Giving the performance review an extreme makeover by Polly LaBarre @FortuneMagazine February 16, 2011, 6:47 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Performance reviews represent just one skirmish in the war against the unhealthy and artificial power dynamic that is a legacy of the industrial era. Australian software company Atlassian has given this staple of corporate life a new look.(ManagementInnovationeXchange) — It’s one of the toughest — and most important — questions in business: How do you mobilize and unleash the best gifts of every single person in your organization? And how do you create an environment and systems for work that ignite extraordinary passion, imagination, and initiative?Few leaders would discount that imperative, yet it’s still remarkable to encounter an organization in which people practices are built around human flourishing rather than designed to satisfy systems. This is why it’s so refreshing and instructive to spend a little time inside a company like eight-year-old Australian software company Atlassian.Founded with the intent to become “a different kind of software company,” Atlassian has also dedicated itself to developing a different way of working. The result: the company stands out as much for its fresh, energetic, relentlessly clever approach to engaging and unleashing people as it does for the software development and collaboration tools it makes.Start with Atlassian’s set of distinct, homegrown (and frankly expressed) values. The first on the list is “Open company, no bullshit — Atlassian embraces transparency wherever at all practical, and sometimes where impractical.” Many companies advertise their “openness” these days, but few bake it in as deeply as Atlassian. In a flip of standard organizational procedure, the company makes all information (whether internal or external) “public by default.”A case in point of this approach is the company’s ongoing experiment in putting its performance review on review. In August 2010, Joris Luijke, Atlassian’s global head of talent, announced a 12-month “public trial” of the company’s approach to performance reviews. Luijke and his colleagues not only decided to “rip apart” the obligatory annual time-sink with its dreaded distribution curve, forced rankings, and underwhelming impact — they committed to running their experiment openly and sharing their findings with the world (See Luijke’s detailed description of the Atlassian’s approach on the MIX).Atlassian’s radical openness not only reflects a spirit of generosity, but also an intrepid practicality. When Luijke says, “Let us be your guinea pig!” — he’s acknowledging that when it comes to tackling the most entrenched and dysfunctional aspects of organizational life, no single company or practitioner can solve the problem alone. (And those who share the most are bound to learn the most.)In just six months, that approach to experimentation has yielded a compelling blueprint for a lightweight performance review model built on continuous coaching with a strong basis in the science of motivation and engagement — and some signature idiosyncratic flourishes.That’s a major leap forward in less than a year. As Luijke recounts, despite the best intentions (and best practices), Atlassian’s approach to performance reviews resulted in less than glowing reviews:“Twice a year the model did exactly the opposite to what we wanted to accomplish,” he says. “Instead of an inspiring discussion about how to enhance people’s performance, the reviews caused disruption, anxiety, and de-motivated team members and managers. Also, even though our model was extremely lean and simple, the time investment was significant.”Transforming the performance review would take something better than a “best practice.” Luijke observed, “We found nothing out there to copy.” So he and his team set apart, inventing an approach that would energize and engage — rather than deplete and demoralize — Atlassian’s people.Some key elements: Rip apart the traditional performance review. Replace it with a series of monthly one-on-one meetings with a rotating agenda of “check-ins” and scrap ratings and the distribution curve Replace individual performance bonuses with top-market salaries, an organizational bonus, and stock options Redesign the review into “bite-sized chunks” of guided coaching conversations Focus on strengths Provide honest feedback without ratings: highlight instances of exceptional performance (and note frequency on a continuum of “never to always”); ask the question “how often have you stretched yourself” Provide peer feedback and rewards Luijke and his team will continue to test and design new mechanisms for reviewing performance, but they may have turned the crucial corner already. By recasting the performance review as an ongoing conversation set inside regular working relationships, the Atlassian folks have reinforced one of their core values: “We want all Atlassians to feel like they work with Atlassian, not for Atlassian.” That’s a distinction that makes a world of difference in organizations where too many people feel subject to rules, acted upon by “superiors,” and victims of the system.Every leader is under pressure today to awaken and deliver the full initiative, imagination and passion of every person in his or her organization (and even beyond the walls of the organization). And there’s no more compelling call to talented people than a cause they can believe in.When you really mean it, “Join us” is a powerfully effective invitation to engage performance. Yet, so many of the practices and processes that pervade our daily working experience reinforce division (labor/management, creative/operations, executive class/front line) rather than invite solidarity.Performance reviews represent just one skirmish in the war against the unhealthy and artificial power dynamic that is a legacy of the industrial era. For its part, Atlassian is constantly inventing and refining practices to unite and ignite its people (such as the quarterly “Fedex Days,” during which employees get 24 hours to work — and deliver — on a passion project, chronicled by Dan Pink in his book, Drive).But more than better practices, Luijke and his colleagues understand that the real key to building organizations that are fit for human beings is to start with a better question: How do we design systems and support work that enlist people as drivers of their own destiny?Polly LaBarre is the editorial director of the MIX (Management Innovation eXchange), an open innovation project dedicated to reinventing management for the 21st century. Atlassian is one of ten semifinalists in the HCI Human Capital M-Prize. Visit the MIX to read and rate the entries.