By Victor Assad

Organizations typically conduct their annual performance reviews and make decisions on merit pay increases and pay adjustments at the end of the year. Employers need to remember that the most effective and innovative teams are built on trust. Executives need to ensure that performance management engenders trust.

The performance management discussion is usually about whether to have forced ranking, and ratings, how often to give feedback and have reviews, or whether to separate merit increases from performance reviews. I will cover these topics below. But first, we need to discuss how to improve the performance and alignment of employees to the organization’s purpose, strategies, culture, and goals. That discussion begins with trust: the placing of confidence in another person.

Multiple studies show the importance of trust

Five studies identified the critical dynamics that contribute to team success. These studies come from MIT Human Dynamics Team, the Harvard Business Review, and Google’s People Operations. Let’s look at one of these studies, and I will provide you with a link to learn about the others.

In the Fall of 2017, Google’s People Operations published the results of its study on team effectiveness. They found that group dynamics mattered and that the key issue of psychological safety (trust) was most important. The People Operations analysis conducted more than 200 interviews with their employees and analyzed 250-plus attributes they identified from more than 180 active Google teams. They compared high-performing teams with low-performing teams.

According to Google’s rework website, they discovered that “who is on the team matters less than how the team members interact, structure their work, and view their contributors.” They discovered five key dynamics that set successful teams apart from the rest:

  1. Psychological safety (commonly called trust): Can we take risks on this team without feeling insecure or embarrassed?
  2. Dependability: Can we count on each other to do high-quality work on time?
  3. Structure & clarity: Are goals, roles, and execution plans on our team clear?
  4. Meaning of work: Are we working on something that is personally important for each of us?
  5. Impact of work: Do we fundamentally believe that the work we’re doing matters?

According to Google, psychological safety was far and away the most important of the five dynamics found, and it is the underpinning of the other four.

The Google post explains that new team members are all reluctant to engage in behaviors that could negatively influence how others perceive their competence, awareness, and positivity. Although this kind of self-protection is natural, it is detrimental to effective teamwork. Conversely, the safer team members feel with one another, the more likely they are to admit mistakes, partner, and take on new roles.

The Google post goes on to explain another significant finding:

Individuals on teams with higher psychological safety are less likely to leave Google. They are more likely to harness the power of diverse ideas from their teammates. They bring in more revenue, and they are rated as effective twice as often by executives.

Learn more about Google’s finds and the findings of MIT and other studies in the Harvard Business Review. By the way, the same dynamics work for remote and hybrid teams. Learn more

Another study by Paul Zak in the Harvard Business Review, looked at the neuroscience of trust and the relationship of trust and the brain chemical oxytocin among people at high-trust companies. By measuring people’s oxytocin levels in response to various situations—first in the lab and later in the workplace—Zak identified eight key management behaviors that stimulate oxytocin production and generate trust: (1) Recognizing excellence. (2) Inducing “challenge stress” (tough but achievable goals with a concrete endpoint) (3) Giving people discretion in how they do their work. (4) Enabling job crafting (people focus their energies on what they care about and their strengths). (5) Sharing information broadly across the organization. (6) Intentionally building relationships. (7) Facilitating whole-person growth. (8) Showing vulnerability.

He discovered that these employees report the following:

  • 74 percent less stress,
  • 106 percent more energy at work
  • 50 percent higher productivity
  • 13 percent fewer sick days
  • 76 percent more engagement
  • 29 percent more satisfied with their lives
  • 40 percent less burnout than people at low-trust companies.

Paul Zach says the following about his decade-long research on the neuroscience of trust:

“Ultimately, you cultivate trust by setting a clear direction, giving people what they need to see it through, and getting out of their way.”

Performance Management needs to engender trust

Performance management is typically thought about as the process of setting goals, building alignment and motivation to complete the goals, providing feedback, coaching, and training, and recognizing progress, success, and excellence. The process also feeds other talent management processes, such as determining merit pay, identifying training needs, and doing succession planning. Done well, performance management will significantly improve team and organizational performance and innovation. But underlying it all is trust.

To engender trust, managers need to continually provide candid feedback and coaching to employees and allow an open dialogue for questions. Additionally, managers need to work with employees to secure needed resources and access to experts to overcome obstacles. I recommend a quarterly, formal process to update and revise goals, as strategies and goals frequently change during the year. I don’t recommend that employees be given ratings and certainly not forced rankings – as they are detrimental to morale, reduce trust and require too much time for their value. In many cases forced ranking is too subjective.

You will know when you have built trust with your employees. They will no longer dread performance management meetings because you will have already discussed their performance. strengths, and development areas. No surprises. They will confide in you because your employees know that you understand their unique skills and abilities, the type of work they like to do, their contributions to the team, and their career aspirations.

Eight Performance Management Issues

Let’s review the following eight performance management issues one by one. With each issue, I will provide the salient point and a link for you to learn more in-depth information. 

1 – Purpose. According to McKinsey’s research, 70 percent of employees expect their jobs to bring a significant sense of purpose to their lives. Employers need to help meet this need or be prepared to lose talent to companies that will. Learn more.

2 – Setting goals. Executives who want to increase their success dramatically should implement Objectives with Key Results (OKRs). Research shows that executives who set such goals can significantly improve the performance of their organizations over those that simply tell employees to just do their best. Moreover, OKRs allow organizations to change measures and tactics to adjust to today’s digital pace of business. For a long time, executives have used SMART goals. (A format for setting goals that call for Specificity, Measures, are Action-orientated, viewed by the employees as Achievable and Relevant, and have Timelines.) OKRs are different from SMART goals. Like SMART goals, OKRs have objectives, measures, and timelines, but they are more ambitious and allow for the writing of tactics as part of the objective “cluster.” The OKR process also allows for goals and milestones to be  quickly, depending on the results. Like SMART goals, OKRs are deployed down into the organization, but the OKR process challenges managers and their teams to write their own OKRs. Learn more.

3 – Providing feedback. Are you the type of leader who loves to provide positive feedback? Or, are you the type who prefers to tell people what they did wrong? Long-standing research shows that the leaders who provide positive feedback more often than negative, at a 5:1 ratio, have teams that perform better, are more innovative, and generate more profit. However, both positive and negative feedback is essential, and employees overwhelmingly believe they are not getting enough of either feedback. New research shows that when an organization has “positive energizers,” the organization improves its performance, innovation, team cohesion, and financial performance. Learn more.

4 – Coaching. Companies want managers who will build relationships with their employees, give them feedback, coach and develop them, and continually recognize them for their achievements.  These managers build trust. The once-a-year performance discussion is not sufficient in a business world of constant change. The problem for managers is that they are too busy with the constant change and pressures of their organizations to be good coaches. And, for the managers who are coaching, too few of them are good at it. Learn these five steps for managers to improve their coaching success.

5 – Recognition. Recognition is often the leading action managers can take to cause employees to produce great work. A whitepaper commissioned by Fortune 100 Best Company to Work For and Great Place to Work-Certified company, O.C. Tanner, investigated the root cause of great employee performance and how managers can tailor their workplaces to promote it. When asked, “What is the most important thing that your manager or company currently does that would cause you to produce great work?” The leading response by nearly a factor of three was more personal recognition, over other drivers, such as “pay me more” or “give me autonomy.” Giving immediate recognition and feedback is easy to do! Learn more.

6 – Forced ranking. One of the most contentious practices used in performance management, is forced ranking It is based on the premise that it is vital to have immediate supervisors rigorously evaluate and rank employees based on agreed-upon abilities, skills, and attitudes. The top performers in the rank get the highest merit pay increase, the most stock, and accelerated career development.  The lowest performers often get no merit increase or stock and are terminated from the company if they don’t improve. Then, they are replaced by more skilled employees. Performance at first increases, then it stalls. The problem is that when it is used more than about two years in a row, it creates a negative culture. One common criticism is that it pits employees against each other, instead of fostering a collaborative work environment. On those occasions when managers lead truly high-performing teams, someone still must be ranked low, despite meeting performance plan goals. Learn more.

7 – Performance ratings. When we removed performance rankings from our performance review process at Medtronic Coronary and Peripheral in 2012, some executive leaders and managers warned that employees would lose the competitive edge to perform. They didn’t. Our changes included holding weekly or biweekly meetings between managers and employees as well as formal quarterly updates to goals and a year-end performance review. We also implemented an online performance management system that enabled goal setting, feedback, note-taking, and the employee’s review. In our experience, employees were more open to feedback when we removed performance rankings. It eliminated arguments over the ratings. Empirical research supported our experience. But before you eliminate ratings, train your managers on to provide excellent feedback. Learn more.

8 – Market and Merit Pay. Compensation is a critical component of your integrated talent management strategy. When done poorly, it will not only create high turnover, it will also ruin your recruiting efforts and sap your employees’ innovation and extra effort. There are two components to pay. It must be market-based to your industry and region and reward effort (even failure when experimenting in order to learn), success, and excellence. If you fail at either component, you will lose your best employees. Learn more. However, if you have a thriving culture (learn more) or provide flexible work schedules (learn more), you can get by without paying market competitive wages.

In addition, companies that want to be innovative need to reward failure in the name of learning fast. Learning fast is critical when it is tied to experimentation and prototyping, with an attitude of “Failing fast, frequently and furiously. What did you learn today, and what is tomorrow’s experiment?” Without trust, support, and recognition for learning, innovation stalls. Learn more.

Performance management is no longer only about holding an annual performance review and determining who gets the high highest percentage of merit pay. It requires providing ongoing feedback and coaching, building relationships, and offering recognition. Ultimately, performance management needs to engender trust.

About InnovationOne®, LLC.

InnovationOne®, LLC helps organizations worldwide build a culture of innovation and make it sustainable. InnovationOne® uses a scientifically developed assessment to measure, benchmark, and improve your company’s culture and capability to innovate and enjoy better outcomes and financial results. Companies scoring in the top quartile of our InnovationOne Culture Index© reported higher financial performance than bottom quartile performers by 22 percent. Our latest research shows that R&D Labs can improve their performance by 20 to 30 percent with higher innovation culture scores. Measure and ignite your culture of innovation.