R.I.P. Annual Performance Review. Now what?


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Imagine if a coach just sat on the sidelines, watching their team win and lose games without giving any feedback. If they saved all of their coaching and strategizing for the last game of the season, it would be too late to even make a difference. They would likely be fired for incompetence.

And yet, this is essentially how businesses have designed performance management since the third century. Fortunately, that’s changing. More and more companies are ditching the demoralizing and ineffective annual performance review in favor of more frequent communication and coaching throughout the year.

Waste of time, money & resources

There’s a certain sense of inertia that causes organizations to continue processes that waste time, money, and resources. But exactly how much waste is associated with the annual performance review?

An article published in The Independent last year cited research from CEB (Corporate Executive Board) that found that the average manager spends more than 200 hours a year on activities related to performance reviews (that’s the equivalent of 25 business days—nearly a month of work). When these hours are added to the cost of performance management technology, CEB estimates that a 10,000-employee company spends about $35 million a year on reviews.

If annual reviews actually succeeded in assessing performance, perhaps the investment in time and money would be warranted. But CEB research found that 90 percent of HR leaders say the reviews don’t even yield accurate information.

Brian Kropp, HR practice leader for CEB, explains part of why the process is so flawed: “Employees that do best in performance management systems tend to be the employees that are the most narcissistic and self-promoting. Those aren’t necessarily the employees you need to be the best organization going forward.”

Employees are also ready for a change. A recent Investors Business Daily article cited a survey by Eagle Hill that found the 49 percent of employees agree with the statement: “It’s a good idea to eliminate annual performance reviews and replace them with a system of regular feedback from supervisors.”

Psychological impact

Beyond the waste of time and money, companies are starting to consider the psychological impact annual performance reviews have on employees. In a Wall Street Journal article titled, “How Performance Reviews Can Harm Mental Health,” Chana Schoenberger references a 2014 paper from researchers at the Neuroleadership Institute. They found that when employees are given ratings, they go into ‘fight or flight’ mode—“the same type of ‘brain hijack’ that occurs when there is an imminent physical threat like a confrontation with a wild animal.”

The study also shows that the element of surprise in annual ratings is detrimental to employee happiness and engagement. Half of all workers are surprised at the rating they receive, and of those, 90% are unhappy because they expected a higher rating. Their engagement also drops 23%.

And as it turns out, no one likes receiving negative feedback. A New Yorker article cited a 2013 survey of 200 university employees on how they felt about their recent performance evaluation. “The researchers figured that people who seek out learning opportunities would react better than those who avoid situations in which they might fail. This was true—but even the avid learners disliked performance reviews, they just disliked them less.”

What millennials want

There’s a reason why everyone wants to know what makes millennials tick. According to Pew Research, more than one-in-three American workers are millennials. Last year they surpassed Generation X as the largest group in the workforce. This is the social generation that lives for instant feedback and communication in their personal lives. Now they want it at work.

Last year, a TrinNet Perform study conducted by Wakefield Research surveyed 1,000 full-time U.S. employees born after 1980 and found that performance reviews are negatively impacting professional growth, breeding mistrust, and causing people to leave companies.

More findings:

  • 62% of millennials have felt “blindsided” by a performance review
  • 74% frequently feel “in the dark” about how their managers and peers think they’re performing at work
  • Nearly one in four (22%) have called in sick because they were anxious about receiving their review
  • More than half (59%) frequently feel their manager is unprepared to give feedback during performance reviews

As an alternative, the survey found that millennials want:

  • More specific feedback, as 40% feel their current feedback is too vague.
  • An open dialogue, given that 32% dislike when reviews don’t allow employees to share thoughts on their own performance.
  • Regular, ongoing feedback, as 32% feel that reviews replace regular feedback.
  • Fair, unbiased feedback to mitigate against the 31% who feel their feedback is biased or unfair.

4 companies that ditched the review 

The shift away from the annual performance review is well underway. Here are just a few of the companies—some of which are known for traditional management practices—that are leading the way.

  1. General Electric: Former CEO Jack Welch was a firm believer in the “rank and yank” system that relied on the annual performance review to rank employees, of which the bottom 10% were then fired. Now GE is getting rid of the formal review and adopting a system of more frequent feedback through an app. A recent Quartz article describes the new app: “There’s an emphasis on coaching throughout, and the tone is unrelentingly positive. The app forces users to categorize feedback in one of two forms: To continue doing something, or to consider changing something.”
  2. Microsoft: The former “stack ranking” system meant Microsoft employees were rated against each other, which “resulted in capricious rankings, power struggles among managers, and unhealthy competition among colleagues,” according to The Wall Street Journal. “Microsoft managers now will give employees more frequent feedback on how they’re performing.”
  3. Adobe: SHRM recently covered the shift at Adobe from an annual forced ranking to “more-frequent, informal conversations between managers and employees—minus the annual ratings.” Donna Morris, senior vice president of global people and places, says voluntary attrition has decreased 25% since the change. Managers are also saving 80,000 hours a year in time they used to spend filling out evaluation forms.
  4. Google: Google developed Objectives and Key Results, or OKRs, which is the first step in the performance management process. Managers rate performance, but then they must solicit peer feedback and calibrate by meeting with other managers to minimize as much bias as possible. Google also purposely keeps reviews and pay discussions separate.

What’s next

You’ll notice some common threads across all these companies. There’s an emphasis on more frequent feedback and the power of positive reinforcement. By coaching employees throughout the year with more informal conversations, we have the opportunity to create an ongoing dialogue that brings out the best in our people.

Why is this so important? Research from Gallup has shown that managers who fail to give feedback fail to engage 98% of their employees. Social recognition is the ideal platform for managers and peers across the organization to promote a coaching culture, because it offers immediate, specific positive feedback whenever colleagues witness great behavior and delivers that positive reinforcement at a time when it will be most immediate and impactful.

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Sarah Payne Sarah Payne (144 Posts)

As Managing Editor, Sarah manages Globoforce's blog and writes content about making work more human for people and organizations worldwide. She has a BA in English and Writing from University of Rhode Island.