I recently had lunch with a friend, who told me I was so lucky to have started my own company, as I wouldn’t have to do an annual performance review. She told the story of her performance review meeting where her boss said he had to give her an average rating, even though her performance was excellent because she’d been promoted last year. “Why?” she asks her boss, “because the top scores have to go to other people who need to be promoted this year”. This doesn’t make sense to my friend (or anyone) and now she is so demotivated that she has done the absolute bare minimum for the last two weeks and started looking for another job.
It is annual performance review time and around the globe managers and employees are sitting down to the most disliked meeting of the year. The Washington Post reported most employees disliked performance reviews and only 40% of employees believed it helped them establish clear goals. Managers dislike them too. Even HR professionals, only 23% think their company’s performance management process accurately reflects employees’ contributions (CEB, 2014). So you have to ask, if they are so disliked:

Why do companies do performance reviews?

There are four main reasons companies do performance reviews:

  1. Motivate performance
  2. Align individual goals to corporate goals
  3. Allocate compensation
  4. Identifying talent and successors

Microsoft created headlines by dropping their performance review and ratings. Then several other companies, like Kelly, Cargill, Sears and Whirlpool, also removed ratings. And with success, these companies have shown an increase engagement and motivation. But what do they do to instead to achieve the four purposes listed above?

  1. Motivate performance
    Microsoft, Whirlpool and Cargill replaced the annual review meeting and rating with shorter, more frequent manager-employee meetings throughout the year, focusing on coaching and development. The new process was supported with upskilling of managers eg Whirlpool’s Manager Minute or Cargill’s Everyday Performance Management. Upskilling is essential. A manager (like where my friends works) who does the annual meeting poorly is not going to suddenly do more frequent meetings well.
    [su_spacer size=”5″]
  2. Align individual goals to corporate goals
    Team and individual goal setting and planning happens frequently during the year. Annual goal setting is seen as outdated as the world is changing faster.
    [su_spacer size=”5″]
  3. Allocate compensation
    This is the difficult one – according to Radford 56% of companies not using ratings rely on managers to use their discretion to allocate merit increases. While this may work with seasoned managers, it could be a challenge for others.
    [su_spacer size=”5″]
  4. Identifying talent and successors
    Companies like Kelly hold annual talent round tables with managers to identify talent and successors. Of course a question comes up – if there is no performance rating is this fair and unbiased talent identification? But then let’s ask ourselves – with performance ratings was talent identification fair and unbiased (take the example above)? There are other ways of assessing potential, such as assessment centres, that could be better and fairer.

At this time of year it is tempting to think that work would be a better place without performance reviews. But before throwing out the ratings consider:

  • Does it fit your culture?
  • Do your managers have the skills and mindset to motivate their team?
  • How will you identify talent?
  • How will you allocate rewards?

How did your performance review go this year? Did you and your employees leave the meeting motivated or demotivated? Is it time to relook change the performance review system?

Jane Piper of Pipsy Consulting finds innovative HR approaches that will help your company engage your people in delivering your company strategy.