Why Companies Are Ditching Annual Performance Reviews

Annual performance reviews have been the cornerstone of performance management for years, but few employees or managers like them. A Deloitte survey found 58% of its managers believed traditional performance reviews did not serve their purpose. What’s more, CEB found 95% of managers were dissatisfied with how their companies conduct performances reviews, and almost 90% of HR leaders said the performance review process doesn’t even provide accurate information.

No wonder companies such as Deloitte, General Electric and Accenture have all declared the they will no longer conduct annual performance reviews.

Here’s why companies are ditching the annual performance review—and what they’re doing instead.  

The Problem With Performance Reviews

Years ago in the Wall Street Journal, Samuel Culbert, a professor of management at UCLA, had a lot to say about the problems with performance reviews. Some of his points were:

    • Participants in a performance review have different purposes. The boss wants to discuss how to improve performance, while the employee wants to discuss issues such as compensation and career advancement. They’re speaking at cross-purposes, which means the conversation isn’t going to be fruitful.

  • Performance doesn’t equal pay. Many companies claim it does, without acknowledging the role market forces play in setting salaries. Most jobs are placed in a pay range before an employee is even hired. An employee’s performance doesn’t change that range.

  • There’s no such thing as an impartial review. Everyone has their own personal preferences, biases, and situational motives. All of these factors come into play when someone is evaluating another person’s performance. In fact, research shows performance ratings reveal more about the person doing the rating than the person being rated.

  • Performance reviews undermine the relationship between bosses and their employees. Performance reviews give managers all the power over the employee, and ignores the fact that managers and their employees work together to achieve their objectives. Joint performance is ignored.

Other researchers have found other flaws with performance reviews. Research psychologists found negative feedback during an annual performance review didn’t motivate employees to improve — in fact, it had the opposite effect on their performance. If that wasn’t bad enough, employees also even misconstrued positive feedback.

The New Approach: Ongoing Performance Management

Annual performance reviews may be on their way out, but performance management is still important. Employees want to know how they’re doing and discuss their performance with a manager. In fact, they want to do it more than once a year.

As GE’s head of human resources Susan Peters has said, "The world isn’t really on an annual cycle any more for anything."

In our on-demand era, companies are moving towards radically frequent check-ins, rather than annual performance reviews. They are also turning managers into coaches and rating future intentions rather than past performance.

Here’s what you can learn from the new, ongoing approach to performance management favored by Deloitte, Accenture, Netflix, and other companies rethinking performance management. Though many of these companies operate in a corporate model, the practices that they undertake can be applied by managers across industries.

Conduct “Radically Frequent” Check-Ins

Research shows the best team leaders regularly check in with their team members to set expectations for upcoming work, review priorities, and provide feedback. Such conversations are important in helping employees understand their purpose and what they are expected to do. They are essential for ensuring employees perform their best.

That’s why companies like Deloitte expect their team leaders to meet with each member of their team on a weekly basis. As they explain:

If a leader checks in less often than once a week, the team member’s priorities may become vague and aspirational, and the leader can’t be as helpful—and the conversation will shift from coaching for near-term work to giving feedback about past performance. In other words, the content of these conversations will be a direct outcome of their frequency: If you want people to talk about how to do their best work in the near future, they need to talk often. And so far we have found in our testing a direct and measurable correlation between the frequency of these conversations and the engagement of team members. Very frequent check-ins (we might say radically frequent check-ins) are a team leader’s killer app.

In addition to regular check-ins, Deloitte and Accenture have instituted systems where employees receive feedback either quarterly or after projects have been completed.

As Patty McCord, the former chief talent officer at Netflix, put it, “If you talk simply and honestly about performance on a regular basis, you can get good results—probably better ones than a company that grades everyone on a five-point scale.”

The data supports this. BetterWorks suggests employees whose managers check in on their progress towards weekly goals are more than 20 times more likely to achieve them.

Turn Managers Into Coaches

Sitting employees down once a year to talk about their performance isn’t going to turn them into high performers. Coaching them will.

With regular check-ins, managers spend less time managing and more time coaching. It becomes more natural for them to help employees troubleshoot issues, manage priorities, discuss learning and development. In other words, managers become coaches and are more involved and invested in their employees’ success and growth.

Rate Future Intentions Rather Than Past Performance

While people are inconsistent and subjective when rating other people’s skills, they are very consistent when rating their own intentions. Deloitte realized a better way of assessing an employee’s skills was to ask their supervisor whether they agreed with these four statements:

  • Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus.

  • Given what I know of this person’s performance, I would always want him or her on my team.

  • This person is at risk for low performance.

  • This person is ready for promotion today.

Feedback solicited in this way is more objective and gets straight to the point of whether or not an employee is performing well.

If the annual performance review has been part of your HR practices for a long time, it may seem impossible to manage performance without it. But take a cue from the companies abandoning it: adopting an approach of ongoing performance management will be better for your employees and your company.

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