Sunday, March 28, 2010

Employee Performance evaluation and Statistics

HR Managers typically insist on 'normalizing' performance ratings such that 10% on band 1, 20% band 2, 40% band 3, 20% band 4 and 10% band 5 etc. This is typically applied recursively to the entire organization (team, dept, organization). This normalization is based on the claim that performance of people follows 'normal distribution'.
There are two flaws in this.
a) Performance of people need not follow 'normal distribution'. Normal distribution occurs when the variation is due to randomness (or chance). Consider two scenarios - one person taking the same test (rather similar test with same pattern) multiple times, and different people takes the same test. One person takes same test multiple times follows normal distribution, as the variation is due to randomness. However different people taking same test may not follow normal distribution. When different people takes same test, the variations are due to randomness as well as difference in individual's skill. Variation in skill need not follow normal distribution.
b) According to statistics, when we take samples out of a population (eg: depts of 100 people in an organization of 10000 people), the mean (average performance) of the samples (individual depts) should follow normal distribution. However current practice is to enforce individual depts normally distributed with same means. This is mainly because no dept head will be ready to admit that his dept performance mean is less than company mean. That simply means the performce ratings are force fit rather than actual performance.


CorDell Larkin said...

Very insightful points Rejeev. This is why I recommend to my customers (I'm a human capital consultant) to use both an absolute and relative measure of performance. Absolute should measure performance relative to a minimum standard or goal. Relative should measure performance relative to other members of the sample population, so if you are measuring just a "dept" as you call it then you are ranking people relative to others within that dept. Those who are measuring performance should also look at historical performance to determine if average is improving, staying the same, or decreasing to identify the trend. Also, comparing dept to the whole organization is a good idea to identify what characteristics drive higher and lower dept performance.

CorDell Larkin

Ashish Agarwal said...

This is very good understanding of normalisation in organisations. Some use the term called bell curve. but your article explains the issue clearly.