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I wrote this post for Qase.io: https://qase.io/blog/performance-reviews-and-quality/

Individual performance reviews and quality

Most companies practice individual performance reviews (also called performance appraisals).

This practice is quite well-established even though 40 years of management science concluded that it has caused great damage to teams in multiple areas.

One can assume as to why the practice still exists: lack of knowledge and/or sunk cost fallacy effect.

W. Edwards Deming condemned performance evaluations as a deadly disease afflicting American management. He argued that performance evaluations nourish fear, encourage short-term thinking, stifle teamwork, and are no better than lotteries.

This article points to detrimental effects on quality resulting from performance reviews.

Teams have emergent properties, only teams can produce value for the client.

There’s almost no value in producing a product. Companies prosper by producing a quality product.

Quality demands effective information flow as well as the following team characteristics:

All these properties are severely damaged by the individual performance review practice.

Low turnover

The practice of individual performance review increases turnover.

The usual performance assessment is unavoidably subjective:

  • the assessee in self-presenting their results for a certain period of time
  • the assessor in assessing the presented results

The assessee compiles their self-assessment based on their subjective understanding of the achieved results.

Assessee’s judgement is clouded even more by a spectrum of biases, from Dunning-Krueger effect to Impostor Syndrome.

NB: Rationalwiki.org lists ~90 well-studied cognitive biases which affect human behaviour, cognition, thinking and decision-making.

NB: People are also almost unaware of the strength of the biases’ effect.

The assessor’s reads the compiled self-assessment and rates the results subjectively too.

Assessor’s judgement is clouded even more by a great number of biases, from Halo effect to Central tendency bias.

The longer the assessment period, the more clouded, subjective and biased both the assessee’s and the assessor’s judgement becomes.

Human memory is full of wonders. Events are not stored and retrieved precisely and accurately, but those are lived through and changed every time a person recalls something.

There’s a separate list of memory biases, effects which not only cloud the recalled event, but often change the memory quite significantly:

Rosy retrospection bias. We tend to remember the past as having been better than it really was, which leads to judging the past disproportionately more positively than we judge the present. As the Romans said: memoria praeteritorum bonorum, or “the past is always well remembered.”

Consistency bias. We incorrectly remember our past attitudes and behaviour as resembling our present attitudes and behaviour, so we feel like acting in accordance with our general self-image.

Mood-congruent memory bias. We better recall memories that are consistent with our current mood. For instance, feeling relaxed may bring back relaxing memories; feeling stressed may bring back stressful memories.

Hindsight bias. We have an inclination to consider past events as being predictable—also called the knew-it-all-along bias.

Egocentric bias. We recall the past in a self-serving manner, such as remembering our exam grades as being better than they really were, or remembering a caught fish as bigger than it was.

Availability bias. We often think that memories that come readily to mind are more representative than is actually the case. This is why people tend to overestimate the likelihood of attacks by sharks or the number of lottery winners.

Recency effect. We best remember the most recently presented information. At a trial, evidence presented last may be the clearest in the juror’s memory.

Choice-supportive bias. We remember chosen options as having been better than rejected options.

Fading affect bias. Our emotions associated with unpleasant memories fades more quickly than our emotions associated with pleasant memories.

Confirmation bias. Our tendency to seek and interpret memories in a way that confirms our prior hypotheses or personal beliefs.

To sum it up:

  • the assessee only believes they recalled something right (the longer period, the more inaccurate the memory becomes)
  • this belief is further clouded by the assessee’s self-esteem-related and other personality biases
  • the assessor perceives the result and tries matching it with their clouded recollection of the events (beliefs, essentially)
  • the matching process is further clouded by the assessor’s biases

Consider this metaphor: the event in the assessment is a signal, and each step of recollecting and reformulating the event adds an unknown degree of noise, almost as if it is a broken telephone game.

signal-noise image

Does it make sense to make a judgement on a result with a completely unknown signal-noise ratio?

Studies prove this subjectivism often triggers a feeling of unfairness: the assessee thinks the assessor’s judgement is unfair:

They [assessments] are in many cases perceived as being procedurally unfair in terms of the Folger and Bies (1989) criteria. Inadequate consideration is given to employee views; there is evidence of bias, inconsistency, poorly justified feedback and a lack of honesty in the process.

Our research confirms findings that the appraisal reinforces power relationships and is often perceived as being open to abuse

Dissatisfaction with processes and the resulting distributive justice had a negative impact on employee perceptions of fairness and could act as a barrier to organizational effectiveness

Another study proves that people are all different, their memory and judgement are affected by biases differently, and that there’s almost no way the assessee’s judgement of their work and effort will match the assessor’s judgement.

Judgements about fairness can only ever be based on an individual’s expectations

Adding to this, people irrationally compare results from the current assessment with the previous ones, as this study shows:

Expectations about performance marks, and the comparison of those marks with the previous year, had a very strong influence over levels of satisfaction.

There's a cross-cultural study that explores the detrimental effects unfairness has on productivity:

Our results revealed that both unfairness approaches (OJ and ERI) were positively related to job-burnout and turnover intention

It makes perfect sense: as performance reviews make people feel that their efforts and results are judged unfairly, the motivation drops and withdrawing from the company is considered.

The situation gets much worse if pay incentives are tied to performance reviews.

It’s a well-known fact that in most companies, newjoiners negotiate higher salaries then tenured colleagues.

Perceived judgement unfairness in this situation is even stronger. Employees might feel that performance reviews are simply punishing them, or taking advantage of their knowledge with the goal to postpone pay rise.

Loss of interest and motivation, similarly to increased turnover, have detrimental effects on quality.

Focus on teamwork

Focus on individual contribution will shift an employee’s focus from collaborative team work to achieving their personal results.

As these results are measured and reviewed, we can say goodbye to teamwork and hello to Goodhart’s law:

When a measure becomes a target, it ceases to be a good measure

Every measure which becomes a target becomes a bad measure – is inexorably, if ruefully, becoming recognized as one of the overriding laws of our times. Ruefully, for this law of the unintended consequence seems so inescapable. But it does so, I suggest, because it is the inevitable corollary of that invention of modernity: accountability

As soon as the employee is focused on improving the individual contribution measured in the assessment, quality also decreases because:

  • the employee loses motivation to help others, to teach and learn
  • the employee focuses only on their individual performance

While, as Dr. Deming says:

the most important figures that one needs for management are unknown or unknowable, but successful management must nevertheless take account of them.

All the effort managers and employees spend on executing the practice becomes waste. Alternatively, time could be more effectively spent on improving the system.

There’s a beautiful thought experiment illustrating Dr. Deming’s ‘95/5 rule’:

“95% of variation in the performance of a system is caused by the system itself; only 5% is caused by the people.”

Red bead experiment

While the desired goal of individual performance reviews is to boost team productivity, they instead:

  • focus on individuals, reducing the teams to mere groups of competing individuals
  • generate stress for everyone
  • negatively impact motivation and interest
  • increase turnover
  • bring the feeling of unfairness
  • focuse people on what’s measured, distorting the system
  • simply waste money

Samantha Evans and Dennis Tourish beautifully coined this in their study ‘Agency theory and performance appraisal: How bad theory damages learning and contributes to bad management practice’:

conventional appraisals prioritise hierarchy over intrinsic motivation, distrust over trust, and the importance of individual effort over that of building sustainable, co-operative systems.

References: