Are annual performance appraisals useless?

Formal performance reviews are inaccurate and have no impact on productivity. Simpler solutions like everyday feedback conversations can provide a better understanding of the value of employees, but there is no silver bullet.  We have long been an advocate of ongoing coaching and setting qualitative Objectives combined with shorter term, more precise Key Measures.

The ultimate success or failure of a company comes down to the quality of employees. As Jack Welch, former chairman of General Electric, once said, “the team with the best players wins.”

Companies spend millions of dollars and burn countless hours conducting performance reviews to assess their employees and sort the good ones from the bad ones. But by all available evidence, formal attempts to rate employees don’t seem to meaningfully improve employee performance or give companies any sort of competitive advantage. A report from 2012 that gathered more than 23,000 employee ratings from 40 companies found no sign that ratings had any effect on profits or losses.

The growing body of research questioning the value of performance reviews has encouraged many companies like Dell, Microsoft and IBM to ditch them. But a 2018 survey by the research firm World at Work found that 80% of companies still used formal performance reviews. Managers must have some rationale for assigning promotions and raises. If there’s no data on performance, the process of handing out promotions and raises can turn chaotic and can even make companies vulnerable to lawsuits if they don’t have a way to justify decisions. 

However, rating employees solely on objective measures such as sales numbers, absentee days, or customer calls can be wildly misleading. A salesperson with the most sales may have a better territory or better luck than others, not more talent or drive. Objective measures may seem straightforward, but many factors are beyond an employee’s control.

According to some experts, rating employees should be kept simple.  The practice of everyday coaching and feedback can really contribute to understanding the value of employees. That means checking in on them every day and giving them real-time feedback on things they’re doing well and areas where they can improve. 

Some companies, like Google, have taken appreciation of superstar employees to extremes by paying high-performing employees five or six times as much as other employees at the same level to improve productivity.

At the end of the day, however, every company has to figure out its own approach to getting the most out of its employees in line with their strategic goals.

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