Why companies are doing away with the annual performance review
The Annual Performance Review is almost universally hated by managers and employees. For decades, it has been the tool of choice for evaluating the performance of employees and their overall value to the company.
Research conducted by the Corporate Executive Board (CEB), found that 77% of HR executive believe that performance reviews don’t accurately reflect employee contributions. Rose Mueller-Hanson, HR Practice Leader at CEB, says that “Our research shows that individual performance ratings have absolutely zero correlation with actual business results.”
This blog post talks about how the Annual Performance Review has failed…and what has emerged to take its place. We’ll also share some insights that can be used to help your company make your performance reviews more relevant and less hated.
The Annual Performance Review
The Annual Performance Review is used to provide managers and employees with feedback on how they have performed over the past year. The aim of this review is to help the employee more clearly understand his roles and responsibilities while clearly defining the supervisor’s performance expectations.
However, it succeeded in mainly being an “expensive and complex way of making people unhappy,” according to Kevin Murphy, a performance review guru at Penn State.
The Annual Performance Review often covers topics related to the employee’s attendance, overall job performance in terms of workplace safety incidents, review of job roles and responsibilities, and the overall quality of work performed. A review may also cover employee participation in job-related education and training, certifications, and awards earned.
Where the Annual Performance Review Fails
It wasn’t just manager subjectivity that doomed it — it was also ridiculously time-consuming.
In the same CEB research, managers reported spending about 210 hours per year working on Annual Performance Reviews, time that most felt could have been spent getting actual work done. Employees spent about 40 hours per year preparing for their reviews.
Given the lack of correlation between employee performance reviews and business results, the managers were right in believing it was a waste of time.
Annual Performance Reviews are often poorly written, lacking details that would be helpful to both the reviewing manager and employee. With ratings that aren’t meaningfully connected to business goals, the reviews themselves are a costly waste of time.
Key Performance Indicators (KPIs) need to be defined in terms of business goals, then written in a way that managers and employees clearly understand.
In 2015, Pierre Nanterme, CEO at Accenture, realized that their annual review process was cumbersome and “the outcome was not great.”
Performance evaluations alienate and demotivate employees
Employees who demonstrate motivation and initiative generally feel alienated by reviews that reduce them to a number value or grade that has no relevance to what they do. This often leads to a reduction in the effort made by top-performing employees, which in turn results in rewarding mediocre performance.
Caroline Stockdale, former Medtronic Chief Talent Officer, said this about annual performance reviews:
“The typical performance review doesn’t work because you’re demotivating half your population, poking them in the eye with a sharp stick.”
For many employees, that’s how it feels, too.
Loss of talent
Businesses also saw a strong correlation between Annual Performance Reviews and a spike in employees quitting their jobs. Companies like General Electric and Adobe lost some of their best talent after those employees completed their annual reviews.
This spurred some of those companies to scrap their annual reviews, replacing them with a review process based on frequent feedback and continuous employee development.
A one-sided relationship
One thing rarely discussed about the Annual Performance Review was how it embodied a very one-sided relationship that clearly favored the employer over the employee. This had the unintended side-effect of leaving employees feeling like the company would use them up and terminate them when they were no longer needed.
Too slow for today’s fast-paced work culture
Annual Performance Reviews were more or less built around business planning and goals that were based on annual cycles.
Today, businesses often have goals with timeframes much shorter than a year. To keep up, HR needs to have employee reviews much more often, with the flexibility to adapt to current business needs.
The annual performance review is labor-intensive and slow, making it difficult to keep up with changing business goals and needs.
The impact on business
Overall, the Annual Performance Review has been time-consuming, expensive, and difficult to maintain. It has generally yielded employee performance evaluations that had nothing to do with business results.
Performance review results were often equally irrelevant to employees, leaving them to figure out where and how to improve on their own. Workplace culture tended to be toxic, with employees pitted against each other for a limited number of top reviews.
Employees were often dissatisfied with their reviews and were likely to quit if they had better opportunities elsewhere. This created a talent drain that hurt business for those companies that lost top talent.
So, what can a business do?
Replace the antiquated Annual Performance Review with something that is flexible and delivers relevant results to managers, employees, and C-level executives.
What is continuous feedback? It is what it sounds like — feedback is submitted often, even multiple times per day.
Many employers utilize 360 Feedback, which may include continuous feedback from managers, supervisors, and co-workers. Most employers who have implemented continuous feedback have experienced happier managers, increased employee engagement, and marked improvement in employee morale.
The success of continuous feedback lies in shifting the focus away from an employee’s past accomplishments toward continuous employee improvement. Continuous feedback bring the employee in, involving them in creating his career path, allowing that employee to set goals and participate in education and training that will help them reach their career goals.
The overall results have been increased job satisfaction among employees, increased employee retention, and a reduction in HR management costs.
What This Means for Business
Businesses that adopt continuous feedback can expect the benefits named above and more, but only if the transition begins at the top.
The president and CEO need to make it clear to everyone else that they are serious about adopting continuous feedback and actively participate in guiding the rest of the business in that direction.
HR managers and employees will have much stronger incentive to adopt continuous feedback when the business leaders are directly involved.
The painful days of the annual performance review are drawing to a close as businesses adopt performance management systems that are based on frequent, relevant feedback that is focused on employee improvement instead of past achievements.
The greatest benefit to this transition is that continuous feedback makes nearly everyone happier and more satisfied with their jobs.