“I love performance reviews!”—said nobody, ever.
Despite their unpopularity, most companies still conduct annual performance reviews even though 98% of CHROs admit their performance management processes are broken. Why cling to something that doesn’t work? Because many executives simply can’t imagine a better way to enhance employee performance.
What if there’s a way to ditch performance reviews and improve performance?
Performance reviews are intended to enhance employee performance by providing feedback, setting goals, and aligning performance with compensation. While these are helpful strategies, the tool used to implement them often undermines their effectiveness, leaving employees disengaged and managers frustrated.
Why Performance Reviews Must Go
Performance reviews originated during WW1 and became the default corporate torture test of bureaucratic futility by the 1960s. If your company has evolved its operations, sales, and IT processes since then, take that as a clear sign it’s long overdue to overhaul your people processes.
Here are a few reasons why performance reviews don’t work:
- Too Infrequent. Performance reviews often bundle months of feedback into a single, overwhelming session. That’s a problem because people can only effectively process one piece of feedback at a time. Performance reviews make feedback difficult to absorb and too late to do anything about.
- Is Subjective and Unfair. Most performance reviews rely primarily on the manager’s opinion. While a manager’s perspective is important, it isn’t always reliable. Manager bias is well-documented and poor leadership is often a key reason for employee underperformance.
- Destroys Trust. Imagine if your partner documented all your mistakes to ensure they have an advantage in the divorce proceedings if things don’t work out. But don’t worry, they’ll review it with you once or twice a year to prove you’ve received this feedback. No relationship would survive that, yet corporate executives wonder why employees don’t trust management.
- Encourages Defensiveness. When performance ratings are tied to pay, employees become motivated to argue their case instead of listening to feedback. In fact, performance reviews often trigger a fight or flight response like how people react to physical threats. Instead of an opportunity for learning, reviews often deteriorate into a negotiation for a higher rating.
Not surprisingly, a large meta-analysis revealed that traditional performance reviews cause employee performance to decline one-third of the time. Fortunately, there is a better way to achieve the goals of performance management through principles, not forms.
Principles of Enlightened Performance Enhancement
The goals of performance management can be achieved in a far more effective way by applying the following principles:
1. Establish Expectation Agreements
The most common reason people fail to meet our expectations is because we haven’t clearly communicated with them. In fact, research shows fewer than half of employees know what is expected of them at work.
If it happens at all, expectation-setting is usually a top-down process. Great managers, however, also ask their team members what they need to succeed. For example, a manager might expect high-quality work, while an employee might require training, examples, or autonomy to deliver. Expectations should be a two-way street.
Clear expectations enable managers to hold people accountable fairly and provide employees with a mechanism to give feedback to their managers. Ironically, most managers only think about discussing expectations once an employee fails to meet them. Imagine how much potential could be unlocked if expectations were clear from the start!
2. Elevate Your One-on-Ones
One-on-one meetings are like the Swiss Army Knife of leadership. They are the ultimate multi-purpose leadership tool ideal for providing feedback, coaching, and discussing goals. Regular one-on-ones can and should replace periodic performance reviews. To make this happen:
- Clarify Purpose. Most manager-employee interactions are about day-to-day issues, not meaningful discussions. In contrast, one-on-ones are scheduled time reserved for strategic discussions and to ensure employees can get what they need from their manager and address sensitive issues as required.
- Increase Frequency. Employees need more than a few annual touchpoints to receive meaningful feedback and coaching. While the ideal frequency of one-on-ones depends on team size and work complexity, weekly meetings yield the highest engagement. Regular meetings proactively address issues, saving countless hours spent reactively firefighting.
- Flexible Agenda. For one-on-ones to feel valuable to employees, they must have some control of the agenda. Shared digital agendas allow both parties to add topics throughout the week, reducing the need to interrupt each other. Different topics can be rotated on the agenda at different frequencies, such as weekly project updates and monthly goal reviews.
3. Keep Managers Accountable
The purpose of providing employees with feedback isn’t to check a box on a form, which means it shouldn’t be measured by the percentage of reviews completed. Rather, the measure of feedback is how useful it is, and only employees can tell you that. This can be accomplished by adding the following two questions on a quarterly engagement survey:
- “My manager provides enough useful feedback to help me improve my performance.”
- “My manager helps me stay accountable to my goals in a positive and productive way.”
When employees identify their manager on engagement surveys, managers can receive individual reports on their leadership impact. These results should feed into managers’ performance discussions and compensation. This approach not only motivates managers to improve their leadership skills but also elevates HR professionals from compliance officers to strategic partners who support managers with leadership development resources when requested.
4. Modernize Your Compensation Formula
Compensation is perceived as fair only when the process behind it is fair. Given the well-documented flaws in traditional performance reviews, it’s no surprise that fewer than one-third of employees feel they are paid fairly.
Consider these questions: Should star performers receive the highest pay increases if they fail to live the company’s values? Should employees be penalized for their manager’s incompetence or bias? And how can you reward team members who make sacrifices for the greater good? A single, subjective, performance rating can’t address these nuances—but a formula can.
Fair compensation contains four key elements: relevance, transparency, equity, and control. For instance, the stock market works because investors know:
- Their returns are tied to the performance of their portfolio (relevance).
- Calculations are open to scrutiny (transparency).
- The same rules apply to everyone (equity).
- Their decisions influence their outcomes (control).
Employers can mirror this fairness by including these elements in compensation systems:
- Relevance. Base pay on factors like market rates, individual performance metrics (measures of quantity and quality of work), goal achievement, customer feedback, teamwork (measured via surveys), leadership impact (from 360-degree feedback or engagement surveys), and overall company results.
- Transparency. Publish all compensation formulas and clearly explain the weighting and rationale for each factor.
- Equity. Ensure formulas are consistent within roles, even if they differ across positions. Transparency helps mitigate any perception of bias for subjective elements like market rates.
- Control. Give employees some say into which factors are included. Managers should help employees understand the behaviors and results needed to influence their pay.
Replacing subjective performance ratings with a formula-driven approach can create a fairer compensation system that boosts engagement and performance.
The Bottom Line
Performance reviews are relics of the past. By embracing two-way expectations, enhancing one-on-ones, keeping managers accountable, and establishing objective compensation systems, organizations can finally fulfill the promise that performance reviews failed to deliver.
Michael Timms is a leadership consultant and speaker. His TED Talk is How to Claim Your Leadership Power. His latest book is How Leaders Can Inspire Accountability