Room for Improvement: How to Build a Better Performance Review System

Business.com / Managing / Last Modified: February 22, 2017

The traditional annual performance review is outdated for today’s knowledge workers. Here's what you should do instead.

In theory, performance reviews help management determine how well employees are doing as well as identify how the company can help employees do better. 

In practice, they are frequently bureaucratic exercises that waste time and effort, divert from more important activities and, worse, add to a manager’s stress in not wanting to strain personal relationships by evaluating anyone unfavorably.

According to a 2014 Deloitte study, “Companies worldwide are questioning their forced-ranking, rigid rating systems and once-a-year appraisal process [which is] damaging employment engagement, alienating high performers and costing managers valuable time. Only eight percent of companies report that their performance management process drives high levels of value, while 58 percent said it is not [...] effective.”

The situation is further exacerbated in startups and small- to mid-sized businesses where goals and strategies are constantly shifting, and managers and employees are constantly switching among multiple projects, frequently under various team leaders.

A yearly evaluation is inadequate to address individual performance problems that can seriously detract from a team accomplishing critical, but short-term, tasks.

Employee flow chart: Working? Work harder.

Related article: Reinventing Performance Management: A Deloitte Case Study

The traditional performance review model was developed in a pre-Internet world, when companies were more hierarchical and most employee performances could be measured by numeric outputs, i.e., number of units produced, hours worked, widgets sold.

But today’s workers are primarily in service-based or knowledge-related jobs that rely on the ability to use unique skills to innovate, create change, and determine and satisfy customer expectations.

As Edie Goldberg in Talent Management and HR describes it, “The traditional performance management (TPM) process has not kept up with contemporary business challenges. Using an outmoded performance management approach feels like driving up in a 1950-era Thunderbird to pick up a colleague. The style might be a classic one, but the ride won’t be very comfortable.”

Related article: Break Free from Performance Management Shackles: Companies That Are Paving the Way

The situation is further exacerbated if management appraisals are based on inaccurate measurements and/or colored by personal prejudices. 

Harvard Business Review notes a study of some 4,500 managers who were rated on certain performance dimensions by two peers, two bosses, and two subordinates.

The results: 62 percent of the variance in ratings could be accounted for by individual raters’ peculiarities of perception, while the actual performance accounted for only 21 percent of the variance. In other words, the ratings tended to reveal more about the raters than those being rated.

The word "change" on a computer screen with a mouse arrow pointed at it.

Somehow performance has to be evaluated and, most importantly, timely support must be provided for employees to improve performance in order to meet company and customer expectations.

Here’s how, based in part on how Max Ventilla, former Google employee and founder and CEO of AltSchool, re-engineered performance reviews to better fit the needs of his startup:

  • Set a frequency for evaluating performance that is both practical, reflective of company culture, and in sync with the needs of the business. A year may be way too long. For some companies, a quarter may be too long, and a weekly or a bi-weekly process may work better.
  • Nothing is set in stone. Just like everything else your company does, the performance process needs to be iterative, subject to feedback, and updated to reflect the current needs of the business.
  • Track data. Make sure this whole process doesn’t get out of hand. The one thing you want to avoid is evaluations taking up an inordinate amount of time. Ventilla reports that the average quarterly performance review takes about two hours for the average employee and five hours on average for managers. If you’re finding out that performance reviews are taking up more time, then you need to determine why, and whether that’s a good thing.
  • Dedicate someone to manage the process. If you don’t have someone in charge to make sure everyone is on the same page then you’re going to get inconsistent, which can lead to producing unfair and inaccurate results.
  • Mix self-reviews, peer-reviews and management assessments. This way you’ve got a number of perspectives, rather than a single viewpoint.
  • Make it plug-and-play. Define a few key criteria in simple, clear terms. 

Examples:

  1. What did someone do to help the team succeed?
  2. What challenges did someone face and how were they overcome?
  3. List key strengths
  4. List areas in need of improvement
  5. Use Ratings: Unsatisfactory, Needs Improvement, Meets Expectations, Exceeds Expectations, Truly Exceptional

It works in both directions. Team members need to evaluate their team leaders and managers as well as the other way around.

Focus on what needs improvement. No one is perfect. The purpose of a performance evaluation is not punitive. The goal is for everyone to grow. Employees should expect and welcome criticism that is constructive, not just merely critical.

Provide actionable steps to improvement. It’s not enough to say someone lacks people skills or misses deadlines. There needs to be a recommendation to actually act on and achieve improvement. The employee without people skills should perhaps be moved to a more technical role where they don’t interact with customers, or even other team members, that much. Determine why a person is missing deadlines (bad work habits, inattention to detail) and develop a plan of support steps (a daily diary of what tasks were done, which needed to be done, and which weren’t and why).

Calibrate. Eventually you’ll have a baseline for each employee. If that baseline deteriorates, the immediate question is why. Is something going on with the employee that needs supporting (say, a medical or family problem)? Or has the employee been put in a new role for which he or she is not really suited?

Provide salary incentives. This is the tricky part. Traditional annual performance reviews were directly tied into determining next year’s salary. Here’s the advantage of more frequent reviewing: You can look at changes over time to see if an employee truly is deserving of rewarding. AltSchool employs a bonus calculation in which very high and very low scores change the multiplier. Scores that stay consistent don’t change. The more even overall good performers improve over four quarters, the higher the bonus calculation. No one is just coasting, as the philosophy of any effective performance review is that everyone has room for improvement, from the CEO down to the new hire.

Related article. 5 Biggest Mistakes Employees Make During Year-End Performance Reviews

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