Here is a curious turn of events. Just as the federal government is forcing schools across the nation to evaluate and rank teachers using dubious metrics, corporations are beginning to back away from simplistic performance measures. The change reflects the philosophy of business guru W. Edwards Deming, who staunchly opposed merit pay and rankings, on grounds that they demoralized employees and made for a less efficient workplace.

This article appeared in the Wall Street Journal.

The Trouble With Grading Employees

Performance ratings such as ‘meets expectations’ sap workers’ morale,
but firms aren’t sure they can do without them

Can a year’s worth of work be boiled down to a stock phrase like
“meets expectations”?

As companies reinvent management by slashing layers of hierarchy or
freeing workers to set their own schedules, performance ratings—which
grade workers on a 1-5 scale or with labels like “on
target”—stubbornly hang on. Companies like Gap Inc.,Adobe Systems
Inc.and Microsoft Corp. abolished such ratings after leaders decided
they deterred collaboration and stoked staffers’ anxieties. Yet other
companies are having a harder time letting go.

Intel Corp. has long rated and ranked its approximately 105,000
workers on a four-level scale, from “outstanding” to “improvement
required.” Devra Johnson, a human-resources director at the chip
maker, observed that ratings tended to deflate morale in a good chunk
of the 70% of the company’s workforce that receives a “successful”
rating each year—the second-lowest label.

“We’d call them the walking wounded,” she said.

Human-resources managers conducted an experiment to test a new way of
managing performance, allowing 1,700 workers in the HR department to
go unrated, although not without feedback, for about two years,
according to Ms. Johnson.

Managers found they could still differentiate performance and
distribute compensation. However, when Ms. Johnson’s team presented
its findings, company executives weren’t ready to give the labels up,
concerned that forgoing ratings would suck healthy tension out of the
workplace, she said. So the HR department started rating the employees
in the experiment again….

Marc Farrugia, the vice president for human resources at Sun
Communities Inc., is going through the “exhausting” process of
revamping performance management at the owner and operator of
manufactured housing communities. He’s concerned about the accuracy of
the company’s current approach to ratings; some managers just dole out
higher scores in order to maximize bonuses for employees they’re
scared might leave; others give everyone average ratings because it is
easy. Workers complain the ratings aren’t fair and don’t paint a true
picture of their annual performance.

“I’m being more and more convinced that ratings are doing more harm
than good,” Mr. Farrugia said….

Some executives worry that figuring performance measures, such as the
time it takes for restaurant workers to take an order, into reviews
might lack context.

“I have a real love-hate relationship with data,” said Kevin Reddy,the
CEO of fast-casual restaurant chain Noodles & Co. “You can get a false
sense of security if you zero in too closely on a rating system.”

The company moved away from numeric ratings about seven years ago but
still places workers into broad categories like “meets expectations.”
Mr. Reddy said he and his leadership team continue to question whether
they’re doing feedback right and motivating employees.

Jean Martin, a director at research and advisory firm Corporate
Executive Board who works with companies on performance management
systems, said executives are “giving the numbers too much power” by
endlessly debating their worth. An analysis of 30,000 employees by her
organization shows ratings don’t have a direct impact on performance,
she said.

Others say they have evidence showing that workers contribute less
after receiving a poor rating. David Rock, the director of the
NeuroLeadership Institute, a research firm that applies neuroscience
to the workplace, said ratings conjure a “threat response” in workers,
or “a sensation of danger,” especially if they don’t get the number
they expect. And the hangover from a bad rating can last for months,
Dr. Rock said….

Companies that have gotten rid of ratings say their employees feel
better about their jobs, and actually listen to managers’ feedback
instead of obsessing over a number. John Ritchie, a Microsoft
human-resources executive who goes by “J,” said the technology
company’s practice of rating and ranking employees discouraged
risk-taking and collaboration; since discontinuing the practice in
late 2013, teamwork is up, he said.

The internal change mirrors the shift CEO Satya Nadella is working to
effect externally, charming and collaborating with startups and
venture-capital firms so that Microsoft doesn’t get left behind in the
increasingly heterogeneous world of technology.

“We needed to change and everybody knew it,” Mr. Ritchie said of the
new performance management system.

The Gap’s new approach dumps ratings in favor of monthly coaching
sessions and frequent employee-manager conversations. But HR
executives had to convince leaders that the move wasn’t
“sacrilegious,” according to Eric Severson, the company’s co-head of
human resources.

Holly Bonds, a 17-year veteran of the company, said it was strange at
first; she was used to scanning her review for her rating and bonus
number. She now talks more frequently with her manager, so she has a
better idea of where she stands, a process that she’s found less
stressful than worrying about her rating.

“I haven’t missed it,” she said.

Write to Rachel Feintzeig at rachel.feintzeig@wsj.com