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The business value of traditional performance management models is collapsing. While these legacy systems still inform decision-making around compensation, promotions, terminations, and other compliance-mandated functions, they’ve become irrelevant to actually improving performance or its management. They do not measurably add value.

Instead of better clarifying expectations and building morale, the traditional annual appraisal aspect of performance management (PM) alienates talented and typical employees alike. Managers dislike it, too. Even as personal and enterprise tools and technologies have radically improved, performance management systems have not. And while the nature of work and the workplace have grown more data-driven and analytical, performance management has not kept pace. Perennial complaints — rigidity, opacity, unfairness, arbitrariness, and an inherent backward-looking bias — persist.



Across industries, serious companies recognize that competing effectively in digital business environments demands a new approach to performance management. Technological innovation, the changing nature of work, and digital transformation all enable and create new demand for novel PM approaches. Getting performance management right is culturally critical to strategic execution in rapidly evolving business environments. The technology-based future of performance management is an essential component of leading successful digital transformation.

Our research offers clear evidence that the future of PM is more data-driven, more flexible, more continuous, and more development-oriented. It’s focused not just on individual employees, but on skills and teams. (Read below about IBM’s move to catalog employee skills, a digital indexing effort that marshals skills, not just roles, to get work done.) It emphasizes technology-enabled, continuous improvement, self-service/DIY skills development, and automated coaching tools. The ways that feedback is given, when, and by whom — and how it is both received and acted upon — are changing.

This global executive research study about the future of performance management is based on more than 30 interviews with leading industry experts.

About the Authors:

Michael Schrage is a research fellow at the MIT Sloan School’s Initiative on the Digital Economy, where he does research and advisory work on how digital media transforms agency, human capital, and innovation.

David Kiron is the executive editor of MIT Sloan Management Review, which brings ideas from the world of thinkers to the executives and managers who use them.

Bryan Hancock is a partner at McKinsey & Company based in Washington, D.C. He is the global leader of McKinsey’s client service on talent.

Raffaele Breschi is an associate partner at McKinsey & Company based in Dubai, where he leads work in organization and performance improvement.


Contributors

Michael Fitzgerald, Carolyn Ann Geason, Allison Ryder, Barbara Spindel, Karina van Berkum


Adviser

Anna Tavis


Acknowledgments

Jeanne Achille, founder and CEO, The Devon Group; chair, Women in HR Tech Summit, U.S. and Singapore

Carrie Altieri, vice president, communications — people and culture, IBM

Jayshankar Balaraman, CEO and founder, Engagedly

Nitesh Banta, CEO, B12

Natalie Baumgartner, chief workforce scientist, Achievers

Josh Bersin, human resources industry analyst

Courtney Bigony, director of people science, 15Five

Jordan Birnbaum, vice president and chief behavioral economist, ADP

Peter Cappelli, George W. Taylor Professor of Management and director, Center for Human Resources, The Wharton School, University of Pennsylvania

Dean Carter, chief people officer, Patagonia

Srikant Chellappa, president, Engagedly

Joanna Daly, vice president, global talent, IBM

Derek DiRisio, president, PSEG Services

Sandra Garcia, global compensation lead for global strategic initiatives, General Motors

Diane Gherson, chief human resources officer and senior vice president, human resources, IBM

David Gledhill, CIO, DBS Bank

Srinivas Krishnamurti, CEO, Zugata

Kelly Kuras, senior manager, global talent evaluation and employee engagement, General Motors

Alexa Lightner, vice president and general manager, Europe, Humanyze

Donna Morris, chief human resources officer and executive vice president, human resources, Adobe

Marcus Mossberger, senior director, global human capital management strategy, Infor

Alex “Sandy” Pentland, professor, Media Arts and Sciences, MIT Media Lab

Linda Quarles, director, strategy and organizational design, Frog

Mike Rehorst, managing director, MK(e) Consulting Group

Terri Rundell, owner and experience designer, Dezign2Think

Lisa Schilling, former vice president, quality and care delivery effectiveness, Kaiser Permanente

Lisa Sterling, executive vice president, chief people and culture officer, Ceridian

John Sumser, founder and principal analyst, HR Examiner

Anna Tavis, clinical associate professor of human capital management, New York University

Ben Waber, CEO, Humanyze

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References

1. D. Kiron and B. Spindel, “Rebooting Work for a Digital Era: How IBM Reimagined Talent and Performance Management,” MIT Sloan Management Review, February 2019.

2. S. Chowdhury, E. Hioe, and B. Schaninger, “Harnessing the Power of Performance Management,” McKinsey & Company, April 2018, www.mckinsey.com.

3. “Performance Management Benchmark Report,” Reflektive, 2018, www.reflektive.com.

4. S. Kasriel, “Skill, Re-skill, and Re-skill Again. How to Keep Up With the Future of Work,” World Economic Forum, July 31, 2017; and J. Manyika, “What Is the Future of Work?” McKinsey Global Institute, December 2017.

5. P. Korkki, “Why Employee Ranking Can Backfire,” The New York Times, July 11, 2015; and S. Rodriguez, “Inside Facebook’s ‘Cult-like’ Workplace, Where Dissent Is Discouraged and Employees Pretend to Be Happy All the Time,” CNBC, Jan. 8, 2019, www.cnbc.com. While forced rankings can have damaging effects on corporate cultures, they can be a useful tool for differentiating employees under the right circumstances. Forced rankings, for instance, can help managers differentiate top performers (for the purpose of retention and promotion) from the bottom performers (for the purpose of remediation or termination). Forced rankings are less useful for making distinctions among mid-level performers.

6. J. Gassée, “How Microsoft’s Human Resources Culture Drove Away Talent,” The Guardian, Aug. 13, 2012.

7. A. Goldsmith, “How Millennials Are Disrupting the Workplace ― for the Better,” Forbes, Dec. 18, 2017.

8. B. Rashid, “The Rise of the Freelancer Economy,” Forbes, Jan. 26, 2016.

9. B. Beardsley, “Winning with Data Science, Golden State Warriors Style,” Dataconomy, July 4, 2017, https://dataconomy.com.

10. RobD, “Houston Rockets and ‘Moreyball,’” Harvard Business School Digital Initiative, April 9, 2018, https://digit.hbs.org.

11. L. Bock, “The Humu Nudge Engine Is Making Work Better — Here’s How,” Humu, Oct. 8, 2018. https://humu.com.

12. In some cases, employees may prefer to receive feedback from automated tools, especially if the feedback is developmental or would otherwise embarrass the employee if a manager were to deliver the information.