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The Performance-Management Secret Only 1 in 5 Companies Knows A survey of over 25,800 companies showed that fully 20 percent had dumped dreaded annual performance ratings.

By Heather R. Huhman Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

For years, performance ratings have plagued organizations. Managers and employees alike have dreaded the yearly meeting when employees received their grade, for lack of a better word. But now -- finally! --employers are wising up to the ineffectiveness of employee ratings.

Related: All You Need to Know About Performance Management Without Ratings

The Global Leadership Forecast 2018 from DDI, the Conference Board and EY, looked at data from over 25,800 company leaders from around the world. The research found that 20 percent of these companies had stopped using performance ratings.

And, an interesting fact -- whether it's related or not -- these companies also had more women in senior positions and a higher quality of leadership.

But before you rush to drop the outdated form of performance management known as performance reviews, you might want to first understand what systems have been successful at other organizations.

Don't boil ratings down to a single number.

Performance ratings attempt to boil down months of behavior to a single number. And they fail. Rating an employee a "3" for communication skills ignores the nuances of his or her behavior. It also leads to biased assessments.

This is why San Francisco-based employee-performance management platform Reflektive has never used performance ratings. Instead, its managers meet with employees quarterly and provide qualitative and quantitative feedback.

"We believe traditional ratings do more harm than good," Rachel Ernst, head of employee success, said via email. "Employees don't typically do well with a number or letter-rating system."

Related: 4 Unconscious Biases That Distort Performance Reviews

Instead of telling employees if they've "passed" or "failed," provide ways for your managers to track different aspects of performance. Using data helps to erase bias and shows employees their evaluations are fair. Just make sure that all employees know how each metric is assessed and how it ties to their role in the organization.

Then, set managers and employees up to have a conversation. Have managers focus on progress with regard to employees' and organizational goals. Encourage them to ask individuals what they believe is working and what is hindering their performance. This will show employees that feedback is collaborative rather than judgmental.

Assess cultural fit.

Performance reviews are not just about behaviors. They also need to take into account how well an employee is representing the company.

William Vanderbloemen, founder and CEO of the Houston-based church-staffing firm Vanderbloemen Search Group, advises including feedback about the company's core values.

"While we still have key result areas [KPIs], we have augmented our review process to include measuring how well our people are living out our nine cultural values," he said in an email.

As a result, Vanderbloemen says his team is more productive and experiences lower turnover. Each employee understands and is invested in the company values.

The trick is to clearly set expectations about values-based performance. Have managers sit down with their employees and discuss what it means to embody each of the core values. Managers should ask employees to explain the values and their specific role in their own words. Then, both can talk about how the employee's responsibilities align with the values. This will help both managers and employees create customized expectations for the individual.

Factor in peers.

Employees spend most of their time at work with their co-workers. Often, they have a better picture of a colleague's performance than managers. This is why, at my company, I ask employees to provide anonymous peer feedback.

I ask everyone to focus on how a co-worker has excelled and where there can still be improvements. This gives me a clear idea of how each individual is doing, so I can have a more meaningful conversation about their performance.

This system also shows employees that the rest of the team appreciates their actions. They see their peers value all they contribute.

Be careful when relaying peer feedback. Never reveal who said what. That will lead to gossip and divide the team. Plus, if employees worry about retribution, they won't provide as honest or detailed feedback.

Focus on development.

The aforementioned Global Leadership Forecast 2018 found that when managers spend 75 percent of a performance review discussing employee development, there is a stronger outcome in the employee's future performance. Atlanta-based psychologist and author of Extraordinary Influence, Tim Irwin, says this is because of how the brain functions.

"Perceived criticism engages the part of the brain that has a "negativity bias,'" Irwin said in an email. "When this part of the brain is engaged, creativity, innovation and problem-solving are diminished. The recipient essentially shuts down and derives minimal benefit from the exchange."

Irwin went on to point out that when managers frame the conversation in terms of employee development, people are more receptive. They process the feedback as a way to reach their personal goals rather than as punishment.

Related: 7 New Trends Top Companies Use to Separate Performance from Compensation

Train managers to deliver feedback in a career-focused manner. For example, instead of telling an employee that clients have complained about his or her communication skills, suggest concrete ways the employee can improve. These steps also need to clearly tie to an individual's goal to show how changing will pay off in the long-run -- for the employee and company alike.

Heather R. Huhman

Career and Workplace Expert; Founder and President, Come Recommended

Waldorf, Md.-based Heather R. Huhman is a career expert, experienced hiring manager and president of Come Recommended, the PR solution for job search and HR tech companies. She writes about issues impacting the modern workplace.

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