Are annual performance reviews really that bad?

In the last couple of years it is extremely fashionable to bash annual performance reviews. A number of companies are publicly apologizing for the fact that they had them in first place, wondering aloud why they could ever have been so stupid, and demonstrate their remorse by publicly joining the ranks of the enlightened ones: those companies that abolished their annual performance review process.

In this context it is important to raise two questions, namely what the purpose of the annual performance review actually is and why it should be abolished.

The purpose of the annual performance review

According to Peter Cappelli and Martin J. Conyon, appraisals evaluate the performance of employees, and link these to rewards and sanctions. It is hard to imagine what could be valid arguments against this. On the contrary, how could employees live up to their full potential if they would not receive feedback on their performance, and on which basis should decisions about employee bonuses, merit pay, employee promotions, and decisions to exit the firm be taken, if not on the basis of performance?

Why do annual performance reviews have such a bad reputation?

The question is why annual performance process are so bad. Arguments to abolish annual performance reviews, that are often mentioned, are:

  • Conducting annual performance reviews take up too much time
  • Annual performance reviews are not a guarantee for equal treatment
  • Annual performance reviews do not reward or stimulate teamwork
  • Annual performance reviews are inflexible
  • Line managers and employees do not like them

Annual performance reviews take up too much time

One of the main arguments to abolish annual performance reviews is the time it takes line managers, employees and HR staff to conduct these annual processes. Having participated in this process in all three roles (as an employee, line manager and HR professional), I completely agree. The question however is whether ‘continuous feedback systems’ are really so much more efficient from a time and effort perspective.

Let’s assume an average performance review takes an hour to prepare by the employee and the line manager, let’s furthermore take an hour for the conversation itself and another hour for the line manager and the HR professional to debrief and follow-up the conversation. All in all, this process has taken 6 hours.

That looks like a lot of work, but first of all, how bad is it to invest 6 hours for a proper reflection of the work an individual has been doing all year? More importantly, however, it is not clear that continuous evaluation systems would be more efficient. Assuming that an employee participated in 4 projects, and each project is evaluated, the average time that could be spent per project evaluation should be no more than 30 minutes for all concerned, in order to be more efficient than an annual performance review. The question is (1) how realistic this is and (2) how much quality a 30-minute evaluation (including preparation and debriefing) could yield.

Annual Performance reviews do not guarantee equal treatment

The argument that annual performance reviews do not guarantee equal treatment (linking the same performance with the same pay, development opportunities and promotion possibilities) is completely true. Different managers apply different objectives and subjective criteria to evaluate the performance of their staff.

The question is, however, if the goal of equal treatment should be abandoned altogether. Imperfect as they may be, processes where rankings of different leaders are compared, where managers are asked to provide input on the performance of each other’s employees, and where HR oversees the process, are probably preferable to processes where central monitoring and control mechanisms are not present at all.

Annual performance reviews do not reward or stimulate teamwork

The idea that annual performance reviews do not facilitate teamwork, because employees will then see each other as competitors, does not make a lot of sense.

The harsh reality is that, when it comes down to the distribution of resources, employees are by definition in competition with each other. Organizations only have a finite amount of resources they can distribute to their employees. There is only so much money for salary increases and bonuses, only so many spots on a management development program, only so many expatriate assignments, only so many positions where people can be promoted to, etc. Whether these means are allocated during yearly annual performance review rounds, or through another process, is probably not that relevant. The point is that these finite resources are being distributed on the basis of comparing the (perceived) performance of employees with one another anyway.

Annual performance reviews are inflexible

Another argument against annual performance reviews is that they are deemed to be inflexible. This argument supposes that goals and objectives are set at the beginning of the year and are not adapted to changing circumstances in the course of the year. As a consequence, employees would be evaluated on the basis of outdated objectives.

This is not the reality, however; it is common practice that line managers have regular 1:1 discussions with their employee to discuss their work. If conducted properly, these discussions ensure that the annual performance review does not result in surprises for the employee about the way the manager has evaluated his or her performance. Furthermore, a number of organizations apply formal mid-year reviews, in which line managers and employees can identify which circumstances have changed in the first half year, and how their agreed-upon objectives should be adapted.

 Line managers and employees do not like it

This is the only argument that is completely valid: there are not many line managers that are looking forward to the annual performance review process. This is especially the case if they need to have difficult conversations with some of their employees. Conversations that require managing unrealistic perceptions of employees regarding their own performance, conversations in which they need to be honest and provide their employees with ‘constructive criticism’ or conversations in which they need to explain to them how their performance relates to others.

At the same time, not all employees like to have reality checks, to listen to ‘constructive criticism’ and also dislike being told that they are not ranked as high as other colleagues. Therefore, not having annual performance reviews solves a problem for both.

The question is, however, if not having these discussions really benefits the employee or the organization. If annual performance reviews have one advantage, it is the fact that they force transparency by using a centralized and structured decision-making process about the distribution of scarce items: ranking scores (e.g. form exceptional to …), rewards, development opportunities, promotions, etc. This is not necessarily a bad thing for the development of employees. If line managers are not willing or able to give candid and honest feedback to their employees, the outcome of these ‘distribution discussions’ might force them to own up.

Having these conversations, painful as they may be, can also serve as early-warning signs for employees that they may have to increase their performance, or change their behavior in order, in order to keep their employment. Too often leaders talk about the performance or behavioral issues of their employees, instead of talking with their employees about this.

There is also evidence that employees want this clarity. In PwC’s case employees wanted numerical evaluations in order to know to ‘how they were doing’.

How to make annual performance reviews work?

All in all, there seems to be nothing wrong with annual performance reviews processes as such, on the contrary, according to research by McKinsey & Company: ‘… when executed well, performance management has a positive impact on employees’ performance and the organization’s performance overall’.

This means that annual performance reviews as such are not the problem, but the way they are implemented and executed: things that can be fixed.

In order to ensure annual performance reviews work, companies need to do three things:

  • Review the system – Review if there are ways in which the process in your organization needs to be enhances or fixed. Most often this can be tweaked by relatively minor interventions.
    • Does your process allow for multi-rater feedback (feedback from other line managers, peers, customers, etc.)
    • Is your system flexible enough to adapt goals throughout the year?
    • Do you use too many ranking categories, which makes it unnecessarily hard to assign individuals in categories?

As an HR leader, I spent a disproportionate amount of my time discussing if people were meeting or exceeding expectations on an “Outstanding – Exceeds Expectations – Meets Expectations – Needs Improvement – Unacceptable scale”. There is always an element of subjectivity in ranking, therefore the more categories you use, the more discussions you are likely to encounter. For this reason I am a strong proponent of 3 point rating scales (not meeting expectations, meeting expectations and exceeding expectations). I have seen the best results in applying this scale where there is a forced distribution: 15% of the staff is ranked as ‘exceeding expecations’ 85% as ‘meeting expectations’ and ‘not meeting expectations’ is only used when required. The reason is that most employees will recognize the few colleagues that make the biggest difference for their teams, be it as ‘rain makers’ or tech-wizards, and would understand why these colleagues belong to the 15% in the exceeding category.

  • Provide SMART and relevant goals – Line managers need to make sure that the goals for their employees are not only SMART (specific, measurable, achievable, realistic and time-bound), but also directly related to the overall goals of the organization. Setting and evaluating SMART goals will decrease the subjectivity of the appraisal. Ensuring that the relationship between the goals of an individual are as directly as possible derived from the business strategy and the overall objectives of the organization, will ensure the understanding of, and the identification with the goals and the organization of the individual employee.
  • Train line managers – The most obvious thing organizations need to do is to train their line managers to set clear goals and have honest conversations with their employees. Strange enough this skill is often taken for granted. The fact that a person is promoted to be a manager does not mean this person is able to set clear goals and provide effective feedback to his or her employees. Investment of the organization in training line managers to have honest conversations with their employees is something that will greatly benefit themselves, their staff and their organization. Benefits of such a training or coaching program will extend greatly beyond the length of the annual performance review process. This is especially the case if line managers are trained or coached to provide this feedback ‘real-time’; i.e. when the behaviour or performance of the employee (positive or negative) warrants this. This will benefit the employee (can swiftly correct factual mistakes and behavioural issues), the organization (increases performance) and the line manager (the earlier he engages in these difficult conversations, the less stressful this is for the line manager and the employee).

If properly done, annual performance reviews might not be such a bad idea after all. From my experience as a management consultant, I can say that most organizations I know that do not do performance reviews, are doing worse than companies that do performance reviews, and that these companies are actually moving towards introducing them.

It is even more telling that, after, revising their performance review system, both GE and Gap, still conduct end-of-year discussions between managers and employees.

Perhaps the same can be said about annual performance reviews, as Churchill once said about political systems. “No one pretends annual performance reviews are perfect or all-wise. Indeed, it has been said that annual performance reviews are the worst form of performance management except all those other forms that have been tried from time to time”.

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Originally published January 23, 2018 on LinkedIn

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