Hack:
8 Reasons For Killing Annual Performance Reviews

I recently had the pleasure of attending the MIX Mashup management conference. The mission of MIX (short for Management Innovation eXchange) is to collect and spread ideas for innovative management techniques for how we inspire employees, increase their job satisfaction, and improve their value for shareholders. Some of the innovative ideas for revolutionizing management came from companies on the cutting edge of changing how we work: Zappos, GE, and McKinsey & Company, just to name a few.

While the ideas and new methods for management passed around at the conference were inspiring and innovative, everyone was stuck on what is the best way to conduct annual performance reviews. There was agreement on one thing: no one enjoys the dreaded annual performance evaluation process. Managers hate doing it and employees rarely look forward to seeing the results or participating in the process. Yet, no one at the conference could provide a solution for making the process more effective and useful, and all companies present admitted to not knowing how to fix it. Here are the eight biggest problems with annual performance reviews:

1. The most hard working employees are set up to fail

Only those employees who care about their professional growth care about performance reviews. Yet, they are set up for disappointment. Most managers are only allowed to give out a handful of top ratings in order to enforce a bell curve. In other cases the standards needed to reach the top rating are purposely set impossibly high. Either way, most of the workers who want to do better, who strive to get the best reviews are likely to fall short and be disappointed at annual review time, no matter how hard they worked throughout the year.

2. Linking pay increases to performance ratings is unfair

It is common practice to link pay increases to the results of annual performance evaluations, but I see this as encouraging unfair disparities in pay. Imagine two employees who work for the same company for 10 years straight, both starting out with the same salary, both getting the midpoint performance rating for nine years and both getting the top grade one year. Unless both of them get the top grade in the same year, they earn a different amount of money over the course of the decade – for no other reason than the timing of their breakout performance. That is not fair. Netflix is one company that has done away with performance-linked pay increases. Instead, they base pay rate changes on the market value of each position, not each individual. This provides a much fairer basis for salaries.

3. Annual reviews are often out of date

Most companies conduct the annual review process two to three months after the end of the year. This means that feedback provided in the review could be as old as 15 months. Much of the information in an annual review is obsolete by the time the employee gets it.

4. Annual feedback is likely to be off target

If managers write reviews based on their observations only, those reviews are necessarily biased and one-sided. Sometimes managers include feedback from other employees, or even customers, which helps, but still does not create a complete picture. It is too easy to miss key points or to misunderstand why an employee has failed to meet a goal.

5. Positive feedback cannot be taken at face value

Getting positive comments about what you are doing right is always more motivating than negative critiques, but is no more timely or accurate. Employees know this and often do not bother to take those positive comments to heart.

6. One-sided feedback is patronizing

Performance feedback always comes from the top down. The one-way communication never makes an employee feel good. Even when employees are asked to write self-assessments, the managers’ views rule. If it were possible to truly have a two-way conversation about performance, the process might be more instructive and uplifting.

7. Annual reviews are a chore most managers do grudgingly

Proponents of the annual performance evaluation say the process is important because managers rarely give any feedback throughout the year. This is true, and ongoing feedback would be more useful than annual feedback. However, some managers do not give real-time coaching because they simply do not care to do so. That attitude does not improve at annual evaluation time, and the quality of performance reviews written up by these managers is likely to be inadequate.

8. Subjective assessments result in arbitrary bonuses

An argument used for conducting annual performance reviews is that they are needed for determining bonuses. Bonuses determined on the basis of inaccurate readings of performance are likely to be unfair. Using objective criteria and metrics is a better approach for determining bonuses than a subjective evaluation process.