Does 360-degree feedback negatively affect company performance? Studies show that 360-degree feedback may do more harm than good. What's the problem? - Performance Management - Statistical Data Included

HR Magazine, June, 2002 by Bruce Pfau, Ira Kay

"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 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; b 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 feed-back 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.