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It is of course great news that innovative companies are trailblazing performance management, but the biggest milestone is probably the announcement that General Electric (GE) is reinventing its performance management. Given that GE is the company that made stack ranking popular in the '80s and '90s, the commotion this move has created is no big surprise.
Having Thomas Edison as one of its founders, General Electric is an American multinational conglomerate that was founded in 1892. Currently, the company operates in several industries ranging from energy to finance and has 300,000 employees. GE’s size and constant success make it an important game-changer in many areas of business, including company culture and management. The industry giant was often mocked by the popular NBC show 30 Rock for its ruthless management practices.
Jack Welch, a 20-year chairman and CEO of GE, made stack ranking a widespread people management policy. During this time, several other companies followed suit and applied similar systems within their organizations. However, 30 years into its inception, GE admits that the old system is not functioning very well anymore. With the move, GE is dumping annual performance reviews and performance management systems over the next couple of years. It will implement more frequent feedback via an app, and an experimental group will pilot feedback without any numerical rankings.
In the late '80s under Welch’s influence, stack ranking became popular as a solution to the performance management system that preceded it. Previously, managers would set goals for their employees, provide feedback about a six or twelve-month performance and then rate employees on whether these goals are met or not. Managers would rate employees from 1 to 5.
As managers would have to justify any rating that indicates outstanding or bad performance, they soon developed a habit of giving most of their employees a 3, which indicates average performance. The “rank and yank”, “stack ranking” or “vitality curve” was invented in hopes of measuring performance better. With the new system, managers were forced to define their top and bottom performers annually. Compensation decisions were tied to the ranking and bottom performers would have to be fired each year to improve performance.
Recently, HR professionals and influencers realized that this decades-old solution actually creates frustrated employees who dread performance review cycles. One of the main reasons is our human reaction to rankings. Research indicates that our brain is evolutionarily wired to have a “fight or flight” response to physical attacks. The response our brains give to criticism of any kind is the same type of neural response when we are confronted with physical danger.
The second problem of stack ranking is the way it reinforces the wrong kind of mindset about human growth. Research conducted by Carol Dweck, a professor of psychology at Stanford University, revealed that people generally have two different approaches to human learning. The “fixed mindset” argues that people have an inherent capacity that remains the same throughout one’s life. The “growth mindset”, on the other hand, holds that people can learn new abilities and advance the one they already have.
Although few people are usually inclined to either a growth or a fixed mindset, popular performance management practices usually favor the fixed mindset. In a performance management environment where bottom performers are shown the door without providing an opportunity to learn, it is unavoidable that a fixed mindset prevails.
One major difference between new performance management systems applied by GE and other companies is their emphasis on the growth mindset. By setting up short-term goals and having ongoing growth conversations that are not tied to compensation, modern workplaces reinforce the notion that anybody can rise to the occasion and learn to be successful professionals.
Led by the current CEO Jeff Immelt, one reason for the change at GE is the rise of mobile technology. Head of Human Resources at GE, Susan Peters stated that millennials influenced this decision. Peters admits that millennials are born into the age of technology, and they are used to getting continuous feedback. With social media becoming widespread, millennials’ need for feedback has become a fact of life.
CEB, an advisory services company specialized in business practices, states that the average number of direct reports for a manager has increased from four to seven, which has decreased the time spent on coaching and guiding each employee. Add to that the fast pace of change that has caused many companies to realize that annually set goals might not remain the same for the whole year.
Raghu Krishnamoorthy, who is in charge of GE’s Crotonville management training center for a long time, tells that the center is currently focused on aiding GE’s culture change. The center is currently working on helping executives transition from a competitive process to one that is identified by its emphasis on growth. The new mission of Crotonville is to “inspire connection and develop people” instead of the previous Welch “command and control” system.
The new performance management at GE involves a mobile app to enable frequent feedback. Called PD@GE, the app provides a platform to define near-term goals for employees. Managers are expected to have frequent conversations, named “touchpoints”, with their employees on how far they are from their goals. The app can provide summaries of these touchpoints when desired. The main aim of the app is to unlock constant improvement.
First adopted by the HR group at GE, the app is currently used by around 25,000 to 30,000 people. Peters estimates 80,000 people will be using the app by the end of this year. While GE hopes to implement the new system throughout the organization by the end of 2016, a small fraction of around 8,000 people is already testing an alternative system with no rankings.
Krishnamoorthy states that the most important element of the new system is a continuous conversation, not the mobile app. Feedback conversations are constructed to be positive, and annual salary decisions are much less linked to performance with the new system.
Although GE transforming its legacy performance management system is big news, there are still several challenges down the road. One of these is “shadow rankings”, which means that companies still rate their employees, but more in the background. Since it is difficult to justify compensation decisions with new methods, managers are still resorting to conducting rankings informally. One of the ways to overcome this is to invest in training managers on how to get used to the new system of performance management. Adobe’s Head of Human Resources Donna Morris states they made big investments in training their leaders during their transition and experienced incredible yields.
Apart from conglomerates developing their own tools and systems for performance management, there are also an impressive amount of companies opting for external solutions such as Impraise. Impraise is a mobile-first platform that enables continuous feedback conversations between coworkers and managers. Managers can initiate 360-degree review cycles to gain better insights into how well their teams are doing. Employees can also request feedback from their peers or managers to take ownership of their own development.
Whether or not the new system will turn into a success story at GE remains unknown, but at least the conversation around performance management is going in the right direction. People management practices are being criticized and enabling growth in the workplace is becoming a hot topic. The conversation around new and old practices in performance management going is vital to establishing the right mindset for new methods, so that they do not become a mere replacement for old systems.
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