November 12, 2010

Performance Reviews: Dreaded Conversations can be Productive Opportunities

It’s that time of year when managers and supervisors sit down with their subordinates and have that annual dreaded conversation, the performance appraisal.

This conversation is made more difficult this year by the fact that there is less to go around in salary increases and bonuses. There cannot be a minimum increase to keep up with inflation, because there is no inflation to offset. In some cases, a company can provide some increase by returning a portion of the wages previously reduced in order to survive the recent economic downturn.

A question that needs to be pondered by management is what type of appraisal system we should use this year. Believe it or not, some employers are revisiting an old favorite, FDS. The forced distribution systems method is where the individuals being appraised are ranked into four categories: A, B, C and D. This method of performance appraisal gained fame and popularity based on the endorsement of former General Electric CEO, Jack Welch.

According to the Journal of Management, up to 20 percent of all U.S. business organizations and up to 25 percent of the Fortune 500 firms use some type of FDS. In recent years, Yahoo! Inc. has stripped away its performance labels in hopes that reviews would center more on substance and less on explaining away a grade. Yahoo also instituted a "stack-ranking†system to determine how compensation increases are distributed. It asks managers to rank employees within each unit, with raises and bonuses distributed accordingly.

Any structured approach to the performance appraisal process has positive and negative consequences. Let’s look at both.

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