Designing a team that would produce software of good quality: get rid of individual performance reviews
Published: 2022-11-02 13:14:04

Most companies practice individual performance reviews (also called [performance appraisals](https://en.wikipedia.org/wiki/Performance_appraisal)).

This practice is quite well-established even though 40 years management science concluded that this practice caused great damage to the teams in multiple areas.

I can only guess the reasons why the practice still exists: lack of knowledge and/or [sunk cost fallacy effect](https://rationalwiki.org/wiki/Sunk_cost).

> W. Edwards Deming condemned performance evaluations as a deadly disease afflicting American management. He argued that performance evaluations nourish fear, encourage short-term thinking, stifle teamwork, and are no better than lotteries.

This article is mostly focused on performance reviews’ detrimental effects on quality.

Teams have [emergent](https://en.wikipedia.org/wiki/Emergence) properties, only teams can produce value for the client.

There’s almost no value in producing _something_, companies prosper by producing _quality product_.

Quality demands effective [information flow](https://qase.io/blog/quality-and-information-loss-in-conversion/), the following team characteristics are required too:
- [Low turnover](https://qase.io/blog/quality-and-turnover/)
- [Constant learning](https://qase.io/blog/quality-knowledge-overlap/) from peers
- Common goal and [common interest in collaborative problem solving](https://qase.io/blog/quality-and-interest/)
- Focus on teamwork

All these properties are severely damaged by the individual performance review practice.

## Low turnover

**Individual performance review practice increases the turnover.**

The usual performance assessment is unavoidably subjective:
- the assessee in self-presenting their results for a certain period of time
- the assessor in assessing the presented results

The assessee compiles their self-assessment based on their subjective understanding of the achieved results.

Assessee’s judgement is clouded even more by a spectrum of biases, from [Dunning-Krueger effect](https://rationalwiki.org/wiki/Dunning–Kruger_effect) to [Impostor Syndrome](https://en.wikipedia.org/wiki/Impostor_syndrome).

**NB:** Rationalwiki.org lists [~90 well-studied cognitive biases](https://rationalwiki.org/wiki/List_of_cognitive_biases) which affect human behaviour, cognition, thinking and decision-making.

**NB:** People are also almost [unaware of the strength of the biases’ effect](https://www.sciencedirect.com/science/article/abs/pii/S0191886919302156).

The assessor’s reads the compiled self-assessment and rates the results subjectively too.

Assessor’s judgement is clouded even more by a great number of biases, from [Halo effect](https://www.theknowledge.io/halo-effect/) to [Central tendency bias](https://www.statology.org/central-tendency-bias/).

**The longer the assessment period, the more clouded, subjective and biased both the assessee’s and the assessor’s judgement is**.

Human memory is full of wonders, events are not _stored and retrieved_ precisely and accurately, but [_lived through_ and _changed_ every time a person recalls something](https://psycnet.apa.org/record/2000-00111-001).

There’s a separate list of [memory biases](https://nesslabs.com/memory-bias), effects which not only _cloud_ the recalled event, but sometimes _change_ it quite significantly:

> **Rosy retrospection bias**. We tend to remember the past as having been better than it really was, which leads to judging the past disproportionately more positively than we judge the present. As the Romans said: memoria praeteritorum bonorum, or “the past is always well remembered.”
>
> **Consistency bias**. We incorrectly remember our past attitudes and behaviour as resembling our present attitudes and behaviour, so we feel like acting in accordance with our general self-image.
>
> **Mood-congruent memory bias**. We better recall memories that are consistent with our current mood. For instance, feeling relaxed may bring back relaxing memories; feeling stressed may bring back stressful memories.
>
> **Hindsight bias**. We have an inclination to consider past events as being predictable—also called the knew-it-all-along bias.
>
> **Egocentric bias**. We recall the past in a self-serving manner, such as remembering our exam grades as being better than they really were, or remembering a caught fish as bigger than it was.
>
> **Availability bias**. We often think that memories that come readily to mind are more representative than is actually the case. This is why people tend to overestimate the likelihood of attacks by sharks or the number of lottery winners.
>
> **Recency effect**. We best remember the most recently presented information. At a trial, evidence presented last may be the clearest in the juror’s memory.
>
> **Choice-supportive bias**. We remember chosen options as having been better than rejected options.
>
> **Fading affect bias**. Our emotions associated with unpleasant memories fades more quickly than our emotions associated with pleasant memories.
>
> **Confirmation bias**. Our tendency to seek and interpret memories in a way that confirms our prior hypotheses or personal beliefs.

To sum it up:
- **the assessee** only _believes_ they recalled something right (the longer period, the worse)
- this _belief_ is clouded even more by **the assessee**’s self-esteem-related and other personality biases
- **the assessor** perceives the result and tries matching it with **their** clouded recollection of the events (_beliefs_, essentially)
- the matching process is clouded even more by **the assessor**’s biases

It’s almost as if an unknown amount of noise is applied to a signal a few times, where the signal is the event in the assessment, and noise is all the recollection/reformulation/comparison process in the assessee’s and assessor’s brains.

![signal-noise image](https://d36r73waboa44k.cloudfront.net/2022/10/signal-noise.png)

**Does it make any sense to conclude anything based on a result with completely unknown signal-noise ratio?**

[Studies](https://www.emerald.com/insight/content/doi/10.1108/14502191211265334/full/html) prove this subjectivism often triggers the feeling of unfairness: the assessee thinks the assessor’s judgement is _unfair_:

> They [assessments] are in many cases perceived as being procedurally unfair in terms of the Folger and Bies (1989) criteria. Inadequate consideration is given to employee views; there is evidence of bias, inconsistency, poorly justified feedback and a lack of honesty in the process.
>
> Our research confirms findings that the appraisal reinforces power relationships and is often perceived as being open to abuse
>
> Dissatisfaction with processes and the resulting distributive justice had a negative impact on employee perceptions of fairness and could act as a barrier to organizational effectiveness

[Another study once again proves](https://www.researchgate.net/publication/242023658_Satisfaction_with_performance_appraisal_systems_A_study_of_role_perceptions) that people are all different, their memory and judgement is affected by biases _differently_, and that there’s almost no way the assessee’s judgement of their work and effort will match the assessor’s judgement.

> Judgements about fairness can only ever be based on an individual’s expectations

Adding to this, people irrationally compare results from the current assessment with the previous ones, as [this study shows](https://www.researchgate.net/publication/242023658_Satisfaction_with_performance_appraisal_systems_A_study_of_role_perceptions):

> Expectations about performance marks, and the comparison of those marks with the previous year, had a very strong influence over levels of satisfaction.

Multiple studies explore the detrimental effects unfairness causes on the productivity, such as this [cross-cultural one](https://www.tandfonline.com/doi/abs/10.1080/01900692.2021.2009854?journalCode=lpad20):

> Our results revealed that both unfairness approaches (OJ and ERI) were positively related to job-burnout and turnover intention

It makes perfect sense: as performance reviews make people feel that their efforts and results are judged unfairly, the motivation drops and they might consider leaving.

The situation gets much worse if pay rise is tied to performance reviews.

It’s a well-known fact that in most companies [newjoiners negotiate higher salaries](https://fortune.com/2019/12/09/companies-not-giving-raises-but-hiring-new-employees-high-paying-jobs/) compared to existing employees.

Perceived judgement unfairness in this situation is even stronger — employees might even feel that the whole practice is established to persuade them in their knowledge and skills inferiority and postpone pay rise.

**[Loss of interest and motivation](https://qase.io/blog/quality-and-interest/), similarly to [increased turnover](https://qase.io/blog/quality-and-turnover/), have detrimental effects on quality.**

## Focus on teamwork

In case the employee is somehow still motivated to stay and work in the company, performance reviews’ focus on _individual contribution_ will shift employee’s focus from collaborative team work to achieving what’s exactly measured.

Good bye teamwork, hello [Goodhart’s law](https://en.wikipedia.org/wiki/Goodhart%27s_law):

> When a measure becomes a target, it ceases to be a good measure
>
> Every measure which becomes a target becomes a bad measure – is inexorably, if ruefully, becoming recognized as one of the overriding laws of our times. Ruefully, for this law of the unintended consequence seems so inescapable. But it does so, I suggest, because it is the inevitable corollary of that invention of modernity: accountability

As soon as the employee is focused on improving the individual contribution measured in the assessment, quality decreases because:
- the employee loses the motivation to help others, to teach and learn
- the employee focuses only on what’s measured

While, as Dr. Deming says:

> the most important figures that one needs for management are unknown or unknowable, but successful management must nevertheless take account of them.

All the effort managers and employees spend on executing the practice is _waste_, it simply could be spent on improving the system.

There’s a beautiful thought experiment illustrating Dr. Deming’s ‘95/5 rule’:

> “95% of variation in the performance of a system is caused by the system itself; only 5% is caused by the people.”

{% embed https://www.youtube.com/watch?v=ckBfbvOXDvU %}

The original goal of the individual performance reviews was to boost the teams productivity and yet the practice:
- focuses on individuals, reducing the teams to mere groups of competing individuals
- generates stress for everyone
- negatively impacts motivation and interest
- increases turnover
- brings the feeling of unfairness
- focuses people on what’s measured, distorting the system
- simply wastes money

Samantha Evans and Dennis Tourish beautifully coined this in their study ‘[Agency theory and performance appraisal: How bad theory damages learning and contributes to bad management practice](https://journals.sagepub.com/doi/full/10.1177/1350507616672736)’:

> conventional appraisals prioritise hierarchy over intrinsic motivation, distrust over trust, and the importance of individual effort over that of building sustainable, co-operative systems.

**References**:

- [Agency theory and performance appraisal: How bad theory damages learning and contributes to bad management practice](https://journals.sagepub.com/doi/full/10.1177/1350507616672736)
- [Conflict between theory and practice: TQM and performance appraisal](https://www.emerald.com/insight/content/doi/10.1108/02656710510617238/full/html)
- [Performance evaluation: A deadly disease?](https://www.sciencedirect.com/science/article/abs/pii/0099133394900086)
- [The Team Handbook Third Edition 3rd (third) Edition by Scholtes, Peter R, Joiner, Brian L., Streibel, Barbara J published by Oriel Inc (2003)](https://www.amazon.com/gp/product/B00E28QA1Y/ref=dbs_a_def_rwt_hsch_vapi_taft_p1_i2)
- [Sunk cost fallacy effect](https://rationalwiki.org/wiki/Sunk_cost)
- [Unpacking the notion of subjectivity: Performance evaluation and supervisor discretion](https://www.narbonbd.com/download/UNPACKING_THE_NOTION_OF_SUBJECTIVITY.pdf)
- [Determinants and Effects of Subjectivity in Incentives](https://www.researchgate.net/publication/228178666_Determinants_and_Effects_of_Subjectivity_in_Incentives)
- [Exploring the emergent quality management paradigm](https://www.tandfonline.com/doi/pdf/10.1080/14783363.2019.1591946)
- [The Effects of Conflict Types, Dimensions, and Emergent States on Group Outcomes](https://pure.uva.nl/ws/files/4352303/60410_greer5.pdf)
- [Ties, Leaders, and Time in Teams: Strong inference about network structure's effects on team viability and performance](https://psycnet.apa.org/record/2006-12062-001)
- [The Set-Up-To-Fail Syndrome](https://hbr.org/1998/03/the-set-up-to-fail-syndrome)
- [A Closer Look at Halo Error in Performance Ratings](https://www.jstor.org/stable/256068)
- [Subjectivity in fairness perceptions: How heuristics and self-efficacy shape the fairness expectations and perceptions of organisational newcomers](https://iaap-journals.onlinelibrary.wiley.com/doi/abs/10.1111/apps.12313)
- [When Everyone Works Harder for Fewer Rewards, Is It Fair? Implications of “Organization-Wide Hardship” for Managing and Studying Organizational Fairness](https://journals.sagepub.com/doi/10.1177/1059601119837045)
- [MAPS OF BOUNDED RATIONALITY: A PERSPECTIVE ON INTUITIVE JUDGMENT AND CHOICE](https://www.nobelprize.org/uploads/2018/06/kahnemann-lecture.pdf)
- [Prejudiced and unaware of it: Evidence for the Dunning-Kruger model in the domains of racism and sexism](https://www.sciencedirect.com/science/article/abs/pii/S0191886919302156)
- [The Effects of Acute Stress on Performance: Implications for Health Professions Education](https://journals.lww.com/academicmedicine/fulltext/2009/10001/the_effects_of_acute_stress_on_performance_.8.aspx)
- [An exploratory analysis of salesperson perceptions of the criteria used in performance appraisals, job satisfaction and organizational commitment.](https://psycnet.apa.org/record/2001-14774-001)
- [AN EXPLORATORY ASSESSMENT OF THE PURPOSES OF PERFORMANCE APPRAISALS IN NORTH AND CENTRAL AMERICA AND THE PACIFIC RIM](https://sci-hub.hkvisa.net/10.1002/hrm.10021)
- [Organizational justice and performance: is appraisal fair?](https://www.emerald.com/insight/content/doi/10.1108/14502191211265334/full/html)
- [Satisfaction with performance appraisal systems: A study of role perceptions](https://www.researchgate.net/publication/242023658_Satisfaction_with_performance_appraisal_systems_A_study_of_role_perceptions)
- [A brief history of memory research](https://psycnet.apa.org/record/2000-00111-001)
- [Unfairness and Stress—An Examination of Two Alternative Models: Organizational-Justice and Effort–Reward Imbalance](https://www.tandfonline.com/doi/abs/10.1080/01900692.2021.2009854?journalCode=lpad20)
- [Performance appraisal: Stressful for some.](https://www.anzam.org/wp-content/uploads/pdf-manager/2356_CARTER_GEOFF_HRM-56.PDF)