Performance Management at Microsoft - Moving from 5-point to 3-point Rating Scale

It's been awhile since I waxed about the limitations of the performance management systems most of us use in our companies.  Probably my biggest pet peeve is the 5 point rating scale, where managers invariably use a combination of 3's and 4's to bail themselves out of tough conversations with average employees (click through on the link to get my take). 

I like the 3-point scale better.  With that in mind, it was good to see Microsoft featured in the most recent print edition of Workforce Managment as having ripped out their 5-point rating scale and installed a 3-point scale.  From the article:

"Under that old system, Microsoft managers assigned current performance ratings of 0 to 5 in half-point increments based on a forced distribution.  Because current performance ratings not only determine annual salary increases but also come in to play when employees apply for another position with the company, the forced distribution approach was a sore spot.

"We also discovered the old system was not fully effective", Ritchie (Microsoft GM for Performance Management) notes.  Consequently, Microsoft trashed its 0 to 5 rating scale and adopted a three point "commitment" scale of "exceeded", "achieved" and "underperformed" with no forced distribution.

"Distribution under the new system is about what we expected," Richie reports.  In the last full cycle, 37 percent of employees received a rating of "exceeded", 58% received a rating of "achieved" and 5 percent were rated "underperformed".  The general rule is that the top group receives a merit increase that is 50% higher than average performers."

Of course, your problems don't end just because you move from a 5-point to 3-point scale.  You still have to have managers that can communicate the difference between a "meets" and an "exceeds", and the distribution of overall ratings can still be an issue. 

But you are taking the "Sometimes Exceeds" crutch away by moving to a 3-point scale, and that's worth the effort alone.

Comments

[Alan]

I believe that Managers, Directors and VP's can be effectively reviewed on a three-point scale, but non-management subordinates should all be reviewed on a five-point scale.

In doing so, reviewing managers need to learn how to be more effective, honest and realistic when they review their subordinates. If they can't do it effectively, then they shouldn't be in a management position in the first place.

I've seen too many reviewing managers give all 4's and 5's to their subordinates in order to either please them or not rock the boat. This does nothing for the subordinate except raise the subordinate's expectations to receive a large increase and create problems down the road if disciplinary issues arise and the first thing attorneys see when looking at an employee's file is a history of reviews where the employee was scored unrealistically high from year to year. That could cost the company dearly.

Reviewing Managers need to be honest and fair when reviewing subordinates. An honest assessment plus realistic, measurable goals for the upcoming year is the only way to truly review your employees. Going to a three-point system for all employees bails out your reviewing managers as well as the subordinates they are supposed to review.

All reviewing managers need appraisal training so they can all possess the same scoring logic. This consistency factor prevents some managers from giving mostly 5's while others give mostly 3's. If done correctly, appraisals can be a very valuable tool for both the employee as well as for the organization and will benefit all who partake in the process.

[Ed]

I'm a big believer in the 3 point rating scale and have been encouraging its use for many years Appraisers don't embarrass themselves trying to explain the difference between a "3" and a "4".

[Soundar]

Irrespective of whether you use 5 or 3 scale, as leaders if we do the assessement more objectively giving specific, honest and timely feedback with an intention of helping the employee to make improvements and progress, it would be the best way to deal with performance management. Very often, people tend to get skewed towards the higher side for a 'good feel' employee and end up not differentiating between performer and non-performers resulting in both ending as non-performers.

Genuinely given objective feedback is liked and appreciated by many employees!