A survey of Fortune 1000 companies, conducted at a 1995 360-Degree Feedback Users’ Conference, found that none of the respondents’ organizations had made a commitment to using 360-degree feedback for performance appraisal and compensation purposes.⁵ Our more recent survey of eighty-one HR professionals found that only 7 percent reported using 360 feedback to inform performance appraisals. It appears little progress has been made in this application of 360. What makes this application of 360 feedback so challenging and what can organizations do to avoid some of these pitfalls?

The issue of whether or not it is appropriate to use 360-degree feedback in performance appraisal is probably the most hotly debated question among experts in the field. Maxine Dalton, of the Center for Creative Leadership, is among those who have come out strongly against the idea. “My argument,” she says, “has two main components: First, you aren’t going to be successful in bringing about change if people resist their data, and by having the feedback administered as part of a process that affects their salaries and chances for promotion, you increase the likelihood that they’re going to resist. Second, studies have shown that when raters believe others will be hurt by what they say, they aren’t going to be as honest, so the quality of the data just won’t be as good.” Dalton also cites a survey of organizations that used 360-degree feedback as part of their performance appraisal systems; over one-half of the companies surveyed had decided to stop using the feedback for that purpose.⁶

Gary Yukl, a noted expert in the fields of management and leadership, is also opposed to the idea of linking multi-source feedback to performance appraisal systems. “The type of specific behavior feedback most valuable for development is not necessarily useful for evaluation. In most types of managerial jobs, there are multiple paths to effective performance, and most behaviors are related to outcomes in a complex way. Moreover, behavior measures need to be more accurate when used for assessment than when used for developmental purposes, and I doubt whether any of the currently available instruments are accurate enough for assessment.” Interestingly, Yukl goes on to say, “Appraisal by peers can pose problems when the raters are competitors for rewards or promotion—some raters may intentionally paint a very negative picture of a key competitor.”

The views expressed by the experts in the field are supported by practitioners as well. In 2007 Personnel Decisions International conducted a survey with savvy organizational insiders who had experience implementing 360. Of the 370 respondents, 77 percent said they believed that raters responded differently depending on their understanding of the intended use of the data. They felt that raters gave higher ratings and were less honest when the organization used the data for performance decisions, such as promotions or raises. In the words of one survey participant, “I have had conversations with raters who expressed concern about whether their input would negatively reflect or impact an individual’s career or compensation. While they know objective input is important to the ratee, they have been reluctant and/or unwilling to ‘commit’ their true opinions/perspectives to an official record.”⁷

Despite the questions associated with the method of data collection and the accuracy of the data, many companies continue to be interested in the possibility of using 360-degree feedback as part of their performance appraisal systems, and some who have done so found ways to avoid the pitfalls cited above. We will focus our discussion, therefore, on the potential advantages of the use of multi-source feedback in this context and offer some suggestions on how to minimize the potential difficulties that may arise.

Moving from the use of 360-degree feedback for development only to its use for appraisal and compensation is a big leap. There are two fundamental differences that make the transition difficult. The first concerns ownership of the data. In development-only systems, the data are the sole property of the recipients. They determine who sees them and control how they will be used. When 360-degree feedback is used in performance management systems, however, the data become the property of the organization. Who sees the data and how they will be used are determined by how the organization has defined the structure and process for performance management.

The second difference relates to the perception of what is at stake for the feedback recipient. In development-only systems, employees focus their efforts on enhancing their skills and improving how they contribute to work unit effectiveness. The organization supports their efforts, but unless development objectives are integrated into performance objectives, there is seldom any repercussion if personal development targets are not met. When 360-degree feedback becomes part of performance management systems, the situation changes dramatically. Now the data will be used to measure results and determine promotability and pay. Such decisions have a much greater effect on the individual than being told what training program to attend or what development initiatives to pursue. Because of this, employees want to be sure that the use of multi-source feedback will provide unbiased information and serve their interests as well as the organization’s.

For the purpose of our discussion, we will look at the two components of performance management—appraisal and compensation—separately, beginning with appraisal.