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The dumbest managerial tool: annual performance reviews

by Jay Shepherd. Average Reading Time: about 2 minutes.

A recent article in The Wall Street Journal discusses some of the problems with annual performance reviews and how a few companies are abandoning them. In the article, (“Performance Reviews Lose Steam,” Dec. 19, 2011), Rachel Emma Silverman mentions that even HR professionals recognize the flaws in the system:

Performance reviews have long received poor grades, even from those who conduct them. Nearly 60% of human-resources executives graded their own performance-management systems a C or below, according to a 2010 survey by Sibson Consulting Inc. and WorldatWork, a professional association. And one academic review of more than 600 employee-feedback studies found that two-thirds of appraisals had zero or even negative effects on employee performance after the feedback was given.

Silverman writes that about one percent of companies are ending the practice, citing a report of the Corporate Executive Board. Well, it’s a start, I guess.

In Chapter 8 of Firing at Will, I discuss annual performance reviews at length, calling them “the dumbest managerial tool.” Here’s why:

First of all, emphasizing that employees’ performance should be measured on an annual basis suggests that there’s less reason to measure it on a more-frequent basis. That’s insane. First of all, who can possibly remember how a particular employee was performing ten or eleven months ago? So what ends up happening is that the past month or two get undue weight in the “annual” evaluation.

Second, if the purpose is to correct poor performance or behavior, why would you wait till the end of a year to do that? Performance and behavior issues need to be dealt with when they arise, not saved up till the end of an arbitrary twelve-month period. Similarly, if the appraisal is intended to reward good behavior or performance, why in the world would you wait? “Hey, Alice. That thing you did back in March was terrific. Way to go.” Alice: “Huh?”

Third, if the purpose is to tie the evaluation to a decision about a possible pay increase, that’s also foolish. In a well-run and well-managed company, pay decisions should be made on the basis of the employees’ individual contributions on an ongoing basis, not based on the mere fact that they avoided attrition for another calendar year.

My fourth problem with the annual basis is that managers tend to blow it on the timing. I always did. An evaluation that was intended to go out in early January would just as likely get finished in late March. That’s normal, because managers usually have more-important managerial tasks to accomplish, like running the actual business.

The problem is, if you tell your employees that you’re going to do annual performance appraisals in January, they’re going to expect to receive them in January, along with some sort of a pay raise. When January slips into February and then March finally comes around, those employees are going to be unhappy with you, even if they know you’ve been busy doing real work.

Companies end up using performance reviews as a crutch in place of actually managing their employees real-time. In fact, the reviews do more harm than good. Don’t be part of the 99%. Get rid of annual performance reviews, and instead teach your managers to manage.

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