Posted by: A.R. Cherian | October 15, 2009

Performance Evaluations at Arrow Electronics

A Harvard Business School case study that  I recently read dealt with how the CEO of Arrow Electronics dealt with an inflated performance review evaluation system (eval system).

Former CEO Steve Kaufman’s strategy for Arrow was to find the “right people for the right slots.” People were their biggest asset. He wanted to use the eval system as a data point when deciding things such as promotions, raises, and who to keep after acquisitions. What he found was that he could not distinguish between employees because the eval system was inflated – everybody received a 4 or 5 out of 5. Nobody received 1’s or 2’s.

In 1995, he sent the evals back to the managers for a re-do. He ordered a forced distribution telling managers the percentages of employees that should fall under each rating (forcing a bell curve). He said that every employee must receive a 2 on at least one of their seven areas of evaluation. No exceptions. Even the CEO himself had received 2’s on his evals from his board – therefore he knew that the system was inflated. This actually turned some of the managers minds around on the new system since they saw Kaufman leading by example.

What CEO Kaufman found was that it was really hard to deflate the eval system scores. There was a lot of discomfort in the company and managers were reluctant to give employees lower scores for many reasons.

This case underlined the problem of inflated performance reviews. Numerous companies have such systems that have become inflated for many reasons. Kaufman’s solution – the forced distribution – is one way that many companies try to deal with this problem. The problem is, as Kaufman correctly stated, “How do we get employees to understand that getting a low score is not punitive, but is critical in helping them identify areas where they need to improve?

One way that I have learned from my classes to remedy this (which will take tremendous effort) is to separate reviews based for pay from reviews based for performance. Make the separate performance reviews more periodic and use the separate performance reviews to clearly communicate how employees can improve.

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