Should You Get Rid of Annual Performance Reviews?

February 18, 2018

Ongoing feedback may improve performance management

Recent research reveals neither employees nor managers appreciate the annual performance review process. About one-third of managers say annual reviews take too much time. Employees worry their managers won’t be fair—according to Forbes, 31% of Millennial employees reported being “afraid their review will be biased.”

Across many industries and at many organizations, the annual performance review is being phased out, in favor of other less regimented forms of feedback. As companies attempt to gain agility in the digital economy, they need to reconsider the frequency and format for delivering employee performance feedback.

The history of the annual performance review

Performance appraisals were developed during World War I as a way for the military to identify underachievers for discharge or transfer. Corporations soon followed suit and by the late 1940’s, 60% of companies used annual performance reviews, though the seniority system still dictated raises for most employees.

In the 1970’s as inflation raged in the U.S. economy, companies began to look for ways to award more merit-based pay to top performers and relied heavily on performance reviews to make those discretionary decisions.

In the 1980’s Jack Welch led GE in a forced ranking system based on annual performance reviews. Top ranked employees profited; the bottom 10% was dismissed. Many other organizations followed GE’s lead throughout the 1990’s.

By the mid 2000’s, many organizational experts were starting to question the efficacy of annual performance reviews. Over the past decade, large tech companies such as Adobe, Microsoft and IBM led the way in abandoning the practice, followed by professional services firms like Deloitte, PwC and Accenture.

Today, even GE—the company most identified with annual performance reviews—is calling it quits on annual performance reviews. GE is “abandoning formal annual reviews and its legacy performance management system for its 300,000-strong workforce over the next couple of years, instead opting for a less regimented system of more frequent feedback via an app.”

Why are companies getting rid of annual performance reviews?

Corporations embraced the annual performance review model for a long time. However, annual reviews have demonstrated serious drawbacks in practice, causing organizations to modify the process or abandon it altogether.

  1. Annual performance reviews look backward. Annual reviews look back over one year to determine merit pay, but it is difficult for managers and employees to remember details from long ago. There is often little correlation between what occurred a year ago and what is needed to improve performance going forward.
  2. Managers dislike both the process and the paperwork. Survey after survey has revealed that managers can’t stand the performance review process. It is time consuming, full of paperwork, and often frustrating as managers attempt to reconcile review scores with salary budgets.
  3. Younger employees prefer more frequent feedback. Millennials in particular, crave positive recognition in the moment and regular, timely feedback that helps them develop professionally.

What is next for performance management?

Performance reviews will continue to be a fixture of organizations, but in the future, they won’t be annual reviews, won’t include rankings, and they may not be so focused on numeric scores. HR researcher, Josh Bersin, suggests conducting more regular conversations about performance and development in order to focus on what is needed in the present and future, rather than the past. Bersin estimates approximately 70% of multinational organizations are adopting this model of performance management.

According to Bersin, the next generation of performance review will include:

  • An open and continuous conversation between manager and employee
  • Employee self-assessment and goal setting
  • More frequent performance goals—according to Bersin, “Companies that set performance goals quarterly generate 31% greater returns from their performance process than those who do it annually, and those who do it monthly get even better results.” 
  • Bi-directional feedback, with employees also giving feedback about managers
  • Reviews less tied to compensation, or “pay for performance,” with managers encouraged to also look at the larger contribution to the company

As your organization works to create a performance review process for the future, Asure Software’s Performance Management solution can help you deliver consistent, timely feedback that keeps the conversation between employees and managers going.