In most cases, the short answer is yes.
That is, if you plan on differentiating your employees for any decision-making purposes. This includes deciding who gets raises or bonuses (and how much), who gets promoted, who gets access to what development opportunities to accelerate their career, and who goes on the list for separation.
Performance ratings are not just about determining a number that feeds into a compensation decision. The performance review – annual or more frequently – is just one part of an organization’s overall performance management process, which also includes development and succession, as well as compensation.
If done well, here’s what ratings provide: a consistent, fair, reasonably objective way to compare performance across employees. Research shows that employees want to know how they are doing, and prefer to receive a rating, assuming it feels fair and accurate. Unfortunately, the reality is that the process is not always fair, or consistent, and often suffers from ratings that feel more subjective than objective. And forced ranking is just a bad idea. But these are problems that can be addressed by improving the process, not by eliminating the ratings themselves.
The real question is not whether you should get rid of performance ratings, but rather: what does your performance management process need to look like and why?
Here are some important questions you should consider when thinking about your performance management process:
- Are you looking to drive a culture that encourages, supports, and enables development? If so, then you should incorporate continuous conversations, feedback, and coaching into your performance management process. You may also want managers to set goals around what they are going to do to develop their people, and likewise ask employees to set goals for their own development, thereby embedding accountability into the process.
- Is your organization heavily project focused? Do your people tend to move in and out of project teams with different leaders and customers? If so, you might want to include a mechanism for evaluation and feedback at each project’s conclusion.
- Do you value not just the results people achieve but how they achieve them? Do you know what behavior is productive in your culture and for your business? If so, you should consider measuring both goal achievement and competencies in your process.
- Do you have pockets of talent that are scarce in the marketplace or key to your competitive advantage and difficult to replace? Or is new talent easy to find? Do you have the bench you need for the future, and how do you know? Being able to identify critical talent so you can differentiate reward, development, and retention strategies may be important to help with these efforts.
Whether to use ratings in performance management is not a simple “yes or no”. The answers to these and other questions will determine what your performance management process should look like, what kind of ratings you need, when you need them, and how they should be used.