Startups Need Personnel Evaluation Only For Clear Reasons

I get asked about this often, so I’m putting together a summary.

First, as a premise: there’s no problem at all if the company runs fine without personnel evaluation. So if you’re going to “deliberately do it,” it’s either because there’s some benefit down the road, or because there’s some problem in the present.

【 Examples of benefits down the road 】 ・Being received positively during IPO screening, acquisition negotiations, and the like ・Being able to show, when hiring members, that “this is a solid company” ・As the organization grows larger, making clear what each member should do and the norms they should follow (people do what gets evaluated)

【 Examples of present problems 】 ・There’s pressure from below within the company saying “please establish a proper evaluation system,” but the executive class thinks “we don’t have time for that right now” ・There’s an unexplained skew in salaries within the company, and some people are unhappy about it ・There’s an underperforming employee, and in some cases dismissal needs to be considered, but there’s no evaluation process that could serve as grounds for it

For a small company, introducing personnel evaluation is quite a difficult undertaking. But if you design it around the purpose described above, you can do it with minimal effort.

So let’s get into specifics below.

【 When you want to create a good external evaluation 】 The best approach is to borrow a system from somewhere that isn’t a burden to operate. Elaborate customization is a waste of effort; a generic template should be enough. That said, if we’re working from the premise that substance doesn’t matter that much, then the operation must not be a burden on the front line — that’s the most important thing. A hollowed-out personnel evaluation system is easily seen through from the outside. Given that, it’s better to steadily and modestly keep running a light, simple evaluation system suited to your size.

【 When you want to unify employee motivation, direction, and norms 】 Up to a certain organizational size, this doesn’t need a personnel evaluation system at all. You can see everyone’s face and talk to them directly. For example, the following do far more to shape the internal mentality of the company: ・1-on-1s (without personnel evaluation or salary negotiation attached) ・The president periodically speaking to everyone about the vision, the current situation, and the company’s positioning including the social climate ・Cross-functional manager meetings and so on. But if you insist on introducing personnel evaluation anyway, something like 360-degree evaluation comes closest to the purpose. Unifying awareness, clarifying what needs to be done, and clarifying norms are things that should originally be accomplished through leadership (though that often doesn’t go so smoothly). That said, a good substitute for this is “teamwork,” and it’s difficult to substitute it with documents or rules. The sticking point is that what’s required changes depending on the situation, so frequent updates are needed. Given that, it’s more flexible and more likely to be effective to close gaps in awareness with the people around you through mesh-like relationships.

【 When members at the staff level want to be managed 】 This puzzles the person doing the managing, but such scenes really do occur. Why would someone want to be managed? Is being evaluated really that pleasing? You might think that, but such scenes certainly do happen. This tendency can be stronger especially when some staff-level members come from large companies, but in any case, the root cause is that managers or executives aren’t paying enough attention to their subordinates, and are damaging their self-esteem. Self-esteem is raised through contact with others. Self, yet dependent on others. Humans are troublesome creatures. In this case, what’s actually needed isn’t a ‘perfectly airtight personnel evaluation system’ but rather things like holding one-on-one interviews and increasing meetings focused on checking individual tasks and progress — those are far more effective. If you insist on tying this to personnel evaluation anyway, the typical template response is to introduce regular interviews, share the individual’s medium-term tasks and goals at that time, review them at the next regular interview, and score that as the personnel evaluation.

【 When there are members dissatisfied with their salary 】 This is actually the most troublesome and complicated case. Handling it through individual consideration tends to fall apart in the end more often than not, so a macro-level approach is preferable here. To begin with, salary is not something that should be raised without limit just because results are being produced. In fact, a picture of salary continuously rising forever would be absurd. If there’s a possibility of it going up, there’s also a possibility of it going down (directly tied to performance and results). If it doesn’t go down much, it also shouldn’t go up much (no more and no less than market rate). With this as the basis of the balance, it’s best to prioritize creating a budget above all else. Having a budget means having a hiring plan, and that in turn means the future revenue plan resulting from that budget investment has already been authorized. The budget also gives the manager class an excuse — “we can only use what’s within this range” — and you should use that to get staff-level members to understand that salaries “don’t just go up however much people want.” Get them to consider the question “do you even want a situation where salaries go up and down all the time?”, and to understand that such a situation “wastes a lot of energy, both in terms of the effort of evaluation and the mental burden on the person being evaluated.” Building on that, you need to construct a generalized system for the salary decision process. The challenge is to design in a certain amount of abstraction (ambiguity), so that adjustments can be made later with some discretion. For example, one approach is to give salary amounts a certain range, such that, on closer inspection, someone one grade lower on the evaluation scale can by design actually receive a better salary than someone one grade higher. In any case, the key is to firmly build the sequence: “budget” → “rules” → “well, that’s just how it’s decided, so there’s nothing to be done about it.” So, this case is genuinely quite a hassle. Depending on the situation, it may be more convenient for the organization to exclude or cut ties, in some form, with members who make their dissatisfaction blatant (members who spread negative influence around them). That’s a judgment call to be weighed against the effort involved.

【 When you want to use it as an aid to personnel turnover 】 Suppose there’s a member whose salary you want to lower for negative reasons, or who you’d be fine with leaving in some cases, and suppose that member’s pay cut is carried out in a way that looks arbitrary and blatant. (Even if management actually had solid reasons, the situation lacks objectivity and transparency.) If that member has some wits about them and goes to the appropriate authorities, it could turn into quite a mess. So as preparation for such times, it’s extremely useful to have a legitimate evaluation system. Behavior that’s generally prohibited (such as violence or intimidation) should of course be written clearly into the employment contract, but what’s really needed is “a mechanism that allows salary to be lowered when performance is terrible.” With that single point as the focus, work out the questions “so what exactly does poor performance mean?” and “what will be tolerated (accommodated) and what won’t be tolerated?”, and build a personnel evaluation system that can properly extract that point (it’s fine if it can’t extract other things). The specifics will differ by organization, but in an organization where “prioritizing teamwork and completing tasks on schedule” matters most, design the system so that anyone who disrupts that inevitably receives a low evaluation, even if their other performance is good. In an organization that demands “creative proposals and concrete creation,” it would be a problem if the system raised evaluations for people who aren’t coming up with new ideas or actually making things with their own hands. As described at the start, the intent of personnel turnover in this sense has, at its highest-level purpose, a systematic nudge that says “this isn’t a good fit for us, so please go elsewhere — surely there’s a place out there where you can thrive.” It’s not at all about wanting to exclude people you simply dislike.

I’ve rambled on about general theory above, but in most cases multiple purposes and issues are probably mixed together. Even then, rather than trying to accomplish everything at once, I think the most important thing — not just for personnel evaluation but for introducing any system — is to narrow down to the issues that should be prioritized and introduce an appropriate, minimal level of precision. That said, if you’ve made a firm decision to hire a large management department all at once, for something like IPO preparation, and build an airtight management structure, there’s no choice but to steel yourself, brace for the effort, accept the friction, and push it through comprehensively. (It’s hard and very tiring, though.)

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Originally published in Japanese at https://clazytech.com/2020/12/441/. Translated with LLM assistance and reviewed before publication.