12/10/2015 03:58 pm ET Updated Dec 09, 2016

Performance Evaluations: Gaussian Curve or Playing to Strengths?

Coauthored with Nandu Nandkishore, Former Executive Board Member at Nestle SA and currently Executive Fellow at LBS

It's time to conduct your annual performance and salary reviews of your employees, and your seasoned HR professional wants you to use a Gaussian (forced-ranked) curve. The argument is attractive: "If you do not differentiate between the high performers and low performers then there is no incentive to work hard." The unstated assumption: what matters is internal equity and internal competition, rather than external equity and the overall team performance in external competitions.

Many companies, like Deloitte and Accenture, are moving away from forced-ranked performance evaluations and instead are managing employees to "play to their strengths." Why? Because forced-ranking guarantees that you will be demotivating at least half of your workforce by telling them they are average or worse, regardless of how good they are or how much they achieved. It is demotivating to put everything you have into a successful project, just to be told that you are average.

Traditional performance management systems assume different employees can be judged on the same metrics. If you're outstanding on one dimension (say, client fulfilment) and weaker on another dimension (say, business development), you get an average rating under most systems.
Strengths-based performance management assumes that different people bring different, complementary value to a team.

A strengths-based approach in this case would result in a high evaluation, and leaders would help you find ways to play to your client fulfilment strength more often. So lots of employees - hopefully most employees - can and will perform above average, in different domains. This approach can alarm managers because it upsets existing assumptions about how to motivate people. If we're all great performers in our own unique way, who gets the biggest raise at the end of the year?

Perhaps it helps to consider the origins of these assumptions about managing people. When management systems were invented during the industrial revolution, the goal was to hire people and convince them do specific things that management needed to be done. You hired people to optimize existing production processes.

This approach seems pretty rational to most of us, since it's the system that's been in place for 150 years. This is when we first experimented with hiring whole cities of employees and making them very specialized in a tiny piece of a production process. HR systems were specifically built so that employees did not innovate on the job based on their strengths, or collaborate with each other.

But that was a time when information travelled slower and the environment changed less often. In 1913 Henry Ford wanted to "put the world on wheels" by bringing the elite automobile concept to the masses by producing the largest number of simple cars for the lowest cost. The assembly line approach changed how workers built cars, and Ford dominated the industry using this innovation for over a decade.

Nowadays information moves quicker and wealth is widely available for innovation, so leaders don't get a decade before innovations are copied. Leaders are lucky to get 10 months before an innovation reappears in other companies. They may not get 10 weeks.

It often is not useful for today's leaders to start with industrial revolution assumptions about managing people. Instead of narrowly-focused, machine-like employees, most leaders today need employees to use creativity to solve problems without waiting for instruction.

Instead of hiring employees to optimize existing procedures, leaders need employees to help maximize business solutions. These employee contributions (innovation, creativity, sharing) are triggered by positive emotions (excitement, pride, and gratitude). Industrial revolution systems are built around negative emotions (like anxiety, fear, and envy). The emotions needed for competitive advantage have shifted.

These shifting needs give way to new assumptions about workforce management systems. For example, on-boarding may improve when it starts with newcomers' strengths rather than the company or the job. We examined this at Wipro BPO, an India-based global leader in the business-process-outsourcing industry. In this industry, annual quit rates were over 50%, and many employees burn out and quit only a few months into the job.

We conducted a field experiment, where we randomly assigned groups of new employees to conditions. Our best-self condition highlighted newcomers' unique perspectives and strengths. Our culture condition taught newcomers about Wipro's values. The pure control group focused on skills training and general firm awareness. The best-self condition led to significantly greater customer satisfaction and over 33% greater retention during the first six months on the job, as compared to the other approaches.

These results demonstrate how activating employees' best selves can benefit organizations, and how industrial-revolution thinking might not be the best way to get the best from employees. Many managers are overwhelmed by these shifts in assumptions, or don't think they have time to make the important changes. Their organizations will likely be less and less competitive as innovation and change accelerate.

Today's decentralised, knowledge-based, innovation economy demands a new model for managing employee potential and performance. What advice do these changes imply about performance management, rewards, and jobs?

• Coach employees to think of their work as a chance to use their best self to complement their team members. Performance discussions get beyond satisficing around existing processes, and move toward helping employees understand their impact on others around them.
• Pay fairly so that you get people's minds off the pay and onto the work itself. Set internal salary benchmarks on external competitiveness for similar functions and review this comparison annually. Do away entirely with the concept of annual individual salary raises.
• Make bonuses a small proportion of total pay, and make sure they are both team-based and individual-based incentives so people perform their best individually and within teams.
• Jobs, and teams, become more fluid, sculpted around individual employees' strengths.
• Employees that don't or can't contribute can be flagged by the team's own evaluations, and are addressed immediately (not wait for an annual review).

We don't need Gaussian curves to get the best out of ourselves and others. Leaders need to encourage teams of people to bring their best to work as they compete in the external market, instead of forcing team members to compete internally with each other.