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Performance management is often equated with evaluation. This means the goal of managing and measuring performance has long been focused on guaranteeing the objectivity of evaluation, and on securing the internal fairness of compensation tied to that evaluation. Many companies pay substantial time and cost to maintain this process. Looking at recent cases of companies that have innovated their performance management, managers spend an average of more than 200 hours per year on performance evaluation.
Meanwhile, the annual merit increase budget — driven by evaluation — has been shrinking each year. From the typical 4.5–5.0% range in the early 2000s, this figure has settled at around 3% per year in the 2010s. Global companies' 2019 merit increase budgets averaged 2.9–3.1%, and for next year (2020) they are projected at 3.0–3.3%. As the size of the budget decreases, the differentiated raise range for top performers has also been shrinking — from 2–3 times the average down to 1.5–2 times.
The picture is similar for incentives. While the share of employees eligible for performance pay is rising, the differentiation range continues to shrink. For hyper-performers — where retention and motivation are at stake — companies typically run a separate, more dramatic compensation plan outside the usual incentive program. So how meaningful is it, really, to run performance management as a tool for evaluation results — or, more practically, for the objectivity of compensation? On top of this, the company's "to-do list" for things it cannot ignore — investment in employee development including training, and changing the workplace through smarter ways of working — only keeps growing.
Recently, a more fundamental challenge is approaching, beyond questions about the operational efficiency of HR. In a business environment that is shifting toward a digital, service-centered economy, new technology change is radical, and the capabilities required of employees are also changing rapidly.
In the past, the proficiency level of capability mattered. The skills and capabilities organization members had to possess were relatively less complex. Required technologies advanced slowly, and employees might keep doing the same work for their entire job life.
Today, the talent market within the workplace shifts every few years, and the pressure to fundamentally change how the same performance is delivered is intensifying. According to a survey by edX — an education platform institution founded by Harvard and MIT — about 30% of respondents aged 25–44 said their work area had completely changed since they entered their first job after graduating from college.
Only about 20% of survey respondents said their major was being applied to the field they currently work in. This kind of increasing career mobility within workplaces is intensifying, and from the company's standpoint, developing employees with new capabilities is becoming the rule rather than the exception.
According to a World Economic Forum report, more than half of all employees (54%) will be required to undergo reskilling — or upskilling at a different proficiency level — within the next three years. The major executives at companies are also bound to recognize that reorganizing work itself around the future, redesigning jobs, and reskilling employee capabilities is the top priority of talent management.
On the other hand, polarization in the external talent market — where the supply of general labor is increasing while demand for and competition over specific, more demanding talent groups grows — makes it harder for companies to secure ready talent in time.
It is increasingly clear that companies cannot rely entirely on recruiting alone to find people who can perform the right roles inside the organization. The Korean conglomerates' move away from group-wide new graduate recruiting and toward more frequent ongoing recruiting can be understood in the same context.
Should the practice and focus of performance management change? Yes. To reduce the waste of resources on decisions that have little impact, and further, as a way to prepare existing employees for the future and secure the talent we need in time, it must change. The era of "development through work" — long stressed as a declarative principle — has firmly arrived.
While the goals and concrete shapes differ, many cases of companies that have innovated performance management share common features. More precisely, there are preconditions for a process to be implemented and to take root.
What is the precondition for frequent feedback, flexible goal management not bound by annual format, and the expansion of employee-participatory processes — rather than one-way and top-down ones?
We need to recognize the value of soft skills like emotional intelligence, empathy, collaboration, communication, and negotiation. The faster the change, the wider and more varied the confusion and obstacles employees encounter while pursuing their goals. And the larger the break with legacy practices that have settled in as habit, the more people wonder, "What do I do now, and how?"
Today's company leaders are accustomed to following set rules and committing to assigned goals, but in many cases they lack the capability to engage with new generations and understand new technology. The new generations continuously entering the workplace have a high level of understanding of technology and adaptability to change, but, surprisingly, they also struggle to form and maintain social relationships. For the values that new performance management aims at to be realized, it is essential for these people to feel cultural connection and to confirm trust. This is not just leadership culture — it must become the common DNA of all employees.
Traditional performance management has managed and measured performance as the result of work, capability as the qualification for achieving it, and work as the process — separately. Whether right or wrong, performance goals could be believed to be objectified if they were measured by their level of achievement within an agreed cycle. But capability and everyday work, which are hard to quantify and not recorded, were often outside the management area.
Under such practice, development-centered HR always remains an unsolved homework problem for front-line managers. The areas more frequently encountered and observed in daily life are actually the moments when specific capabilities are expressed in the work process — performance is just a result that becomes visible after a certain amount of time. Especially from a development perspective, the process by which an individual grows, if not carefully observed and managed, makes it hard to notice the moments when intervention is needed and the moments when capability is amplified.
P&G's W&DP (Work & Development Planning) is not the icon of continuous performance management innovation, but it has long been famous as a process that escaped this practice. Their performance management process, like any other, starts with reviewing the previous year's plan and results. But the discussion of the plan focuses on areas where future growth and development are needed, short- and long-term career hopes, and development and training plans for the coming year. Managers are therefore encouraged to take on informal and continuous coaching obligations, in addition to the formal W&DP review and updates.
Also, the process is preceded by employees and managers actually agreeing on the work that employees should do (Defining the job), so that goals and actual work are not separated. This process is reviewed quarterly. The outer reach of performance management needs to expand. The definition of the work (job), goals for growth, and that process need to be included within the scope of performance management.
Evaluation-centered performance management tends to take a fundamentally top-down approach. It focuses on managing the individual goals that employees should have to achieve the company-wide or higher-organization goals. Of course, this process has the advantage of letting all employees be aligned toward the same goal while showing what is working well and where problems are arising. But individual growth often happens not only through guidance from a supervisor but also through mutual learning with the colleagues you frequently communicate with at work.
Peer learning and recognition encourage employees to learn from each other and share accumulated knowledge — yielding the additional benefit of building growth-oriented social relationships. Among developers — who lead the trend of agile culture — there is a process called "code review." The biggest goal is to give feedback on code each developer has written and ultimately get "clean code."
But employees experience this process and feel the need and desire for growth, and the benefits of learning, very strongly. And ultimately, they end up with a shared way of achieving (a mental model) for their performance goals (the development model). If the result is the same, employees learning the most effective and efficient way to achieve it — and going further, being able to set higher expectations if the process is the same — is the very picture of development-centered performance management.
In evaluation-centered performance management, shared goals are generally not encouraged. This is because of the problems of measurement (measuring relative contribution) and the risk of mutual avoidance of responsibility. It is realistic that distinguishing responsibility between individuals is harder than distinguishing work and performance responsibility at the organizational level. But recent performance goals are increasingly hard to achieve without collaboration. Everyone knows that bringing together individuals with diverse skills and capabilities to create new value is the source of competitiveness.
While many companies try to overcome the silos of departmental and individual self-interest, focusing performance on individual contribution alone gives employees great confusion. Learning how to share and manage joint performance accountability is itself a developmental process of internalizing the values of the new workplace. It is also the only way to actually experience — rather than learn through training — the corporate ideology posted on a corner of the office wall. Employees need preparation for the future. The pace of growth accelerates when they prepare not in a training room at a corporate academy but in reality, where there is risk of failure.
One thing emphasized in new performance management is that the level — and the content — of goals should be flexibly managed at the moments they are needed. Employees resonate with necessity and are more engaged with visible goals. So beyond the ultimate goal (outcome) for a defined performance period, it is necessary to encourage setting small goals (output) needed at specific moments. This is also a way of communicating priorities along the process. It is also a way to accumulate "small success experiences" — the most important source of growth through work.
In the HRD field as well, "micro-learning" has been drawing attention. Bite-sized learning content that can be completed within 10 minutes in audio or video form not only allows quick absorption but also reduces the implicit conflict cost of scheduling adjustments — proving its effectiveness.
For generations accustomed to a mobile-centered digital world, fun is also an important element. Coaching and performance dialogue are critical pillars of development-centered performance management, but managing the process through face-to-face conversation and paperwork alone gives both managers and employees fatigue. Performance dialogue concentrated only between supervisor and subordinate can also be mistaken for lectures and nagging. To have as many observers as possible leave opinions from as many dimensions as possible, and to drive growth motivation through this, digital tools are needed.
And in that process, fun elements like gamification need to be considered as well. Digital performance management environments — badges or points that record moments of recognition, boards and communities that capture work and performance records — have the effect of promoting employee experience along with fun. They can also eliminate the time waste of busy employees.
The goal management led by the C-suite — the company's top executive group — and HR now needs to gradually shift its focus. To enable development-centered performance management — summarized as organization-level learning, mutual potential development among employees, and self-driven engagement and achievement — we have to change the top-down management practice that focuses on result measurement.
The key to settling these new practices ultimately lies with executives and HR. Even if there are employees with the prepared mindset and capabilities, you cannot make them build new performance management processes and tools by themselves. Just as innovation is bound to fail when companies encourage taking risks and trying new things while imposing a heavy penalty for failure, executives and HR — as the champions and sponsors leading change — should take on the role of bearing the risk of practice transformation together and spreading the achievements.