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Performance management, David Smith told the London Business Forum (LBF), is one of his favourite topics. “What’s it about?” the former People Director at Asda asked the audience: “keeping the company running and profitable,” “getting the best from people,” “improving performance,” they responded.

Most CEOs that Smith works with tell him that despite the significance of performance management they’re not very good at it. This is not surprising because, he insisted, “this is nasty.” Managing performance is subjective, it involves difficult conversations, is time consuming, and done badly can lead to costly tribunals and reputational damage.

“How good are you at this stuff?” he asked LBF delegates. Smith was reassuring, explaining that when he worked at Asda they made mistakes so he has earned his “battle scars.” Through their mistakes they inevitably learnt a lot of lessons and he began by surveying the room to see what actions his listeners were already taking to improve performance, asking:

• "Do you have an appraisal system?
• Do you review people twice a year?
• Do you review your people every quarter?
• Do your people get ranked in grades within the organisation?
• Does everybody know exactly where they stand in potential terms/ Do they know what the organisation has planned for them?"

“The systems that we invent are imperfect,” said Smith, pointing out that when people are appraised the majority find themselves in the middle grade. Smith warns that this encourages “performance loafing,” where employees feel safe with an “I’m OK, you’re OK” mentality. To prevent this Asda introduced a ranking system, which helped to differentiate performance within this middle grade. Smith highly commended ranking because it meant people felt noticed; those at the top of the middle knew that they could be promoted, whilst those at the bottom knew that they were at risk of falling behind and had to work harder.

“There are two sides to performance,” said Smith, “and I think performance management should be about both in equal proportions.” His mantra is: “Remove your underperformers and push your talent.” At GE they used to remove 10% of their management every year, and Pepsico took out 20%. Smith believes this is a dangerous strategy that can have terrible consequences. It develops fear and in the short term, “some people will be frightened into performing” but the best people, argues Smith, will leave “because [the atmosphere] will be sufficiently uncomfortable.”

Instead, Smith advocates that HR professionals think about both behaviour and performance together. Looking solely at objectives is not enough because people might meet them but behave in a way that is not sustainable in order to do so.

“I don’t like nine box [models],” continued Smith, referring to a model frequently used to manage performance. Smith prefers a simpler grid with only four boxes: “Stars”, “Dogs”, “Nice but no delivery” and “Lands everything but bullies.” The stars, he said, are those who deliver on both high performance and fantastic behaviour. In the opposite box sit the dogs, “the people who don’t deliver and are pretty horrible too.” Why, demanded Smith, do companies have these people? They badly effect performance levels and can’t be ignored.

The other two boxes are slightly more difficult to deal with. Those in the “lands everything but bullies” box are often seen, said Smith, “as a highly regarded necessary evil.” People fear that if you remove these people then the performance level will drop but, argued Smith, they are “brand damaging” and suggest that the organisation does not practice what it preaches. The “nice but no deliveries” often stay in an organisation because it is feared that if they are removed “everybody would be up in arms.” Smith suggests that these are the people who should be "retired with dignity."

Smith emphasised that if companies fail to remove their underperformers then they also fail to create the openings for their talent. You have to take risks on talent, Smith told the LBF, because potential is not proven and is subjective. “We should have more confidence in taking risks,” he urged as most of the time we get it right and select the true talent.

Most importantly, “move early” with talent, Smith insisted. He argued that we are often limited and limit others with the mindset that everyone needs “to wait […] to serve your time.” Those in HR need to ensure that top talent is mentored and if it transpires that the wrong decision has been made, “You must manage failure well.” If someone was identified as a star but hasn’t risen to the challenge then return them to the role in which they did perform.

He asked the LBF to err on the side of caution with “broadening.” Smith warned that whilst the “broadening of people” and selecting “the generalists of the future” is vital, if you do too much of it then “you lose focus on the specifics.” Smith has learned this from experience, explaining that they had to reverse their broadening policy because they did it on too large a scale. After all, there are only a limited number of generalist jobs and there is only one CEO.

Smith is a staunch advocate of talent programmes that are well managed. Concluding his talk to the LBF he emphasised the value of preparing talent for internal job vacancies that will occur. Not enough organisations, he suggested, have people waiting on the “conveyer belt” ready to step up to a role. There should always be talent waiting; talented people who have been developed and who are “ready to appoint.”