You may recall from a year or so ago a flurry of publicity within the HR world for a number of major companies which had abandoned formal performance ratings (not, as widely misreported, appraisals) in favour of better informal performance management conversations.  Pioneers included Accenture, Netflix and Microsoft.  The thinking was that a formal rating had traditionally led to the focus being on that number or letter and not on the employee’s future development.  More useful performance discussions could perhaps be had if the thrust of the process were on the future, not the past.  As a result, it was thought, employees would become more engaged, managers could spend more time on informal performance guidance, the quality of performance conversations would improve and it would become easier to differentiate pay decisions, good news all round.

A recent study by international HR solution providers, CEB Corporate Leadership Council, has taken a look at doing without ratings, based on a survey of nearly 10,000 employees in 18 countries in a wide array of industry sectors. It indicates a tendency to positive feedback from staff immediately after the removal of ratings, but that the initial reaction then fades and that the key performance outcomes that organisations expected to improve actually worsened: “Our performance and pay systems began to look like a black box. Without the visible symbol of a rating, employees didn’t understand the processes or philosophies behind them“, said one HR VP.

There was a 6% drop in employee engagement, no doubt fuelled in part by the discovery that without the impetus and context of the formal rating process as a topic for discussion, management time on informal performance conversations actually fell too (perhaps confirming that managers are no keener on the performance aspects of their role than the employees being managed). Not only that, but the perceived quality of such performance conversations as did take place dropped also by nearly 15%.

Without the need to defend a rating, managers tended to put less time into collating the necessary concrete examples, leaving employees feeling unclear as to how they were doing. That in turn led to a weakening in employees’ minds of the link between performance and pay, since managers struggled without examples to explain how pay decisions were linked to individual contributions.  That was particularly the case for the high performers who often viewed the rating as a form of recognition and differentiation from the herd.  They saw its removal as a sign that they were no longer being rewarded appropriately relative to their peers, an active disengagement factor.

The CEB survey indicates that where doing without ratings works, it is due to the very high quality of line management in that organisation. Absent that, average corporate performance among survey respondents dropped by around 10%.  Making performance management work without ratings will therefore need a very substantial investment in manager training.  Even then, says the study, “most organisations will struggle to reach the level of manager effectiveness required as currently only the top 5% of managers are able to manage talent effectively without ratings“.

Nowhere in the CEB report is there any reference to the need for ratings to justify management decisions as between employees in the Employment Tribunal. However, that is not a factor to be overlooked.  If, as a result of dropping formal ratings your company loses the closest it has to an objective performance assessment and your managers no longer feel the same need to the generate comments or collect the examples necessary to defend such decisions, it will be far less easy for an employer to discharge the burden of showing them not to be discriminatory.  A drift towards informal conversations, unless your managers are really top-notch, is likely to be a drift away from the creation and maintenance of proper written records of what you think of your staff and why, and it is those which will be the mainstay of the employer’s justification in many cases.

Unless you are sure that your line management is in that top 5%, the safe money would therefore seem to be on retaining a formal rating structure. Neither managers nor employees may enjoy the process, but the fairly consistent view, even before you get to the employment lawyers’ need for evidence, is that doing without is worse.