Time to Rethink Your Annual Performance Review?

The performance review is broken. Or, as Brian Kropp of CEB (Corporate Executive Board) says, “A lot of our performance management systems don’t do a really good job of capturing ideas or insights.” Many companies agree and are part of a growing trend toward new performance management processes. Instead of formal, numbers-based, annual reviews, these organizations are conducting informal and frequent feedback sessions. Others have maintained a numerical approach, but couple the feedback with anecdotal evidence and give it more frequently. The common motivating factor in these changes is this – companies are worried that their performance management techniques do not successfully drive excellent performance.

What are the problems?

First, waiting a year between evaluations misses opportunities for correction of poor performance as it is happening. As opposed to monitoring the current work of employees and providing helpful and timely insight as necessary, annual reviews focus on the past, by which time it may be less effective. They permit poor performance and then punish, instead of guiding along the way, detractors of the annual review argue.

Second, annual review systems are often attached to a quantitative and relative ranking system. After collecting data from managerial and peer ratings, companies rank employees along a bell curve distribution model. However, this bell curve model is not an accurate representation of how employees perform relative to each other. Instead, studies suggest that the performance of employees maps more closely to the Pareto principle. In other words, 20% of the workforce does 80% of the value-driving work. To align their practices with this insight, Google has adjusted their pay scale in such a way that people of the same title and level can have pay discrepancies of up to 500%, because one employee may outperform others so significantly. A more intuitive problem with the ranking of employees is that it can foster internal competition at the expense of collaboration. This tradeoff may not be worth the incentive it provides.

Third, the annual review system does not account for how often an employee’s role and company goals may change in today’s workplace. While employees and companies are dynamic, the goals by which managers evaluate success remain stagnant. It is because of this that Netflix implemented a policy whereby employees are not measured against annual objectives, because those objectives are fluid. Instead of having annual reviews, Netflix encourages their employees and managers to have informal, organic conversations as they are working. This may also be an effective approach for project-based feedback, which will be sure to increase in the gig economy.

Essentially, the annual review process as a system of employee evaluation weighs accountability heavily, at the expense of development and agility. Instead of focusing on opportunities for positive change, it harps on past mistakes. Yet, even with the problems some organizations see in the traditional annual review process, many find it difficult to find a better approach.

Why are HR departments hesitant to change their systems?

The hesitancy that some organizations have when it comes to changing their evaluation processes stems from several factors. The Human Resource departments of those organizations cite a lack of trust that managers will actually perform consistent and frequent evaluations with employees. In their traditional form, annual reviews are labor intensive. As the Society for Human Resource Management suggested, some fear that if conversations about performance become more frequent, even more time would be spent on this process.  If that is the case, it is understandable to question the efficiency of such efforts.

Furthermore, HR systems are often dependent on the review results, so changing the current model would have larger implications on the whole. Because annual reviews are often coupled with compensation conversations, the outcome of these meetings is the basis for various HR processes. Dick Grote, founder of HR consulting company Grote Consulting, says annual meetings provide “a mechanism for giving people feedback…for deciding who is ready for a promotion…for supporting when a termination has to occur.” Without the annual review, the fear is that there will not be any mechanism for making these decisions. It is for this reason that clear communication is critical. An open dialogue between managers and HR could help set expectations. Still, without an expected time for things like adjusting pay and updating employee records, the HR department’s ability to plan effectively may be diminished.

Another reason for hesitancy to change is the complication related to pay that comes with more frequent reviews. Formal annual reviews supposedly allow for numbers-driven, objective pay decisions made once a year. Tracking metrics is easy and justifiable, and pay changes can be easily benchmarked against other performers. With informal reviews, there is some worry that subjective bias could play a larger role. Managers may choose to evaluate or give feedback to some employees more than others without a formal occasion for doing so, and pay changes could correlate accordingly. On the other hand, some HR departments fear that poor performers will escape accountability and slip through the cracks, when they should be reprimanded, demoted, or fired altogether at the annual review. While these reasons have prevented some HR departments from changing processes, there are some companies who are trying to find a third way, incorporating elements of the different models.

The Middle Ground

Several companies that initially eliminated their annual review processes have since implemented another kind of performance evaluation that represents a third way. In the past, GE famously ranked employees based on managerial and peer ratings, and then fired the bottom 10% automatically. They now use a custom app called PD@GE that allows employees and managers to log and quantify moments of importance, success, or failure. This gives management a more holistic view of performance. It also allows managers to give both quantitative and qualitative feedback that is timely and fresh in the minds of employees. Managers are using this tool throughout the year to gear the conversation toward development and coaching, instead of at the end of the year with a focus on accountability.

Adobe Systems has completely revamped their performance review model. Instead of having an annual review, they moved to a model in which managers meet with employees quarterly. These reviews are less formal, without a script or extensive paperwork. The conversations focus on feedback, expectations, and development. Adobe has seen a 30% decrease in voluntary turnover since they made the change in 2012. At the same time, it seems these new reviews catch subpar performance; Adobe has also seen a 50% rise in involuntary departures, because managers are forced to confront poor performance.

Still, it is clear that the right choice for a company’s performance management is specific to the talents and goals of the company, the managers, and the employees. Just as the annual review seems to not be the right choice for every company, it should not be assumed that it is wrong for all.

Contemplating a change?

With these competing methods of evaluating employees, it can be difficult to evaluate the relative merits of one system over another. In order to find the right performance review system for your company, it can be helpful to take these steps.