GE Had to Kill Its Annual Performance Reviews After More Than Three Decades

The annual performance review has been a ubiquitous and generally loathed fixture of the corporate world for decades. But haters can rejoice: It’s finally starting to topple. The best part? Even the company that popularized the toughest form of formal annual review is moving away from them.

For decades, General Electric practiced (and proselytized) a rigid system, championed by then-CEO Jack Welch, of ranking employees. Formally known as the “vitality curve” but frequently called “rank and yank,” the system hinged on the annual performance review, and boiled the employees’ performance down to a number on which they were judged and ranked against peers. A bottom percentage (10% in GE’s case) of underperformers were then fired.

The company got rid of formal, forced ranking around 10 years ago. But now, GE’s in the middle of a far bigger shift. It’s abandoning formal annual reviews and its legacy performance management system for its 300,000-strong workforce over the next couple of years, instead opting for a less regimented system of more frequent feedback via an app. For some employees, in smaller experimental groups, there won’t be any numerical rankings whatsoever.

With the decision, GE joins other high-profile companies—like Microsoft, Accenture, and Adobe—that have started dumping or have already gotten rid of formal annual reviews. GE may not have invented stack ranking, but it’s the company most identified with it. And given the longstanding and pervasive influence GE has had over the business world, its move could represent the beginning of the end for a practice that has been at the heart of how corporations have managed people for many decades.

“It existed in more or less the same form since I started at the company in 1979,” GE’s head of human resources, Susan Peters, tells Quartz. “But we think over many years it had become more a ritual than moving the company upwards and forwards.”

A century old icon, shifting rapidly

There are few companies in America that have General Electric’s legacy. Founded by no less than the great inventor Thomas Edison, it’s well into its second century of existence. Its move to dump the annual review for large swathes of its workforce underscores a sweeping shift underway at the blue-chip conglomerate. It’s selling off billion-dollar pieces of the lucrative financing business that imperiled it during the 2008 crisis and led to a “too big to fail” designation. It’s fundamentally restructuring to refocus on its increasingly high tech and industrial businesses, emphasizing things like power and water infrastructure, advanced jet turbines and imaging equipment. By the end of the transition, industrial businesses will provide over 90% of earnings(PDF), and the only lending the company will do will be to customers buying industrial machinery.

It’s made broad changes in its management style too, under current CEO Jeff Immelt. They mark an emphatic break from the hard-charging style Welch embodied as CEO from 1981 to 2001. Welch’s intense and widely imitated approach made sense for the GE of yesteryear. It was a bloated industrial conglomerate that was facing extraordinary competition from Asian manufacturers. In 1994—near the mid-point of Welch’s tenure—nearly 60% of GE sales came from a vast number of industrial businesses that were becoming increasingly commoditized. That economic reality led to obsessions with cost, efficiency, and operational excellence, which were embodied in Welch’s management style.

Welch’s rapid cost cutting and wholesale reorganization of the company led to the nickname “Neutron Jack.” The company’s value increased by more than $300 billion during his reign, making it the world’s largest at one point. Fortune Magazine dubbed him the “manager of the century”in 1999. Along with its rank and yank policy, GE also subscribed to Six Sigma, a manufacturing quality protocol that worked to ruthlessly boost quality control and eliminate mistakes. Welch was a believer in confrontation, in “brutal candor,” in argument, and in pushing people extremely hard. In a lot of ways, he ran the company by sheer force of will and personality.

Welch’s approach to management made him a legend at GE and American business schools. Parts of his legacy remain at GE, particularly his insistence that managers be given ownership of their businesses. But his style and focus on the annual performance review simply doesn’t work for the company or its younger workforce any more, say GE human resources executives.

“The world isn’t really on an annual cycle anymore for anything.” Peters told Quartz. “I think some of it to be really honest is millennial based. It’s the way millennials are used to working and getting feedback, which is more frequent, faster, mobile-enabled, so there were multiple drivers that said it’s time to make this big change.”

She’s not the only one who thinks so. There’s a growing realization that the annual review just isn’t a particularly good way to manage people or to boost performance. It leads to a tendency for HR to focus excessively on process over outcomes.

“When you think of the leadership association people have with Jack Welch and the ranking and rating, it suited a certain time, it does not suit today and today’s worker in my opinion,” Adobe HR head Donna Morris, who led that company’s transition away from annual reviews and ratings, told Quartz. “It’s a process that looks in the rear view mirror, that’s focused on what you’ve done a year ago. That just isn’t current with how I think we’re working and how many of the employees that we’re looking to attract or grow have been raised.”

Welch doesn’t comment on current GE practices. But as recently as 2013, he defended the bell curve in The Wall Street Journal (paywall). He argues that “rank and yank” is a pejorative term, and prefers to call it “differentiation.” But he argues forcefully that candid appraisal of employees is essential, that they need to know exactly where they stand in an organization, and that with constant communication and feedback, it isn’t as harsh as people make it out to be.

“Yes, I realize that some believe the bell-curve aspect of differentiation is ‘cruel,'” Welch wrote. “That always strikes me as odd. We grade children in school, often as young as 9 or 10, and no one calls that cruel. But somehow adults can’t take it? Explain that one to me.”

Of course, that discounts the often highly negative experiences of employees of some companies that took up the practice.

From “The Pit” to mindfulness training

The changes are palpable at GE’s legendary Crotonville management training center, the leafy campus in upstate New York where the company has sent up-and-coming executives since 1957. The heart of Crotonville was always “the Pit,” the largest of several imposing lecture halls where Welch used to deliver his passionate, hours-long speeches, during which he expected managers to challenge him, only to push them right back. The company recently cut an enormous window into the formerly nearly subterranean Pit. It’s trying to make the place more modern, friendly, welcoming, and open.

The campus is also getting new buildings. One includes a studio where executives are taught suminagashi, the Japanese art of painting on water. There’s a new two-sided kitchen, built in a renovated carriage house, that was used to hold cooking competitions until a tendency towards overcompetetiveness led to some modifications. A once clubby English-style pub at the center of campus in a converted farmhouse called “The White House” is now an airy cafe and meeting space serving craft coffee. Instead of drills on Six Sigma, executives can now take courses on mindfulness. A string quartet and improv sessions are used to prompt discussion about teamwork.

It’s just about the opposite of what you’d expect if you went by one of Welch’s bestsellers or NBC sitcom 30 Rock‘s parody of the place, which characterized two of the core “Six Sigma” values of the company asbrutality and “hand-shake-fulness.”

Raghu Krishnamoorthy, the longtime GE exec in charge of Crotonville, sees the programs he runs there as essential to helping transition the company from management by process and rigid bell curve to management enabled by mobile phones for a new generation of employees who have different expectations. The last generation of workers expected and were often motivated by competition. That’s not really the case any more, he says.

“Command and control is what Jack was famous for. Now it’s about connection and inspiration,” Krishnamoorthy recently told a group of HR executives at a conference at the campus. “In fact, we’re repurposing the mission of Crotonville as a place where we inspire connection and develop people.”

Management via app

The new app is called “PD@GE” for “performance development at GE” by the admittedly acronym-happy company, and was built by a team from its large and growing group of software engineers in Silicon Valley’s San Ramon. The HR group has been one of the first to adopt it, including the experiment with no numerical ratings.

Each employee has a series of near-term goals, or “priorities.” Managers are expected to have frequent discussions, called “touchpoints,” on progress toward those goals and note what was discussed, committed to, and resolved. The app can provide summaries on command, through typed notes, photographs of a notepad, or even voice recordings. The focus isn’t on grading how well people are doing, but on constant improvement.

Employees can give or request feedback at any point through a feature called “insights,” which isn’t limited to their immediate manager, or even their division. Normally, you never get that feedback unless you manage to track someone down the next day, which people rarely do, and only from a direct manager. If you wait for an annual review, any specifics are probably long forgotten.

“This allows me to ensure that I’m in a position to change tomorrrow ,” Krishnamoorthy says, pointing at the app. “But this is just the tool. The most important thing is the conversation. [The app] makes it incumbent on me to be a coach.”

There’s an emphasis on coaching throughout, and the tone is unrelentingly positive. The app forces users to categorize feedback in one of two forms: To continue doing something, or to consider changing something.

“We’ve found that that terminology has been extremely helpful,” Peters says. “You know that humans don’t really like to give negative feedback, it’s just not something that anybody does well, I think it’s just not in human nature. So if you want the person that’s working for you to improve, you have to think about it in true coaching terms.”

Managers will still have an annual summary conversation with employees around December where they look back at the year and set goals, but it’s far less consequential and fraught than the formal review the company is replacing. It’s not meant to be all that different from the conversations expected to occur throughout the year, and entirely unlike the sort of formal review that sets decisions on things like pay or advancement.

The rollout is going to be slow. There are about 25,000 to 30,000 people using the new system now, and Peters estimates there will be 80,000 on board by the end of this year. The rest will transition by the end of 2016.

The shift in how GE employees think about and track their performance mirrors the broader transition underway at the company to substantially simplify its business. “FastWorks” is a successor in many ways to Six Sigma and consciously mimics the way that companies in Silicon Valley work. There’s a focus on rapid and frequent experimentation, learning from the market, only funding projects that prove themselves, and acceptance and willingness to move on from failures.

“It is a really important element of what we’re trying to do, which is to make a major shift of the company’s culture towards simplification, towards better, faster outcomes for customers,” Peters says.

A long time coming

The move by more and larger companies away from annual reviews and ratings is well past due, say management theorists. Years of research, from both business school professors and neuroscientists, has found that the practice is ineffective at boosting performance, actively alienates employees, is based on a flawed understanding of human motivation, and is often arbitrary and biased. People simply don’t fit neatly (pdf) on a bell curve. It ends up being an exercise in paperwork and bureaucracy instead of an agent of change.

“When you look at the evidence about stack ranking…. The kind of stuff that they were doing, which was essentially creating a bigger distribution between the haves and the have nots in their workforce, then firing 10% of them, it just amazed me,” Bob Sutton, a professor at Stanford’s Graduate School of Business told Quartz. “We looked at every peer reviewed study we could find, and in every one when there was a bigger difference between the pay at of the people at the bottom and the top there was worse performance.”

As much as researchers and many employees might applaud the decision, it doesn’t mean it’s going to be easy. There’s a reason reviews have stuck around for so long, and it’s hard to overemphasize how entrenched the annual review has become. It’s the way most were raised as employees, a huge part of their workload, and a comfortable framework to administer and to defend pay, promotion, and firing decisions. Adobe’s Morris says that one of her biggest obstacles was actually convincing her own people that this could work.

Even if companies claim loudly that they’ve done away with annual reviews and rankings, there are often “shadow rankings,” where companies still do effectively the same thing, but more informally, in the background. Meanwhile, HR executives get particularly nervous about the pay piece, about how they can pay for performance in the absence of a formal performance measurement system.

“If you get rid of the performance ratings, how are you going to get rid of a fair and equitable and measurable system to blame the distribution of pay on?” Paul Rubinstein, a partner in Aon Hewitt’s talent strategy consultancy asks, rhetorically. “Because why did performance ratings come into existence? So there’s some mechanism to force pay decisions. People wonder, which came first the rating or the pay decision.”

Support and training on how to make pay decisions without rankings has taken a lot of investment at Adobe, Morris says. Even within GE, there’s still a sense of conflict, which might help explain why the company seems hesitant to fully commit to removing numerical rankings.

“One thing we do know is that we will maintain our culture of meritocracy and differentiation,” Peters says. “So we have to make sure what ever other aspects or factors come into play, to make sure you still have that. We’re trying to figure this out and keep some of the fundamentals of the culture and also move to a place where it’s more contemporary. I don’t know what the answer on that’s going to be yet.”

In early pilots, the company saw no difference in pay differentiation when managers didn’t use ratings. But it has a lot of people to convince of that, so different pilot groups will continue doing different things until there’s more longitudinal data.

The harshest critics of performance reviews and ratings argue that numerical rankings and pay differentiation are perhaps the most damaging parts of the system, and that any regime that preserves them can’t hope to truly change. And many companies like the idea of getting rid of reviews and rankings, but struggle to follow through.

If GE has one thing going for it, it’s a uniquely deep bench of management talent, and a culture that emphasizes constant improvement and helping other people succeed. That made stack ranking less harmful at GE than it was at other companies, according to Bob Sutton, and it might help it overcome the rockier parts of the transition.

“Although Jack believed in it like a religion, I think that they figured out [stack ranking] was something that didn’t work, that was faith based,” Sutton says. “One thing I will give them credit for, going back to Jack and continuing to today, is that they’ve clearly defined a star employee as someone who does great work and who helps others succeed as well.”

(Image via Bocman1973 / Shutterstock.com )