The past two years have seen some impressive companies ditching the traditional annual performance review. Adobe and Medtronic jettisoned them in early 2014. International consulting firms Deloitte and Accenture both nixed reviews in 2015, and even behemoths Microsoft and GE (the godfather of performance review stack ranking) have 86'ed the HR mainstay in the past year. In fact, about 10 percent of Fortune 500 companies have abandoned the process. So why are they running from it and where are they going?
The Truth About Performance Reviews
For starters, and this is the easy one, no one likes them. Managers hate doing them, employees hate receiving them, and HR professionals hate organizing them. For many companies, the annual performance review process is a forced exercise in compensation change justification. And really, no one cares if they got a 3.2 or a 3.5, they want to know what kind of raise they are getting. The number rating is seen more as an internal calculus tool for companies who fell in love with the "pay for performance" idea...until the company suffers a setback and despite your 4-star ranking, you still take a pay cut.
Secondly, no one believes in them. According to a survey conducted by San Francisco-based consulting firm, Achievers, only about 2 percent (yes, two) of HR leaders think they have a meaningful impact on improving performance. You think we would have picked up on the irony of looking backward to direct progress, but I suppose that is hindsight (wait a minute...).
Performance reviews are not designed as a developmental guide; they are a review tool. Giving a movie a rating of 2.5 stars doesn't change the movie. And moreover, I doubt that rating does anything to improve the sequel.
Lastly, and here is where it hits the wallet, the annual review process is hugely expensive. If you figure the average cost of a performance management system of $7 per employee per month plus annual maintenance fees, a company like Adobe with over 13,000 employees could be paying over $1 million just for the system. When you add in the time to review multiple employees, level set ratings (as most companies do), and have conversations, Adobe was spending easily $2-$3 million more in salary costs. And with little or no return,it's a miracle performance reviews have lasted this long.
Feedback Still Matters
Right now, most companies are opting for nothing over an ineffective and costly strategy. When you read about what companies are doing instead, the large majority say they are simply encouraging more frequent check-ins and feedback conversations; which is what should have been happening all along.
The advice on how to move away from the performance review process is sound: get your executives' buy-in by demonstrating the financial savings, train your managers to have more effective feedback conversations (you've been doing that, right?), and be consistent. Just because you scrapped the form, don't create arbitrary expectations and measurements.
Of course, scrapping the process sounds simple, but the reality is much more complex. For one reason, we've hired and promoted a huge number of managers who don't know how to have effective feedback conversations and many who don't see coaching as a part of their job. Those conversations either don't happen at all or result in confusion or conflict.
And when you get rid of the performance review, how do you hold your managers accountable to even having those conversations? The other challenge of getting rid of the performance review is losing all the data. Granted, the performance data coming out of the performance review was flawed, but at least it was something to help you make employment decisions. At least now you can be honest about your employment decisions and say it's all subjective and based on who you like. (Which really, when something is top-down and universally applied, it's largely a matter of perspective.)
Humans by nature are problem solvers. We rarely look at something that we know is bad and just let it be. In a way, that is why we created and are now obliterating the performance review. Having no data was bad, having bad data was bad, so now we are back to having no data...but at least that gets us to the same outcome for less money. But it won't stand for long. I see a solution coming and maybe it follows the demise of 20th century staples like Consumer Reports and Encyclopedia Britannica when it comes to getting information. Those icons of old as well as the traditional performance review (and even the new and improved frequent conversations model) assume one thing, the "authority" knows best and is the best source of feedback.
Prior to the millennium, we turned to trusted "experts" for information. AAA, Zagat, Michelin, Conde Nast, and others gave us reviews on restaurants, hotels, and travel companies. Consumer Reports helped you find the best toaster or washing machine. But not anymore. Now we go to TripAdvisor for hotels, Yelp for restaurants, and a host of other community-based resources to help us find the best cell phones and TVs, or the least horrible airline.
Getting rid of the expert model and moving to a collective intelligence model just makes sense. It's cheaper, easier, and more widely trusted. If done correctly, people who are great will get a chance to be recognized, and the people who are just shiny versions of cheap toasters will get discovered no one likes to get burnt. That will have an impact on performance.