Are Performance Reviews Underperforming?

Articles I’ve read recently in The Los Angles Business Journal and The Wall Street Journal that indirectly touched on the topic of how to measure the performance of employees were the inspiration of this piece. It made me think about the decades-old and well-used tool known as the “Annual Performance Review.”  Goodness knows, I’ve had many given to me, I’ve delivered many more, and I’ve created and managed annual review programs.  In many companies, it’s simply a given, a sacred in the book of management processes. Adobe got a bit or press a few years ago when they go rid of annual reviews. 

But do annual reviews actually work for the intended purpose?  Let’s start with why companies do them in the first place.  Certainly, they provide a tool that closely aligns with compensation systems.  In theory, we should know how you are performing to determine in part how much to pay you, particularly in relation to rewarding you with a pay increase.  If there is (hopefully) some sort of goal setting process in place, the annual review provides a mechanism to measure achievement of those goals.  Undoubtedly, there is also the idea that, whether it be through fear, aspiration, or simply the prospect of making make more money, having that annual review meeting will provide motivation to perform.  On the negative side, if there are perceived performance issues in play, the review process can provide practical and legally-critical documentation should a termination be the inevitable end game for said employee.  Or, on a more constructive note, the annual review can head off those dire consequences and help someone get back on track by providing feedback on areas where improvement is needed.   

That’s all well and good.  However, my experience tells me that when measured against the above criteria, annual performance reviews underperform – and can also have unintended consequences of the not so good kind. I will explain – and attempt to offer an alternative.

First, there is no free lunch here.  The annual review process costs companies money. Sometimes those costs are spread out over the year when reviews are linked to hire dates or dates when promotions or status change dates.  In some cases, companies link reviews to their fiscal year and set aside time to have all of the performance reviews done in one discreet (usually dreaded) timeframe.  This latter method normally is spread out over a number of days, depending on the size and organizational structure/complexity of the company.  It’s very distracting and inevitably works against focus and productivity.  

But even if one puts the administrative costs aside, I believe there are bigger issues.  Agility is certainly an emerging concept in management circles.  In its simplest firm, agility is about being in touch with your market and customers’ needs while continually adjusting your strategy and tactics to best meet them.  In a global, increasingly digital world, the need to be more agile continues to increase.  The increasingly connected world doesn’t move in annual cycles.  Information flows rapidly impacting businesses and their customers everyday.  An annual review process doesn’t provide a very agile structure.  Certainly, there is nothing to stop a firm’s managers from providing feedback on a regular basis to lead employees toward achieving company goals and also mentor their professional growth.  However, I’ve observed that such regular feedback often doesn’t happen – or happen often enough.  There is always that sense that much or most of that will be dealt with at review time.  

Another issue emerges when the annual review actually takes place. Most human beings don’t like to be confrontational or be the bearer of bad news.  So, performance reviews inevitably over-emphasize the good and tend to avoid the bad. Constructive criticism is often missing in the process, especially for employees whose demeanor and performance are essentially good.  And who likes to explain to an employee that they are not getting the maximum allowable pay increase or bonus compensation?  So, unless the system forces managers to assess their team on a predetermined statistical curve, there is a natural tendency for reviews to skew upward, impacting pay increases and overall labor costs.  

There is a psychological and motivational aspect to all of this that comes into play as well. Employees that do receive negative feedback, even if done constructively, often get discouraged and demotivated.  This is particularly acute when feedback is not given regularly during the review year, thus creating this sense of being blindsided. 

So, if this is a messy, ultimately ineffective process, what’s the alternative? That’s inevitably a subject of debate, but I will offer one potential solution as a starting point. 

First, it is essential that a company should have clearly defined strategies from which short and long-term goals can be developed. Those top-level strategies and goals should be clearly articulated and communicated to everyone in the organization.  Based on that, management at all levels can breakdown the supporting goals and tactics that relate to their team.  Every employee should know what their role is in achieving those division or department goals.  Ideally, this process of goal setting and tactical planning should take place on a monthly or bi-monthly timeframe – quarterly at the outset.

Goals can be discussed and agreed in 1:1 meetings and be limited to a small (and standardized across the company) number of key initiatives. These can range from small projects to portions of longer- term initiatives. Division/department heads can then assess each cycle whether the goals were achieved and why or why not.  If goals aren’t being achieved or conditions change within the goal period, goals can be renegotiated by mutual agreement.  The premise here is that there is consistent communication, dialogue, and agreement of what a manager expects from his or her team member. Within every cycle, goal achievement is evaluated, corrective actions agreed where achievement is missed, and new goals set.

Additionally, as a company’s strategic plan should be an ever evolving process, a more frequent and flexible dialogue will provide a more agile means of aligning the company’s workforce and resources to stay in-step with changes.

Over the period of a year, a clear record of goal achievement (or under-performance) has been documented and communicated. It is then possible to quantify this process and tie that to compensation systems. In any case, there is a framework from which to link performance, accountability, and compensation while promoting employee development. And, in theory, surprises and the issues that surround them are minimized.