Performance Feedback Culture Drives Business Impact

Performance Feedback Culture (PFC) creates the necessary environment that determines whether managers feel compelled to deliver high-quality performance feedback to employees. PFC is established and nurtured by company practices that focus managers’ attention on doing performance feedback effectively:

• regular and varied communication,
  
• training on how to do it well,
  
• modeling by senior executives in how they do it for their subordinates,
  
• rewards and recognition for doing it well,
  
• monitoring getting it done, and
  
• manager selection and promotion based on excellent performance feedback competencies.
  

When these practices are in place, managers know that the organization values high-quality performance conversations—and they have them; our evidence shows that positive organizational results follow.

Our study produced three primary conclusions.

1. Performance feedback culture (PFC) has strong effects on organizational financial success in addition to other positive consequences.

An analysis of financial results for a subsample of 57 publicly traded U.S. companies showed, most impressively, that companies in the top third on our measure of PFC compared to those in the bottom third doubled net profit margin, return on investment, return on assets, and return on equity. Some performance management techniques also are associated with better financial performance, but the direct and indirect relationship of PFC to financial performance is much stronger and more consistent.

2. Performance feedback culture (PFC) has significantly stronger effects than performance management techniques on performance management effectiveness.

The data are highly consistent in showing that companies with an effective PFC report their performance management processes are effective—even if their techniques are crude. And, it follows that companies with a weak PFC report ineffective performance management processes even if they use all the flashiest and most modern techniques.

3. Performance management effectiveness for employee-oriented outcomes (including employee development, employee motivation, and employee retention) has an extremely strong effect on organizational financial returns.

PFC creates positive employee outcomes and those positive employee outcomes produce significant corporate financial returns. Indeed, moving from the bottom to the top third of the sample on this measure is associated with at least a doubling of net profit margin, return on investment, and return on assets, and a tripling of return on equity. 

The commonplace belief that performance management is incapable of delivering business results clearly is wrong. Performance management is ineffective for companies that have a weak performance feedback culture.

An important related finding is that performance management effectiveness for organization-oriented outcomes (aligning employees with the business strategy, supporting company values, and increasing organizational performance) is not related to financial business outcomes. Performance management that is focused on employee-oriented outcomes (including employee development, employee motivation, and employee retention), not performance management that is focused on organizational outcomes, leads to financial success.

The new i4cp/CEO report, Performance Feedback Culture Drives Business Impact , explores these findings in considerable detail, and outlines the practical steps that managers need to take to create an effective performance feedback culture.

The report is available exclusively to members of i4cp and sponsors of the Center for Effective Organizations (CEO), and will be released publicly on August 1, 2018.

Gerald E. Ledford, Jr., Ph.D. and Benjamin Schneider, Ph.D. are affiliated research scientists at the Center for Effective Organizations (CEO), at the University of Southern California.