If the Annual Performance Review Is on Its Way Out, What Can Replace It?

Systems are still needed to fairly award promotions, pay raises, bonuses

By Dana Wilkie Dec 7, 2015
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The traditional performance review is losing favor with some companies, but without a systematic review, how can workers’ progress be documented so that managers can objectively hand out promotions, pay raises and bonuses?

That’s the overarching question among HR professionals as company after company announces that it’s scrapping annual performance reviews—a development that has sparked a national dialogue about the usefulness of such appraisals and the alternatives available.

Citing managerial dissatisfaction with reviews, their time-consuming nature, the awkward dynamic they create between managers and employees, and the unhealthy competition they can foster among co-workers, companies such as General Electric, Accenture, Deloitte, Microsoft, Adobe, Gap and Medtronic have replaced performance reviews with other approaches.

Among the changes: eliminating all numeric scales; doing away with “forced” or “stacked” rankings that create competition among employees; and replacing the once-a-year appraisal with ongoing feedback on a worker’s performance throughout the year.

In all, 6 percent of Fortune 500 companies have gotten rid of rankings, according to CEB, a management research firm formerly known as the Corporate Executive Board. Cliff Stevenson, a senior research analyst for the Institute for Corporate Productivity—which studies management practices—recently told The Washington Post that the figure is closer to 10 percent.

Shift from Annual to Ongoing Reviews

So are companies rejecting the conventional metric- and goal-based performance review altogether? Or just the “annual” nature of such appraisals? Are they getting rid of most of the data collection that tracks a worker’s progress, or only changing the way they collect data?

It depends on the company.

“In most cases, when we hear about organizations getting rid of annual performance reviews, we’re actually hearing about a shift away from waiting until the end of the year to share information, rankings or ratings to [providing] ongoing feedback,” said Dominique Jones, vice president of human resources at Halogen Software.

Real-time feedback, as it’s called in the HR industry, often relies on software that allows managers and workers to frequently report on what steps are being taken to reach goals, how far along a project has evolved and what roadblocks need to be removed to finish an assignment. Such software can allow managers to see a day-by-day snapshot of a worker’s progress toward specific goals, often using graphs or charts. An employee’s manager, direct reports and peers can comment on his performance. Managers get a broad, well-sourced perspective about an employee, which can eliminate some of the personal bias that can crop up during a one-on-one performance review, said Kris Duggan, CEO at BetterWorks, an information technology and services provider in the San Francisco Bay Area.

“We need to document performance, but we need to do this on a more frequent basis than once a year when managers can’t remember what their team members did at the beginning of the year,” said Jason Averbook, CEO of TMBC, a global provider of engagement and performance solutions based in Los Angeles, Calif. “By asking team leaders to frequently answer questions about each team member, this allows organizations to establish metrics and data that can be used to assign promotions, raises and bonuses, with statistically reliable data.”

There is much talk about more-frequent check-ins with employees—for instance, immediate feedback after an assignment—rather than annual reviews. Could this mean even more work on the part of managers, especially those who oversee large teams?

“Actually, more-frequent check-ins with employees saves time,” Duggan said. “It takes three weeks a year to do an annual performance review, or it can be done in small segments regularly, making it more relevant to the employee and less burdensome to the manager. Imagine waiting until the end of the year to get a summary of your Fitbit step count. The information obtained wouldn’t be as timely or relevant, and it certainly wouldn’t change much behavior.”

What about forced rankings, which typically require managers to rate each worker’s performance using a number that compares him or her with peers? In some companies, employees scoring in the bottom percentiles are fired. Research indicates that forced rankings don’t foster productivity or improvement and actually create antagonism between managers and workers.

“Ultimately, an employee’s performance should not be judged and compared to others, but judged against the metrics that are set for success for that role,” said David Brennan, general manager for Achievers, a San Francisco-based employee recognition company. “The days of pitting employees against each other are gone. The days of recognizing employees for their individual attributes and contributions, and how those strengths can support the overall company goal and mission, are here.”

Yet some companies dole out limited promotions and salary and bonus dollars by comparing the work of employees. Can a worker more easily claim discrimination in promotions or pay if there isn’t data documenting that others were more deserving based on their ranking in the company?

Experts said that promotions and raises have long been decided based partly on subjective evaluations, even when supposedly objective annual reviews are involved. Well-respected testing tools show that personal quirks and biases, conscious and not, influence how supervisors think about and describe workers.

“When evaluating who gets promotions, raises and bonuses, it has to be done in a more subjective manner, taking into account the competitive rate for the market, the amount of time since the last raise, what sorts of customer or internal relationships have been developed, and how well the employee is executing on his or her objectives,” Duggan said. “Ratings and ranking don’t capture this—the framework is too difficult to follow and often ends with managerial debate. If things remain the way they are across many companies, you will let down your highest performers.”

Tips for Transitioning

Brennan said it should be every company’s 2016 New Year’s resolution to transition from “outdated annual performance reviews to a new feedback system that increases engagement.” A few of his tips:

  • Train your front line. Give managers the tools they need—such as real-time performance software—to initiate frequent and productive conversations with workers. Make sure they know why this new approach is important. “Traditional performance reviews can be extremely anxiety-inducing,” Brennan said. “Managers feel awkward giving them, and employees shut down and turn defensive in the face of imminent criticism. Teach your leaders how to engage in real-time conversations that raise performance—not blood pressure.”
  • Be consistent. If you’re ditching the annual performance review, be consistent in the new format so employees know what to expect. Achievers, for instance, encourages managers to meet one-on-one with each employee every week. “These conversations are invaluable,” Brennan said. “Managers can help employees set career paths, provide important coaching moments, listen to ideas, and identify areas where they need to remove roadblocks. The focus isn’t on grading how well people are doing, but on constant improvement through consistent communication.”
  • Get executive buy-in. Executives will warm up to a new performance management system if you show them data, Brennan said. That means reporting on return on investment for financial leaders, customer satisfaction for sales leaders and engagement for HR executives. Record baseline metrics before you eliminate your old review system, and then track changes as managers begin to roll out real-time feedback. When you’re able to provide concrete evidence that the new system achieves desired outcomes, you can win executive support.

Dana Wilkie is an online editor/manager for SHRM.

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