In one of the earlier discussions around performance management, a common question emerged: is being overly generous with ratings actually helping businesses, or harming them in the long run? Many organizations tend to lean towards inflated ratings in an attempt to engage and retain employees, especially in a competitive talent market. Many also rely on insights from employee survey companies to better understand how such practices impact engagement and performance over time.

This raises an important concern—does this approach truly work, or does it create unintended consequences?

Let’s look at some key observations and real-world scenarios:

Impact of PMS Ratings on Engagement:

Performance ratings tend to have only a short-term impact on engagement. In several cases, the effect—positive or negative—lasted merely 6 to 8 weeks. After this period, employees reverted to their original levels of engagement or disengagement. While this may have helped achieve short-term attrition goals, it did not necessarily translate into improved productivity or performance outcomes.

PMS Ratings and Attrition:

Studies revealed that inflated ratings had little to no correlation with reducing attrition. Disengaged employees with better opportunities still chose to leave, regardless of higher ratings. On the other hand, employees who stayed without better alternatives often contributed to mediocrity, especially when they were in managerial roles, leading to reduced overall team effectiveness.

PMS Ratings, Attrition, and Performance Culture:

In one consulting organization, performance ratings were widely used as a tool to retain employees. However, this led to a culture where effort and accountability diminished. Despite having strong talent, the organization became inefficient and unresponsive. Over time, a perception developed that employees only needed to work hard in their early years, after which performance expectations significantly dropped.

This environment discouraged high performance and reduced the overall value delivered to clients and stakeholders.

Short-Term Gains vs Long-Term Impact:

In earlier years, businesses had to consistently perform at high levels to remain profitable. However, relying on inflated performance ratings as a quick fix for engagement and retention created long-term challenges. Organizations that adopted this approach often struggled with low engagement scores and higher attrition in the long run.

The pressure to deliver short-term results has made it increasingly difficult for leaders and HR teams to take tough but necessary decisions. While short-termism may seem unavoidable, the benefits of inflated ratings are minimal, and the long-term costs can be significant.

This brings us to a critical question—if compensation, promotions, and performance ratings are not sustainable drivers of engagement, then what truly motivates employees?

Organizations need to shift their focus towards deeper drivers of engagement such as purpose, meaningful work, growth opportunities, and a strong performance culture.