Performance Management - HR Magazine

Does 360-Degree Feedback Negatively Affect Company Performance?

Studies show that 360-degree feedback may do more harm than good. What's the problem?

If we practiced medicine like we practice management—based on hunch, intuition and ideology—we would have much more malpractice and a lot of mortality and morbidity.

Ouch. Those are tough words from Dr. Jeffrey C. Pfeffer, professor of organizational behavior at Stanford University and a leader in management thinking, but they are on the mark. Too many organizations base their human resources investment decisions on tradition, fads or competitors’ practices, instead of on sound financial measures.

A perfect example of this phenomenon may be 360-degree feedback. Adopted by a growing number of organizations, 360-degree feedback is widely accepted as an effective performance management tool.

However, new research shows that 360-degree feedback programs may hurt more than they help. Watson Wyatt’s 2001 Human Capital Index (HCI), an ongoing study of the linkages between specific HR practices and shareholder value at 750 large, publicly traded companies, found that 360-degree feedback programs were associated with a 10.6 percent decrease in shareholder value.

That doesn’t necessarily mean 360-degree feedback programs should be abandoned. But it does mean organizations should take a second look at their performance management programs to see if they are accomplishing what they are supposed to.

Popularity of 360-Degree Feedback

360-degree feedback is a performance appraisal approach that uses input from an employee’s supervisors, colleagues, subordinates—and, sometimes, even suppliers and customers. Most 360-degree feedback programs focus on the manager level and above.

The use of 360-degree feedback has grown dramatically in recent years. According to HR consulting firm William M. Mercer, 40 percent of companies used 360-degree feedback in 1995; by 2000, this figure jumped to 65 percent.

The premise behind 360-degree feedback is logical: The people who work most closely with an employee see that person’s behavior in settings and circumstances that a supervisor may not. And, in theory, the more complete the insight into an employee’s performance, the more likely he will understand what needs to be improved and how.

The theory is very promising. The reality, on the other hand, is another matter.

Watson Wyatt’s 2001 HCI report revealed that companies using 360-degree feedback have lower market value. According to the study, companies that use peer review have a market value that is 4.9 percent lower than similarly situated companies that don’t use peer review. Likewise, companies that allow employees to evaluate their managers are valued 5.7 percent lower than similar firms that don’t.

Taken together, these practices are associated with a 10.6 percent decline in shareholder value.

Voices of Doubt

The HCI study is not the only indicator that 360-degree feedback programs may be failing to match their promise. Researchers and formerly strong advocates of 360-degree feedback have begun to raise questions. Jai Ghorpade, a professor of management at San Diego State University, wrote in the Academy of Management Executive that, “while it delivers valuable feedback, the 360-degree concept has serious problems relating to privacy, validity and effectiveness.”

Ghorpade also reported that out of more than 600 feedback studies, one-third found improvements in performance, one-third reported decreases in performance and the rest reported no impact at all.

John Sullivan, professor of human resource management at San Francisco State University, says “there is no data showing that [360-degree feedback] actually improves productivity, increases retention, decreases grievances or is superior to forced ranking and standard performance appraisal systems. It sounds good, but there is no proof it works.”

Roots of the Problem

Why is 360-degree feedback failing to live up to its potential? For starters, giving effective appraisals is a difficult task. Unless everyone participating in a 360-degree program is trained in the art of giving and receiving feedback, the process can lead to uncertainty and conflict among team members.

Another issue is that there may be a gap between an organization’s business objectives and what 360-degree feedback programs measure. Typical 360-degree feedback programs assess competencies that are not directly related to business results or are so broad that they aren’t relevant to the average employee.

The time and cost associated with 360-degree feedback also are stumbling blocks. By trying to capture every nuance of a worker’s performance, many 360-degree feedback programs have become so complex that they require a much greater investment in time and money than they can return.

Another common problem: Reviewers and those being reviewed fail to follow up after feedback. When there are no consequences for poor performance—which often is the case with 360-degree reviews—performance won’t change.

Mend It, Don’t End It

Despite these drawbacks, there are good reasons not to give up on 360-degree feedback.

The process still holds the potential to deepen employees’ understanding of their own performance. And, it may be able to help companies create value by better aligning job performance with business strategy.

The question is this: Can 360-degree feedback be implemented in such a way that it achieves these benefits without negatively affecting the bottom line? Based on our analysis—and conversations with clients—we believe the following steps may help companies transform 360-degree feedback into a value creator, not destroyer.

• Implement 360-degree feedback for the right reasons. “The first thing you need to ask is why you’re doing it,” says Paul Rumely, a New York-based executive coach. If you can’t articulate a strong business case for a 360-degree feedback program, it should not be introduced.

Jeff Seretan, head of human resources for Barclay’s Global Investors, based in San Francisco, agrees. “You should not implement it unless you can show that it is solving a problem or adding value,” he says.

Barclay’s uses 360-degree feedback to provide senior executives with input on their management styles. “Our executives had minimal input into their leadership styles, so our goal was to address these information gaps,” Seretan explains.

• Assess the costs of the program. Employers must “assess the real burden they are placing on the organization by doing 360-degree feedback,” Seretan says. “If you don’t do it in a way that is targeted and strategic, you run the risk of value destruction.”

• Focus on business goals and strategy. Feedback should provide employees with insight into the skills they must develop to help the organization meet its goals.
• Do not rely solely on 360-degree feedback. Employees must receive regular, timely feedback about their day-to-day performance. “360-degree feedback is just one part of our approach,” Seretan says.

• Rumely likes to use 360-degree feedback as a baseline for a more in-depth look at an individual’s performance profile. “While I’ve yet to see a 360 that was inaccurate, often they can stand to be fleshed out a bit,” he says.

He recalls one 360-degree feedback assessment that made an employee “look like Mother Theresa.” The woman was very talented, he says, “but nobody walks on water like that. I conducted a series of personal interviews with the woman’s raters to follow-up. After the interviews, I had a much better view of her strengths and weaknesses.”

Additional interviews won’t always be necessary, but companies should consider using them in situations where they can help clarify the results of 360 feedback. Ultimately, the thing to remember is that 360 feedback is just one part of an overall performance management system.

• Get support at all levels of the organization. Make sure executives play a key, visible role. And, give line employees a voice in designing and implementing the program to ensure relevance and ownership. A 360-degree feedback program is doomed if HR is its only champion.

Train people in giving and receiving feedback. Companies that implement 360-degree feedback without first checking and developing managers’ feedback skills risk serious damage to teamwork and morale. Providing constructive feedback takes instruction, training and practice. While training individuals to give and receive feedback may temporarily increase the expense associated with 360-degree feedback programs, the gains will outweigh the higher costs as the feedback delivered to participants becomes more focused, targeting the behaviors most closely associated with value creation and destruction. Ultimately, the goal should be to create a culture in which individuals feel comfortable giving and receiving feedback—both positive and negative—on a real-time basis, rather than waiting for an annual review.

• Create an “action plan” for each employee based on the feedback. “Knowing what to do and not doing it doesn’t get you very far,” Pfeffer says.

Rumely recommends that individuals sit down with their managers and their subordinates and review scores. “They should present their scores and then ask, ‘Which ones do you think are the most critical to being as effective as possible, and what tactics are necessary to get there?’”

Companies should identify and enforce rewards and consequences for individuals related to their success in following their action plans. “If the program is just another add-on and not part of a scorecard, you’re kidding yourself,” Rumely says.

• Monitor implementation, ask for ideas for improvement and make adjustments. Companies don’t always get 360-degree feedback exactly right on the first try. By monitoring results, asking for feedback on the process and implementing changes based on the answers, companies may be able to put 360-degree feedback programs back on track.

  It also helps to continually benchmark results against the objective articulated at the outset. “For us, the test is not whether we have a program in place, it’s whether we got the desired result,” Seretan says.

• Recognize that 360-degree feedback is not a panacea. Just because an individual receives insight into his behavior doesn’t mean he can—or will—change it. Traditional performance management systems have struggled with this axiom for years, and it is naïve to think that 360-degree feedback programs will be significantly different.

Take Another Look

The findings about 360-degree feedback programs are eye-opening. The fact that they are associated with a decline in shareholder value should persuade HR managers to revisit their existing or planned 360-degree feedback programs.

The existence of such data also should force companies to ask themselves what they hope to gain from 360 reviews—or, for that matter, from any HR initiative they undertake. What is the potential return on investment (ROI)? How do ROI projections compare to actual performance? And, if expectations haven’t been met, what can be done to improve the effectiveness of these programs?

Implementing a successful 360-degree feedback program is akin to managing your own investment portfolio: You can come out ahead, but it takes work.

Bruce Pfau is the national practice leader for organization effectiveness at human capital consulting firm Watson Wyatt Worldwide; Ira Kay is Watson Wyatt’s national practice leader for compensation. Pfau and Kay are co-authors of The Human Capital Edge: 21 People Management Practices Your Company Must Implement (or Avoid) to Maximize Shareholder value (McGraw-Hill, February 2002).

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