We’re on the brink of major disruption as businesses overhaul their performance management processes, which in most cases have been around for decades. Already 10% of Fortune 500 companies have done away with the annual performance review, according to Cliff Stevenson, a senior research analyst for the Institute for Corporate Productivity. At BetterWorks, we’ve seen firsthand why this is only the beginning of an entire industry ready for a change.

We predict that 50% of F500 companies will kill annual rankings by early 2017, and replace these systems with a continuous feedback model. Ratings and rankings boil the progress of people—your company’s greatest asset—down to a number. Most disagree with their categorization, which completely demotivates them at work. In fact, Cornell psychologist David Dunning has studied a phenomenon known as “illusory superiority” for decades, and has found that most people think they’re better than their peers across many arenas, from good looks to work performance. When workers assume they’re above average at their job, and you deploy ratings and rankings as the tool to give them an objective version of the harsh reality, it’s entirely demotivating.

To create the first edition of the quarterly Performance Management Watch, we’ve sifted through data, research and even Glassdoor profiles to boil it down to everything you need to know about what’s happening – and what’s on the horizon – in the performance management landscape.

Let’s critically examine the state of the workplace to discover the viable options that are soon to take its place. You can also learn valuable lessons from the organizations that are on the forefront of driving major change and disrupting performance management altogether.

Five Driving Forces

There’s a fairly consistent vibe when it comes to why organizations are ditching old performance management systems. Simply put, employees deserve more. The feedback from BetterWorks customers and prospects is consistent with much of the research and employee surveys completed to date. Here are the top driving forces:

Demand for frequent feedback. Annual reviews aren’t enough to feed the demand for continuous feedback. 42% of Millennials—now the largest share of the U.S. workforce – want weekly feedback on their performance. You wouldn’t expect Fitbit to only provide your step count once a year. There would be no real behavior change. The reason Fitbit users take 43% more steps than non Fitbit users is because they see their progress—or lack thereof—in real time and can make changes to take more steps, or get more exercise, immediately.

Be agile, or risk getting beat by the competition. Think about how innovative Honeywell was, until Nest came along. Entirely new concepts are being threatened by even newer, more innovative concepts. Unless teams can react with enough agility to implement new ideas, they will be left in the dust.

No room for coaching. The role of the manager is evolving. Out with the task-masters (we have software for that), in with coaching methodology that actually helps workers improve their skillsets. 

Biases impact the performance discussion. Performance appraisals bring about several biases that can seem unavoidable from the employee’s perspective. For example, the halo effect might help one employee be seen in a positive light across the board because she is really great in one area. Contrast bias occurs when a manager compares an employee’s performance to his peers instead of the company standard. Managers can also hold a bias based on only reviewing an employee’s most recent behavior, even if they’ve previously had a stellar (or awful) track record.

Transparency is the new norm. 88% prefer a collaborative work culture rather than a competitive one. Transparency and openness drive collaboration, and rankings/ratings/annual reviews drive competition.

Seven Trendsetters

Google search “performance review” and the first ten pages are filled with news reports on the latest companies to declare themselves “annual review” free. But what’s happening next? We’d argue that it’s better for employees to have an annual review, than no review at all. We’ve identified and defined seven businesses as “trendsetters,” and summarized the lessons learned from each of them. These trendsetters are an inspiration to us all, especially the 50% of the Fortune 500 we predict will be following suite in the next 36 months.

  1. General Electric. GE’s performance management overhaul is especially unique because of its long history with a rank and yank model. The company is also the highest-ranking Fortune 500 company on our list of trendsetters to undergo such a bold revamp of its performance management process. In the past, GE managers would meet with employees once a year and let go of the bottom-ranked 10%. GE’s new process will enable managers to regularly coach and provide feedback to employees to help them meet their career goals.
  2. Cargill Inc. The Minneapolis-based food producer and distributor has 155,000 employees across the globe and introduced its “Everyday Performance Management” system back in 2012. Since then, the company has been working to integrate daily encouragement and feedback by supporting regular performance conversations™. It has experienced a breakthrough year in 2015, with managers and employees reporting a shift in mindset and attitude. The company has successfully changed its processes from reviewing the past to thinking about what to do better in the future.
  3. Eli Lilly. Eli Lilly has always held progressive standards when its come to offering unique HR benefits, including job sharing and family assistance, unlike most other companies of its size. Recently, the ninth largest grossing pharmaceutical company went public with its recommended best practices for transforming performance management at the NeuroLeadership Institute’s annual summit. According to Eli Lilly’s Senior VP of HR and Diversity Steve Fry, the new process “empowers employees to take initiative and voice their ideas, and also strengthens the partnership between supervisors and employees.
  4. Adobe. Adobe has one of the most talked about performance management revamps because the company has already published statistics that prove how great of an impact feedback and check-ins can have on your bottom line. Adobe’s SVP for People and Places Donna Morris has gone on record to say Adobe has experienced 30% less employee turnover with a frequent check-in program, and involuntary departures have increased by 50% because the new system “requires executives and managers to have regular ‘tough discussions’ with employees who are struggling with performance issues—rather than putting them off until the next performance review cycle comes around.”
  5. Medtronic. Well ahead of the curve, the world’s largest standalone medical technology development company launched a total employee engagement campaign 5 years ago. The company believes employee engagement and retention are directly correlated with corporate financial performance. Through this new performance management lens, they’re on the forefront of solving some of the big retention and company culture issues large organizations are prone to experiencing.
  6. Accenture. New to the performance management revolution game, but moving very swiftly, is Accenture. The company’s CEO Pierre Nanterme told Washington Post how its team plans to quietly revamp 90% of its old methodologies with a new process, beginning in September 2015. Part of this process included building a proprietary app to solve for performance discussion problems. 
  7. Google. Untraditional performance management has been a part of Google’s DNA since day one. More than a decade ago, KPCB’s John Doerr introduced a new style of goal setting, OKRs, to Google (from Intel). To this day Googlers rely on this performance management philosophy to coach employees towards creating and achieving their goals.

With 10% or more of the F500, plus hundreds of others, revamping their performance management processes, there are dozens of other trendsetters. Others to watch include GoPro, Instructure, Intuit, Disney, IBM, Microsoft, Gap, Netflix, Dell and REI.

Where is Performance Management Headed?

While the abandonment of stiff annual reviews and rank and yank systems may be on the fast track to becoming the norm, the challenges to implementing better performance management best practices and technologies are imminent. We can take direction from the companies who have successfully found a replacement for old performance management systems. They’re already proving how important individualized coaching, agile management and goal setting are to the growth and success of a company.

If all seven trendsetters have one thing in common, it’s this: they want to help employees be more successful. Yet as it stands, companies spend a significant amount of time on evaluation, but very little on development. In the words of Google’s VP of People Analytics and Compensation, Prasad Setty, “Traditional performance management systems make a big mistake. They combine two things that should be completely separate: performance evaluation and people development. Evaluation is necessary to distribute finite resources, like salary increases or bonus dollars. Development is just as necessary so people grow and improve.” His colleague Laszlo Bock, ‎SVP of People Operations at Google and author of Work Rules!, agrees and says “if you want people to grow, don’t have those two conversations (performance development™ and evaluation) at the same time. Make development a constant back and forth between you and your team members, rather than a year end surprise.”

The disruption we’re seeing in performance management might still be invisible to the naked eye, but that’s about to all change as formal processes around coaching and developing individuals to become even better at their jobs are put in place. The future of performance management will include continuous feedback and development, recognition for achievements, agile goal setting and managers taking on the role of coaches in the workplace. In the next edition of Performance Watch, we’ll dive into how the top F500 businesses are balancing performance development and evaluations to change the future of management. As we focus on developing employees, they’ll become empowered to come up with even greater ideas—and that’s a win-win for us all.

What is performance management?

Performance management is intentionally creating the type of business culture that will allow employees to perform to the best of their abilities. It also includes the interactions between employees and the management team during the different stages of a project or a task.

Performance management ensures goals are met and that projects end with a positive result. It can be used company-wide, but some team leaders may utilize it for a particular department or project.

What aspects are an important part of performance management?

Most companies can agree that performance management revolves around the achievement of goals. Evaluations are also a necessary part of the process, as well as actionable plans that emerge as a result.

Since performance management is key in a company’s success, it may also focus on employee engagement, retention, and working environments. All work as part of a whole to create successful outcomes.

Is performance management on the way out?

A good portion of companies who tried to reduce the time spent on performance management have already reversed their decision. And the answer why is simple.

Managing performance is one of the few ways to monitor the relationships between leaders and their team, as well as overall productivity and time management. This is why performance management will continue to be important for company evaluations.