Company Culture

9 Critical Reasons to Revise Your Annual Employee Review

March 7, 2018

0min

Few people look forward to their annual employee review, but I don't think that's a big secret.

In fact, many employees dread their upcoming evaluations for weeks or months in advance. And whether or not they're willing to admit it, most managers hate employee evaluations, too.

Yet we continue to suffer through annual evaluations, submitting ourselves to the status quo of these unappealing, supposedly necessary checkups on organizational health. According to a recent SHRM study, as many as 72% of companies still conduct an annual employee review.

Although employee evaluations can be uncomfortable, they're not like root canals; subjects don't often experience tangible benefits at the end of the procedure. In some cases, they're worse off than they were before.

Middle managers, team leads, and employees of all types have voiced their apprehension towards such annual evaluations. A People IQ survey found that 87% of both managers and employees believed annual reviews were ineffective and not useful.

"The reality is that the traditional performance appraisal as practiced in the majority of organizations today is fundamentally flawed and incongruent with our values-based, vision-driven and collaborative work environments," writes executive coach Ray Williams.

So why do we conduct annual evaluations at all? What is it about this process that so many organizations find attractive how has it persisted for so long? In many cases, it's the mindset of "this is how we've always done it" or "if it isn't broken, don't fix it" that has perpetuated the use of annual employee evaluations.

It's an unfortunate predicament, because most employee evaluations are broken.

It's time to fix them.

The encouraging news is that senior leaders and organizations around the world are ditching their annual employee evaluations in favor of more effective and productive strategies.

Unfortunately, some companies commit to updating their outdated employee review processes but continue administering them by a different name.

Here are nine research-backed reasons why everyone should take time to rethink their annual employee evaluations. That thoughtfulness might result in plans for a total overhaul, or some meaningful upgrades; either way, it's an important exercise:

1. They're an overly simplistic measurement for a complicated subject.

One of the greatest failings of the employee evaluation is that it attempts to quantify the value of an employee's contributions, often within a small numerical range.

In her report "Behold the Entrenched—and Reviled—Annual Review," which aired on Morning Edition, Yuki Noguchi explains:

Companies started embracing the review system in the 1960s and 70s, hoping to manage bigger workforces more effectively. They needed a uniform grading system.

The uniform grading system is extraordinarily problematic because it introduced the five point scale, probably the world's worst candidate for measuring human potential.

On a five point scale, there's no room for context.

A single digit can account for a huge difference in the perceived meaning of someone's score, and that's only a small part of the problem. A whole host of complications arise when you try to shoehorn human beings into a standardized mold.

For a literal interpretation, there's an excellent episode of 99% Invisible that details the history of fit standards, the one-size-fits all fallacy, and how breaking from those standards not only improved results but, in some cases, saved lives.

Todd Rose, the Harvard Graduate School of Education's Director of the Mind, Brain, & Education Program, shared some fascinating insights on this topic on the TEDx stage:

2. Science tells us that even great employees are crushed by receiving negative feedback.

It's a common belief that the feedback employees receive during their annual evaluations is constructive—that it's providing them with learning opportunities and some invaluable insights into opportunities for growth. Employees with a desire for self-improvement and a willingness to learn can take the feedback they receive in reviews and become better at their job.

Unfortunately, that belief isn't always true. In many cases, employees receive negative feedback and experience fallout as a result.

In her summary of some fascinating research carried out by scientists at Kansas State University, Eastern Kentucky University, and Texas A&M University, the Washington Post's Jenna McGregor explains how, in the context of a performance review, 'constructive criticism' doesn't really build anyone up. Instead, it deflates even those employees who might be perceived as ready to receive it:

"Those who like to learn—presumably some of the best employees—were significantly bothered by the negative feedback they received."

It's not about having thick or thin skin. Even the elements of a performance review that a manager doesn't intend to be critical can often be perceived in a negative light. McGregor goes on to say that "managers need to be especially careful that what's intended as praise doesn't get misconstrued as criticism. This particularly applies to performance ratings, which HR professionals often plot along a bell curve and use to classify employees' performance."

Even the elements of a performance review that a manager doesn't intend to be critical can often be perceived in a negative light.

A TriNet study of over 1,000 young professionals exiting their annual performance reviews found that half of the respondents felt they couldn't do anything right.

In his recent Forbes article, "Time to Scrap Performance Appraisals?", Josh Bersin notes:

People are inspired and motivated by positive, constructive feedback—and the 'appraisal' process almost always works against this.

Performance appraisals aren't just wasted effort; they can even produce results counter to organizational goals.

Many employees aren't leaving their reviews with brilliant insights into their professional development paths; instead, they're walking away with a sense of disappointment and lowered self-esteem that often translates to decreased performance.

Learn more about the connection between feedback and engagement in our free Essential Guide to Employee Engagement.

3. They're traditionally one-sided.

Annual performance reviews don't just rob employees of the opportunity to share their unique stories; they rob managers of the opportunity to learn about the work environment they're cultivating and identify novel ways to move their organizations forward.

That's a huge blind spot.

Managers significantly impact the outcome of their employees' work and their growth in an organization. That impact can be positive or negative. Nobody wants to be a bad boss, but good intentions aren't enough. There are a lot of well-intentioned but misguided bosses out there.

A constant multidirectional flow of communication isn't just useful in helping employees achieve their highest aspirations; it can help managers and leaders reach a higher level of competency as well.

Research by Utah Valley University showed that less than a third of organizations provide excellent leadership and communication skills training for managers.

When you consider the impact that managers and leaders can have across an organization, it's clear that we should provide them with every opportunity to improve their competencies, whether they're hard or soft skills.

Better communication can help leaders and managers expand their own competencies and help their teams to do the same.

4. No matter how hard you try, they'll always be subjective.

In his lightning-rod feature for the Wall Street Journal, leadership expert Samuel A. Culbert details one of the annual employee evaluation's greatest flaws. Behind the 1 to 5 scale's facade of objective measurement, there will always be an inescapable layer of subjectivity:

"In almost every instance what's being 'measured' has less to do with what an individual was focusing on in attempting to perform competently and more to do with a checklist expert's assumptions about what competent people do."

The Idiosyncratic Rater Effect, published by The Marcus Buckingham Company, reveals that "61% of a performance rating is a reflection of the rater, not the ratee."

We try to be as objective as possible by using matrices or a series of simple scores but the truth still remains: managers and their direct reports are all human.

Different raters will consistently give different ratings to the same person, which can be extraordinarily problematic when the results of these evaluations are tied to employee compensation and career advancement.

5. Some evaluation frameworks derail teamwork and pit employees against one another.

In a case developed for a course on scaling organizational change, the Stanford Graduate School of Business detailed the history of Adobe's employee evaluation practices and its successful restructuring.

There were several key findings in the case, one of which was the counter-effective nature of stack ranking:

With stack ranking, Adobe employees felt compelled to strategically ensure they ranked among the top 15%... Employees attempted to maximize individual success, often at the expense of the team... stack ranking threatened effective teamwork and collaboration because it pitted employees against one another.

Because only a certain percentage of employees can be listed as top performers, many employee evaluation practices with a stacked ranking system risk harming the health of the organizational atmosphere.

6. There are better alternatives.

If it's so problematic, what do we replace the annual employee evaluation with?

You don't have to immediately resort to a dramatic shift, and sometimes that option isn't even on the table. That's okay, though.

Many of the most negative aspects of the annual employee performance review can be mitigated, simply by exhibiting a more frequent cadence of check-ins throughout the year.

As part of a panel discussion during the panel discussion at our recent "The Future of Work: Talent and Culture for the 21st Century," event, Jonathan Basker explained that the annual review isn't the problem all by itself.

It's when that review becomes the singular management moment between an employee and the person who is supposed to be dedicated to helping them achieve their best:

If you manage people, make sure you’ve internalized the obligation you have to these other human beings, how much you affect someone else’s life, and the responsibility that comes with that, whether you like it or not. If you have a problem with that, stop being a manager. You owe those people the growth they’re looking for—the environment and life they’re looking for.

The 360 review

An employee review can become much more effective and useful when it's no longer one-sided. The 360 review is becoming more and more common across modern businesses, especially as the competition heats up for top talent and organizational performance. If you're looking for an easy way to implement and track them, our friends at Small Improvements have a great tool for 360 reviews.

Peer recognition

Although it isn't exactly a formal review process, peer recognition is a great way for employees to understand which of their contributions impact the organization most positively while showing appreciation. Because it's often given on a regular cadence, peer recognition can also help avoid the 'blindsiding' effect some employee evaluations can have. If you're using a system like Bonusly to track and catalog these interactions, it can be an extraordinarily useful record to look back on during more comprehensive long-term reviews.

Read about the power of recognition in our popular Guide to Modern Employee Recognition.

Regular meetings

We recently published an article on the positive impact one-on-one meetings have had on our management relationships. Check it out for some great tips on improving the effectiveness of these meetings. We've also got one on holding more productive and enjoyable group meetings.

Plus, consider implementing employee engagement surveys as a frequent, timely way to gather feedback from your employees.

7. They’re subject to many biases.

Whether they take a more subtle form or they’re baked directly into the review’s framework, unconscious biases are frequently present annual employee performance reviews.

Although most managers work hard to eliminate visible biases from their review process, they inevitably find their way in. In many cases, such biases are difficult to call out because they're not applied consciously.

Here are a few examples of avoidable biases that may be hiding in your own review process or in your subconscious:

Forced/stack ranking

Stack ranking forces managers to hand out scores that aren’t reflective of an employee’s true performance by permitting only a certain percentage of employees to receive high scores. Instead of accurately measuring an employee’s performance against the company standard—that is, the standard they agreed to uphold when they signed on—stacked ranking pushes managers to measure employee performance against that of their peers in a vacuum.

Why is that such a problem? Let’s take a look at this example:

Audrey directly manages a team of six. Each of her direct reports has performed admirably, either achieving or surpassing the goals they set together at the beginning of the review period.

Logically, each of Audrey’s reports should receive a strong score in their performance review; however, in a forced ranking structure, only a small subset of those employees can receive the highest score. What's worse, the greater majority of Audrey’s reports would receive scores lower than they should have rightly earned.

Although stack ranking as a format is on its way out, many organizations still utilize it in employee reviews. Proponents of stack ranking argue that it leads to a higher level of organizational performance overall, but contemporary research suggests the opposite.

Central tendency bias

On the converse side of the forced/stack ranking issue lies the central tendency bias.

This bias is most likely to appear in situations where managers tasked with scoring individual employees poorly opt instead to give everyone a similar, satisfactory score. As Impraise cofounder Steffen Maier explains in his Forbes article, it’s particularly common for managers to participate in this form of bias when faced with the responsibility of giving feedback to low performers.

Why is central tendency bias a big problem?

Feedback is crucial to employee development and sometimes that feedback is necessarily focused on areas employees can improve. If central tendency bias takes hold of your employee review process, you're more likely to blindside your poor performers when you eventually have to let them go since they'll be able to point on a history of strong performance ratings.

Combatting central tendency bias is straightforward once you’ve established that it does exist. Instead of waiting until the end of the year or quarter to have those discussions, provide a channel for continuous feedback between employees, their peers, and their managers.

This strategy allows employees an opportunity to course-correct early on and remedy the situation, which not only benefits them as individuals but benefits the organization as a whole by helping to ensure employee output matches or exceeds expectations more often.

Similarity bias

Similarity bias happens when someone sees more shared qualities in one person than they do another, and as a result, shows a greater affinity towards them. This phenomenon presents itself frequently in daily life outside of work, and takes on a particularly worrisome form in the workplace.

Why is similarity bias such a problem?

Similarity bias shows its more insidious side when applied to the workplace, and especially in the context of an annual performance review, which may impact an employee’s immediate compensation picture, as well as their future at the organization.

“You’re more like me, so I like you more; therefore you get better marks in performance evaluations; therefore you get larger or more frequent raises, greater access to hands-on training, and more career advancement opportunities.”

Similarity bias can be incredibly difficult to overcome on an organizational level, particularly in the context of employee reviews because doing so relies on individual managers to recognize and compensate for an inherent tendency to like those like them. And research has shown that human beings are really bad at doing that.

While some examples of similarity bias may be more obvious or easy to spot, other more subtle examples are likely finding their way into reviews, undermining their effectiveness and purpose. Look for evidence of similarity bias in employee reviews—the first step toward mitigating any bias is to acknowledge its existence.

Recency bias

Are managers taking in the full picture of an employee’s contributions over the year, or are they focused on the few most recent ones?

Recency bias is a common feature of annual performance reviews, particularly within structures without some kind of continuous feedback mechanism. Managers are faced with the challenge of looking back on the contributions of all their direct reports over the past year and accurately assessing them. To put the difficulty of doing this effectively into context, let's start with something simple and personal: try to remember what you had for lunch on this day, six weeks ago.

As Sharlyn Lauby explains in a recent HR Bartender post,

This can go both ways. A poor performer does something terrific and their past performance is forgotten. Or an excellent performer makes a mistake and it weighs down the rest of the review.

Spillover bias

Spillover bias is the opposite of recency bias. Spillover bias moves managers to rate employees based on their historical performance level. Similarly to recency bias, spillover bias can impact a manager’s review process (and an employee’s career) either positively or negatively, based on the nature of the manager’s recollection.

Halo/Horn bias

Halo and horn bias are similar to both recency and spillover bias in that managers aren’t considering the full picture of an employee’s contributions throughout the review period. Halo and horn biases focus a manager on one specific past action. If that action stands out to the reviewer as good, it produces a ‘halo’ effect; if it stands out as bad, it produces a ‘horn’ effect, and becomes the standard by which that employee is rated from that point on.

Mitigating temporal bias

The simplest step toward mitigating temporal biases like recency, spillover and halo/horn bias is having a continuous feedback mechanism that both managers and employees can look back on as a reasonably accurate and objective lens for gauging the year’s performance.

8. They’re expensive

The resource requirements for annual employee evaluations, both in terms of bandwidth and lost productivity might be a surprise if you added them up.

An effectively-conducted review requires a lot of effort and consideration, which comes at a significant cost. The foundation of that cost is simple to calculate—just start with these fundamental components:

The manager’s hourly wage = (x)
The manager’s time spent completing the written portion (1 hour on average)
The manager’s time spent coordinating the review (let’s call it 30 minutes)
The manager’s time spent in the formal review meeting (1 hour on average)
The average hourly wage of direct reports = (y)
The direct report’s time spent in the formal review meeting (1 hour on average)
The number of reports a manager is expected to review = (z)

What you end up with is an equation that looks something like this:

(2.5x + 1y) * z

For a single manager making $55/hr with 10 direct reports making an average of $35/hr, the cost just in hourly wages for one annual review cycle could be as high as $1725. Now repeat that process for all managers required to perform annual reviews.

Now apply the same formula to any of these managers who also participate on the receiving end of an annual review with senior leadership or their own immediate manager. A few of these variables may look a bit different in your organization, but this is some basic math you can use to evaluate the cost in hourly wages, and it's math that doesn't always get done.

Not a fan of doing math? No problem! I created a spreadsheet you can use. Simply make yourself a copy and punch in the numbers.

Keep in mind also that this is representative only of the cost in hourly wages, with no consideration for the cognitive load associated with task switching or the negative impact reviews can potentially have on employee morale.

With that in mind, it’s not surprising that many annual reviews take the form of a 10 minute, impromptu surface-level meeting that neither party gains from.

So this begs the question: is either approach worth it?

9. They occur too infrequently to be actionable.

In the best case scenario, both parties might leave a particularly positive or constructive evaluation feeling re-energized about and re-focused on their work. But what are the odds they’ll be equally engaged and excited one month, two months, or six months after the evaluation?

Because they occur only once a year, even the best annual employee evaluations aren’t often enough to sustain motivation and employee engagement. A lot can happen in a year, which is why frequent, timely, and ongoing feedback and recognition are invaluable to continuous employee development.

Josh Bersin estimates that about 70% of multinational companies are moving away from annual reviews that are critical of past behavior “at the expense of improving current performance and grooming talent for the future” and moving towards the model of regular conversations about performance and development, reports the Harvard Business Review.

“Rapid feedback matters because it translates experience into learning while the experience is still alive for us. This translates into registering whatever value there might be in the feedback more deeply, and into internalizing the learning more fully,” writes Niko Canner in his piece for Thrive Global.

See something, say something

If you’re addressing an issue with someone for the first time during their performance review, they’ll no doubt be wondering why you didn’t say something sooner. “Effective managers discuss both positive performance and areas for improvement regularly, even daily or weekly,” writes Susan M. Heathfield for The Balance. “Aim to make the contents of the performance review discussion a re-emphasis of critical points.”

Frequently giving constructive developmental feedback, whether you’re rewarding past successes or focusing on opportunities for improvement, will increase the number of positive interactions you have with your team. By increasing the frequency and lowering the perceived stakes of each teachable moment, you might even start to enjoy giving feedback.

In conclusion

Although the annual employee evaluation is fairly entrenched across many organizations, it has proven not to be as useful a tool as it was promised to be decades ago.

Fortunately, there are many great alternatives to the annual review, and some excellent strategies for improvement when it can't be replaced.

Let's take a moment to recap with this infographic: