What have we learned about performance management?

What has management learnt from the global economic crisis about getting the best out of their people? Two recent examples of the way in which people's performance is managed, suggest that the answer might be "a lot" and "not much".

In the first case, it's been reported that auto maker GM, the recipient of large government handouts, is actually improving its performance management system. Under the old system, senior managers were evaluated quarterly on criteria that were spelt out in exhaustive detail. Such reviews were many pages long – in fact they needed to be contained in a ring binder!

As Terry Woychowski, former GM Director of Engineering said: "We measured ourselves 10 ways from Sunday." It was in fact a performance measurement system, not a performance management system.

In their new performance management system, GM managers will be evaluated using simpler criteria. The performance review will be contained on a single page. It will be annual and they will be held accountable for previously agreed performance goals.

Then there's the case of the troubled A.I.G., another recipient of government funding. What have they learnt? How are they going to improve their management processes?

Under the headline of "A.I.G. Roles Out New Pay Plan" (New York Times 10 Feb), a brave new performance based pay plan was announced. Under their new scheme, people's performance will be graded numerically which will be tied directly to their performance bonus.

Robert H. Benmosche, A.I.G.'s new chief executive is the brainchild behind the scheme. Perhaps bowing to extensive public pressure to reduce the enormous bonuses paid to employees (or at least to be able to justify them), he is reported to be introducing a forced ranking system for employees' performance.

As the NY Times article reported: "Under the new system, employees will be ranked on a scale from 1 to 4. Those ranked number 1, a group expected to be no larger than 10 percent, will receive much more in annual bonus payments, according to an A.I.G. spokeswoman. Those ranked 2 or 3 — together comprising about 70 percent of A.I.G. employees — will be considered as having performed above or in line with expectations. Those ranked 4 will receive lower incentive pay."

Sound familiar? Yes, it's almost the same as the 20-70-10 scheme previously used by G.E. where employees were ranked A, B or C on the basis that there should normally be 20% above expectations, 70% meeting expectations and 10% below expectations.

The difference here apparently is that those ranked 4 (or C in the G.E. model) will not be immediately pushed to leave the firm as they were at G.E.

Will this new "incentive based scheme" be effective? Time will tell. However, if the G.E. experience is anything to go by the answer could be problematic. Some people suggest that the GE "yank and rank" scheme was responsible for a 28-fold increase in earnings and a five-fold increase in revenue between 1981 and 2001 (that was also the year that Jack Welch left G.E.).

Critics of such schemes however, label them as a "competitive" model of managing performance (people compete against one another to achieve a better ranking) as opposed to cooperative. Even the statisticians have got onto the critique bandwagon by showing that over time, assuming that the intended aim of the scheme is successful (to get people to improve their performance and thus their ranking), there will be more As and Bs and less Cs.

If readers' comments on the NY Times article are anything to go by, the system may be doomed before it starts. Here's a taste of how some readers responded:

Employees will be ranked by whom, based on what? Unless the "what" is directly tied to long term profitability there will be no curbs on risk taking for short term profit.

If employees ranked 3 are described as "having performed... in line with expectations," then by definition those ranked 4 will have not met expectations. Yet, "those ranked 4 will receive lower incentive pay..." means that even if they do not meet expectations, they will receive incentive pay (a.k.a. bonus).

What it fails to do is link incentives with risk containment — not an easy task, but necessary to avoid future financial crises.

And finally:

So essentially nothing changes at A.I.G. Your bonus is now openly based on how much you suck up to your manager, not on any real measure of competency (though "competency" and "A.I.G." is an oxymoron at best).

There were no positive comments for the new A.I.G. scheme.

So, what's been learnt here?

It appears that in the GM example, emphasis will now be placed on "managing" performance. The new Chairman of GM, suggests the changes are part of a much needed cultural change throughout the organisation, where layers of bureaucracy are being cut and wider managerial responsibilities being given to a younger cadre of managers. "Replacing a binder full of job expectations with a one-page set of goals is just one sign of the fresh start."

One gathers that at A.I.G. the emphasis will be on measuring performance (after the event) rather than proactively managing performance.

Can you imagine yourself sitting down to do a performance review in either GM or A.I.G. (either as a manager or receiving the review)? I'm sure your mindset would be quite different in both cases. I've long been a critic of performance management systems, particularly those linked to individual pay incentives – nothing should take the place of good management.

However, as they are now part and parcel of most organisations they at least need to be designed in such a way that they encourage managers to "manage" rather than allow them to rely on some bureaucratic system as a crutch for poor management. Whilst the economic crisis might have been the catalyst, it's generally agreed that poor management got both organisations into real trouble. The way they manage their people had to change.

From their pre-crisis performances, both companies seemed to be in need of cultural change. It will be interesting to observe the results of the two quite different change processes over the coming years.