Taking the pain out of appraisals: rethinking performance reviews

Organisations are rethinking performance management with a focus on continuous feedback, clear goals and employee development, writes IMD's Lars Häggström

This article is republished with permission from I by IMD, the knowledge platform of IMD Business School. You may access the original article here.

As the annual appraisal season begins, how can organisations transform performance reviews into positive and effective experiences, aligning with overall business goals and values?

In a bold departure from decades-old corporate traditions, Microsoft is stepping away from traditional annual evaluations and embracing a more dynamic approach to performance reviews. The tech giant now champions regular “Connects” – check-ins between employees and managers – designed to delve into performance, career development, and alignment with company objectives. This strategy prioritises timely feedback and aims to foster continuous employee growth.

Microsoft’s stance on performance reviews addresses a prevalent challenge in today’s workplaces – the limitations of classic annual appraisals. A survey of North American companies exposes a stark reality: fewer than half believe their existing performance review systems effectively gauge employee work. Other research highlights the stress, perceived unfairness, and lack of productivity associated with annual appraisals.

Indeed, studies show how conventional appraisals result in performance deterioration about one-third of the time. As the consultancy Gallup noted, “if performance reviews were a drug, they would not meet FDA approval for efficacy.”

As the annual review season gets underway, it’s an opportune time to scrutinise the flaws in these crucial meetings and explore how organisations can transform their performance review processes into positive and effective experiences that align with overall business goals and values. That is even more important given the considerable expense organisations incur for conducting performance reviews, amounting to up to $35 million annually in lost working hours for a company with 10,000 employees.

When it comes to performance reviews, organisations typically fall into one of two categories, both pursuing suboptimal solutions. The first involves the classic annual appraisal – a reflective session with a supervisor where employees assess their past year’s objectives and key performance indicators (KPIs). However, this approach is hindered by its infrequency, overlooking the dynamic nature of today’s fast-paced work environments and the need for continuous feedback.

The second camp abandons annual reviews in favour of continuous feedback loops. Adobe, for example, has shifted away from traditional annual reviews to a system called the “check-in”. This involves regular, informal meetings between employees and managers to discuss expectations, provide feedback, and set goals, emphasising continuous communication over a once-a-year evaluation.

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Balancing communication and objectives

While this approach fosters regular contact, it can lack a clear focus on performance objectives, often drifting toward discussions about relationships, development, and overall workplace satisfaction. Managers play a pivotal role in ensuring that employees have transparent expectations regarding their roles and responsibilities. This encompasses a clear understanding of performance standards and targets.

To achieve this, goals should adhere to the SMART criteria – specific, measurable, achievable, relevant, and time-bound. Aligning individual goals with broader organisational objectives is also essential for fostering a cohesive and motivated workforce.

Google, for one, is recognised for its data-driven approach to performance management, employing the Objectives and Key Results (OKRs) system. This involves setting specific, measurable goals for employees, with regular check-ins and continuous feedback also integral to the process, promoting agility and adaptability.

Companies face potential consequences – such as disengagement and decreased organisational performance – when performance reviews are ineffective. Disengagement may result from the absence of clear performance targets; employees want to see how their contribution connects to a greater whole. On the other hand, overly frequent check-ins without clear objectives can lead to a lack of motivation, making it harder to retain top performers. Striking the right balance is essential for maintaining an engaged and aligned workforce.

However, there is no one-size-fits-all approach to performance reviews. The key is to tailor the process to fit your organisation’s culture, values, and goals while prioritising ongoing communication, feedback, and employee development.

The trust factor: crucial to appraisal success

Central to any effective performance review, though, is the presence of trust between managers and subordinates. Unfortunately, evidence suggests that trust in this relationship is often lacking. According to Deloitte, 80 per cent of employees who strongly trust their employer report feeling motivated to work, compared to fewer than 30 per cent among those lacking trust. But only half of workers have trust in their employer.

Building and maintaining trust requires ongoing effort from both managers and staff. Open communication, consistency, fairness, and a genuine commitment to employee development and well-being are key factors in fostering a trusting work environment.

Without trust, performance reviews become shallow, brief, and fail to address the employee’s needs. This presents a significant issue since employees attach importance to these evaluations, paying close attention to aspects directly affecting them, such as their individual performance. Unfortunately, the significance of these interactions is often underestimated by managers, impacting the creation of a positive work environment.

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Creating a fair and transparent review process

So how can organisations create a fair and transparent performance evaluation process? They must base assessments on both what employees deliver and how they deliver it. Recognising that sustainable performance requires a focus on both tangible contributions and the interpersonal aspects of work, organisations should prioritise enabling, developing, caring for, and recognising employees.

Lastly, linking evaluations to compensation may ensure a fair distribution of limited resources. Evaluating employee performance against objectives, but also how results are achieved, provides a data-driven foundation for compensation decisions, which can help in fostering a sense of fairness and accountability.

Overall, there is a clear need for organisations to move beyond the limitations of traditional approaches to annual appraisals. By prioritising ongoing feedback, trust-building, and a balanced evaluation process, managers can create a workplace culture that promotes employee development, engagement, and overall organisational success. But remember there is no one-size-fits-all approach.

Lars Häggström is Senior Adviser at IMD's Business School and a former CHRO at Stora Enso, Nordea and Gambro.