When I first started working, performance appraisals were closely linked with the term “normalization”. What we were told was that it was not just your absolute performance that mattered, what also mattered was relative performance vis a vis peers in the organization. You not only had to be good at your job, you also had to be better than others. To take an examination analogy, normalization is like the percentile system MBA Entrance exams in India follow as opposed to the absolute grading that say a GMAT exam follows. The idea behind normalization was that by force ranking peers and rewarding the best and in some cases penalizing / letting go of the ones at the bottom we would be rewarding our best talent and also improving the “average” performance levels in the organization. While in theory it seems logical, the implementation of normal curve brings in problems at a practical level:

1. It forces team players to compete with each other: The normal curve works well if all the team members are independently working on their tasks with no dependency on each other. However if the work is of collaborative nature, this causes a problem. To ensure that the team does its task, it is imperative for team members to teach and learn from each other – however in an environment where the sword of normalization hangs over all team members, there will be a tendency for team members to claim credit at the expense of others which in turn brings down trust in the team. Once trust falls, collaboration suffers which in turn impacts team performance which in turn leads to a blame game where every body starts blaming others for the problem which in turn leads to a further deterioration in trust and collaboration. Basically downward spiral ad infinitum.
2. Different skill sets may be lumped together: Normalization requires a cohort of 30 individuals. Many times smaller teams are merged into larger teams to achieve this 30 number and then a normalization is applied on this agglomeration of sub groups. The outcome in this case is never satisfactory.
3. Talent Levels Fall and Talent Risk Rises: Because its a “winner takes all” world, individuals generally ranked in the level right below the top performers will seek out other opportunities. When this happens the pressure for taking up the workload goes to the higher performers as replacements need time to be hired and come up to the level required. This in turn increases the load on the top performers which could lead to burnout. Alternatively it could make the company more dependent on the top performers and impact them negatively if they were to leave. The logic behind normalizing is to ensure that the top 20% can take care of 80% of outcomes – but this also implies putting most of your eggs in too few baskets.

Thankfully many companies are realizing the pitfalls of the model and are moving to a model where employees are measured on absolute levels and not on a relative basis. Reviews are also being done more frequently allowing employees and organisations to do appropriate course corrections. While this does certainly solve some of the problems associated with normalization, it also requires a rigorous goal setting exercise linked to the organizational goals. If the goal setting process is too dependent on the dynamics between the manager and the reportee then there is a chance that the goals may not be aligned with the organization and one may penalize / reward employees disproportionately. Another risk is that managers may be tempted to rate all employees as the same level knowing very well that this will probably minimize heartburn levels in the team. This in turn will lead to genuine high performers leaving for better opportunities. The organization also needs to have a clear view on the competencies required for each job, with clear and comprehensive learning and development paths that the employees can undertake to ensure that they can fulfill current job roles satisfactorily. In addition to this companies will also have to ensure that they have a robust career path for their employees along with an ecosystem that can help employees grow into roles of higher / different responsibilities.

If organizations get this right then we could see more happier workplaces that foster collaboration which will result in happier customers and wealthier shareholders. I am optimistic that this will happen!