II and nearly 60% of companies had implemented this practice. By the 1960s, following the Performance Rating Act and Incentive Awards Act, this number crept closer to 90%.

In the 1970s, another shift happened. When inflation spiked, so did merit based pay. Managers often had authority to give substantial raises (20% or more) to strong performers. Where the military used this appraisal system for discharges and transfers, corporate America adopted this process to justify raises and terminations.

Jack Welch, General Electric’s then CEO laid the foundation for corporate performance reviews that stuck for the next few decades. His system, met with criticism, called for forced ranking of employees against one another. “A” players were then rewarded (in the form of compensation and/or promotions), “B” players accommodated, and “C” players dismissed.

By the early 2000s, a third of US companies, including 60% of the Fortune 500 had enforced a forced-ranking system. A system employees hated. And a system that actually led to performance declining.

So when Jack left GE, so did this appraisal system. By the 2010s, many of the early adopters of forced ranking had abandoned it, barely a decade later.

To give Jack credit, he defended his system by saying “As a manager, you owe candor to your people. They must not be guessing about what the organization thinks of them.”

The message resonates with many leaders, yet this system was broken, time consuming, and the results were inconclusive, with Deloitte research stating that 58% of HR executives considered reviews an ineffective use of supervisors’ time.

The focus started to shift from control to something more human: engagement.

The Age of Engagement

High-tech companies quickly latched onto the 2001 Agile Manifesto, which emphasized the value of collaboration, iterative cycles, and a departure from rigid annual planning. As the Agile method changed the way teams worked, it also changed the way that work was reviewed.

From Annual to Continuous

In 2011, Adobe led the charge, being the first to publicly denounce the annual performance review. Instead, they used their sprint cycles, followed by debriefs, to inspire a culture of constant assessment and feedback. Other large tech giants quickly followed suit, creating a domino effect of companies dropping their annual performance review processes entirely.

Now, there’s another catalyst to this ‘continuous feedback’ movement worth mentioning: In 2017, the employee turnover rate jumped to ~13%, with the average job tenure at the 10 biggest tech companies lasting less than 2 years. Competitors snagged top performing employees with higher salaries and better roles, forcing all companies to think about how to keep employees engaged and growing within shorter timeframes.

Take Progress Software for example. Their performance review process encouraged quarterly conversations between managers and employees. Managers filled in questionnaires called snapshots, used to identify performance issues and address retention concerns. Employees also filled out their own ‘pulse checks’. The system was designed to more frequently facilitate bi-directional feedback, and answer the question Katherine Coffman poses of “how can we have you do your best work in a way that’s going to be valuable for both of us?”.

In this era, it became clear that the winning companies weren’t waiting until the end of the year to find out how their people are doing.

But as companies rushed to reinvent performance management, a new challenge emerged: good intentions don’t always translate into good outcomes.

The Promise vs. Reality

Adoption of systems focused on continuous feedback remained inconsistent across teams, and as Josh Bersin points out in We Wasted Ten Years Talking About Performance Ratings. The Seven Things We’ve Learned, “nearly half the variance in performance ratings could be traced back to the manager, not the employee”. In other words, the same biases, just in a new wrapper.

In a similar vein, cultural aspirations like becoming ‘growth mindset’ and ‘feedback-driven’ organizations rarely translated into impact. McKinsey found that employees and leaders alike continue to lack confidence in most performance management systems due to fragmentation, “shadow” systems, misalignment, and inconsistency. And employees felt it too: Bersin notes that performance management earned a net promoter score of -60, one of the lowest of any HR practice (and that’s saying something). Performance reviews remained universally despised.

Nearly a century after the first ‘merit rating system’ was introduced, performance reviews still failed to have the desired impact on assessing performance and facilitating employee growth. The intent had evolved but the outcomes remained the same.

We’ve been doing this for 100 years. It’s about time performance reviews started working for us.

Enter the Age of Intelligence. Stay tuned for part 2.