Annual Performance Reviews: The Down Side of Dumping Them

Recently, many big companies have dumped their annual performance reviews, with some fanfare. This article in HBR says by early 2015, about 30 large companies had done so, representing more than a million employees. Of course, we’ve hated these laborious processes for years, but there seems to be some groundswell of support now for actually not doing them.

Part of this analysis is financial; time is money, and annual performance reviews take tons of time. Deloitte recently dumped their annual review, based on an estimate that their employees and managers were spending 2 million hours a year on the process (yikes!). In general, I am a big fan of digging into those traditional aspects of management we keep doing even though they stopped making sense decades ago. I am one of those people who has lamented performance reviews for a long time.

But here’s the deal; getting rid of an annoying process is only half the battle. Remember the process was put in place for a reason. If you only remove the process and don’t address the underlying reason, then you really haven’t solved the problem. Step 1 is useless, in this case, without Step 2.

So yes, get rid of those stupid forced ranking systems and the hours you spend concocting justifications for a “4” rating versus a “3” rating, just so you can figure out how to give some employees a 2% merit increase rather than 3%. That’s step 1. Then roll up your sleeves and design a new way to address the underlying needs. Here are some of the aspects of step 2.

Compensation

Too many organizations have half-baked systems for determining compensation. The annual performance rating was our fantasy solution. If Bob gets a 5, he gets a bigger increase. Problem solved! Of course, as soon as we tie compensation to the rating system, people figure out how to game it. That’s what you do when money’s on the line. So take compensation out of performance management, but take the time to develop an actual system for your compensation that you can share visibly with everyone internally.

For example, in a webinar that I did recently with my business partner  Charlie Judy (an experienced HR guy), he presented a fairly simple construct for examining compensation increases. It’s not based on “performance” ratings over the last year. It’s based on an assessment of how “valuable” the employee is to the company (important, crucial, indispensable) combined with how close their existing pay is to the market standard for that position. This won’t be cut and dry, but at least it’s a clear system.

Firing People

In addition to using annual performance reviews to give raises, we’ve been using them to cover ourselves legally when we have to fire people for not doing their job well. This one annoys me, but mostly because I hate the fact that it’s a reality that we need to cover ourselves legally. If that’s the case, then build a system just for that. Mixing it with performance management makes it messy. And it forces us to use a bad process for everyone just to make sure we have documentation for the very few that will need it.

Developing People

Amidst all the raises and firing, sometimes this one gets lost, even though I think this should be central to the system. We want to improve the performance of the system, right? So wouldn’t that involve having individual players in that system constantly learning, growing, and developing? I think many companies who dump annual performance reviews actually have this in mind because they say they are explicitly moving to systems where the feedback is more continuous, rather than once per year.

But if you take away the once-a-year part, people can sometimes get lost as they develop their plans to learn and grow. Every move becomes short-term. Feedback becomes more micro. Just because the whole system was annoying doesn’t remove the need for a once-yearly conversation.

Culture

This is the big one. One of the biggest problems with the existing annual performance reviews we’re dumping is that they have been disconnected from culture. Again, it should be about increasing the performance of the system, and your culture should be carefully aligned with what drives your success, so performance reviews should evaluate whether people support and live the culture. That means those lovely core values statements you have on the wall need to be translated into tangible, observable behaviors.

What does “accountability” actually look like, so we can give people feedback on it? What does “honesty” actually mean here? Don’t people tell blatant lies? Does it imply that people are willing to confront and have tough conversations rather than shy away from topics? I can give someone good feedback on the latter, but not the former (unless they’re pathological or something). But you need to figure it out, and there’s nothing wrong with a once or twice annual conversation about it.

So go ahead and dump that annual review process, but only when you’ve figured out how to solve these other issues with either new or existing processes.

Jamie Notter

Jamie is a founding partner at WorkXO where he helps leaders create stronger cultures and upgrade their workplaces, based on a deeper understanding of their organizational genetic code. He brings 25 years of experience in conflict resolution, generational differences, leadership, and culture change to the consulting firm he started with Maddie Grant and Charlie Judy in 2016. Author of two books (When Millennials Take Over, and Humanize), Jamie has a Master’s in conflict resolution from George Mason and a certificate in OD from Georgetown, where he serves as adjunct faculty.