A Call to Ditch the Annual Review Cycle: Human CI’s Take
If you have ever been a part of corporate America you are likely all too familiar with the painful experience of the annual employee review cycle. Providing peer and manager feedback, writing employee evaluations, stressing about your own performance rating, and going through the thunderdome-like calibration process; it’s more than just a time suck, it’s an emotional rollercoaster. We’ve been doing this antiquated, sorry, "traditional" and wasteful process for so long, it likely doesn’t occur to us that we can function just fine without this non-value-add time suck. Human CI thinks we can, and should, give up the annual review process.
From the LinkedIn Post “Annual Reviews Suck. What to do Instead” by Steve Martin
95% of managers are dissatisfied with how companies conduct performance reviews. (1)
90% of HR leaders say the process fails to yield accurate information. (1)
A McKinsey study found most CEOs don’t think appraisals effectively identify top performers. (2)
Gallup discovered only 1 in 5 employees feels motivated by their company’s performance practices. (2)
To understand our take, we start with a question that is common for those in Continuous Improvement, “Why does this process exist in the first place?” Below are the outputs of the annual review cycle and why we think that, if they are not all together pointless, at best they are not worth the resource drain, stress, and negative impact to employee morale.
Reason 1: “That’s how we determine people’s bonuses”
Our take: There’s no better way to do this? Here’s one suggestion. At the start of the year, set SMART goals for each individual with stretch goals (exceeds expectations). This could also be a collaborative process, with individuals drafting their own goals. At the end of the year, compare actual vs performance to the goals, and allocate the corresponding score. Ideally, the performance rating is transparent, little time is spent debating, and no one is surprised.
Reason 2 “We need to reward our top performers”. Top performers are not incentivized by bonuses. When your top performer is attacking their latest project or task, their year end bonus is probably the last thing on their mind. Reward and motivate with development, opportunity, recognition, and promotion.
Reason 3 “We have to keep bonuses in budget”. Yes, we can’t spend double on bonuses than we expected and we believe that reason #3 is one of the primary drivers to the annual review cycle, because we have assumptions that a certain percentage of employees should fall on a scale of 1-to-x, for example, in a sort of normal distribution. So, simplify it. 3 buckets. Audit the process once. If the managers feel that the distribution is not normal and we have more top performers than bottom… change the budget. Don’t bump people down a level because you can’t afford to pay what you agreed to. An individual's performance is not related to those of their peers, especially when comparing between very different teams. Pay bonuses based on their performance, not your bell curve. If a football player signs a deal that if they score x touchdowns they get a bonus you don’t say- “sorry, no, because a bunch of other running backs also scored x touchdowns”. You made the deal, live up to it. Or get rid of the whole thing all together. No more bonuses, we are bumping everyone’s pay and avoiding this headache from here on out. Everyone will probably thank you.
Reason 4 “We need to make it fair”. Ok, but, it’s not. See the tip under reason 1 for a more fair approach, or simply make bonuses linked to how the business is doing. Perfectly fair for everyone.
Reason 5 “We need to cut the bottom (x%)”. This one is the worst reason of all. If you NEED to accept the cost of attrition and turn over to cut the bottom 10% or so, your organization has bigger problems. Improve your hiring practices. Currently, managers are already incentivized to performance-manage bottom performers. Trust them. Or, if your organization is so poor at hiring good talent, perhaps it’s time to look in the mirror and realize- you aren’t that great. Trust your managers to let you know who needs to go.
In addition to all the cost and waste when reviews are done the employee is left feeling either assured that their self assessment was correct (they got what they expected) or they are disappointed. They are almost NEVER happy or delighted, given that most people think they are doing a good job and deserve 100% of their bonus. Similarly, top performers know they are good and if anything often get less than they expect due to the fight for the top spots on the bell curve.
The annual review is a process that causes anxiety and fear. It puts people in defensive mode and pits co-worker against co-worker. It’s a cage-match process, where managers fight over their piece of the pie and biases are prevalent with little incentive for disruption, as long as you or your employee isn’t the one suffering. Give. It. Up.
All in all, there are no positive outcomes from this process and only negative ones. The process is ineffective in both assessing talent and motivating employees, often instead has the opposite result, all while pulling focus away from valuable activities in the business. So what should we do instead? Coach, develop, promote, terminate, get feedback, give feedback- do all those things. Ditch the annual review. And if not, at least make the playing field fair. One suggestion, maybe it’s time to allow employees to give their organizations annual reviews and hold leaders accountable to those rankings and plans to improve?
(1) Weinstein, M. (2016). Annual review under review. Training, 53(4), 22–28.
(2) Cespedes, F. (2022, July 8). How to conduct a great performance review. Harvard Business Review. https://hbr.org/2022/07/how-to-conduct-a-great-performance-review
