The Problem: Why Annual Appraisals Don’t Work
Welcome to our guide to Continuous Performance Management. You may be reading this because you’re looking for an effective alternative to annual appraisals in your organisation. Or perhaps you’ve heard that annual appraisals are dead and are feeling confused about what to do instead. Either way, this eBook will give you some practical answers.
Forward from Stuart Hearn, Co-Founder, Clear Review
A continuous approach to performance management is something that I’ve personally advocated throughout my 20 years in HR. Both as an HR Director and a performance management consultant, I’ve seen first-hand how informal one-to-ones and regular feedback are much more powerful drivers of performance than annual appraisals. In more recent years, research has shown that when these simple principles are applied within a defined framework, the results can be dramatic. And it’s that framework that I’ll be introducing you to over the course of this eBook. I hope you enjoy it.
Let’s start by understanding why appraisals exist and why they don’t work effectively.
How did we end up with annual appraisals?
Imagine you know absolutely nothing about performance management techniques. Imagine also that you’ve been tasked with coming up with a framework for your managers to help them to get the best out of their staff and maximise their potential. Would your solution be a once-a-year meeting where staff are assessed on their performance over the last 12 months? I doubt it. So how did we get to a point where the majority of organisations are doing precisely this? To answer this, we need to dig into a bit of history.
Appraisals actually date back to Word War I where they were used to identify poor performers for discharge or transfer. By the 1970s, around 90% of companies were using them. At that time they made sense. Inflation levels were very high and managers were being tasked with deciding how to allocate pay rises of 20% or more. Annual appraisals and ratings were a convenient way of doing this.
Appraisals remained popular into the early 2000s as flat organisational structures become popular. Supervisors often had up to 25 direct reports to manage (compared to an average of 6 in the 1960s), as well as having to deliver their own work, so having regular, developmental performance discussions was simply not feasible in many organisations.
Fast forward to today and the business landscape is fundamentally different. We no longer have high inflation levels and flat management structures have generally fallen out of favour. Businesses are faster moving and setting annual objectives and assessing staff against them once or twice a year no longer makes sense. Annual appraisals were appropriate for a specific period in history, but they are not the right solution to meet today’s business challenges.
What research tells us about annual performance appraisal methods
Research has identified a number of problems with annual appraisals in today’s organisations:
- Problem #1 – Managers hate doing performance appraisals. Research from the CEB has revealed that 95% of managers aren’t satisfied with them. Because of this, managers often avoid doing them, or treat them as a tick-box exercise with little meaningful discussion taking place.
- Problem #2 – Employees don’t like appraisals either. 75% of employees see them as unfair and 66% say they interfere with their productivity.
- Problem #3 – Appraisals are not adding value. A Deloitte study found that only 8% of organisations say they add value and that the majority of companies feel they are not an effective use of time. This is especially worrying considering the amount of time taken up by appraisal meetings, completing forms and collating and moderating ratings – around 210 hours a year per manager according to the CEB!
- Problem #4 – Appraisals are not improving employee performance and engagement. A meta analysis of 607 studies of performance evaluations found this to be the case. The study also found that 30% of the performance reviews actually ended up decreasing employee performance.
Why are organisations still doing annual appraisals?
Despite the above research highlighting the problems with performance appraisals, why do organisations continue with annual appraisals? This is a question that the Corporate Executive Board asked of the organisations it works with and two main reasons were cited:
1. To assess performance to make decisions about pay and promotions
Yet over three quarters of HR executives say that their performance review process does not accurately reflect employee contributions. This is due to a combination of manager bias (both conscious and subconscious), managers being unable to effectively differentiate staff performance, and managers reverse-engineering performance ratings to get the reward outcome they want. This is been proven in numerous research studies, with one major study finding that there is zero correlation between individual performance ratings and actual performance.
2. To identify poor performers and hold them accountable
However, less than 5% of employees in an organisation are typically poor performers, so it doesn’t make sense to require extensive documentation from everyone. Furthermore, managers frequently rate poor performers as satisfactory, so performance appraisals are not a reliable way of identifying poor performers.
Why performance appraisals don’t drive better performance
There are three main reasons why performance appraisal methods are not effective drivers of performance and engagement:
(a) They are trying to achieve too much in one meeting
The average annual appraisal today tries to achieve a number of different outcomes: reviewing performance against past objectives, assessing demonstration of competencies or values, giving feedback, recognising achievements, identifying performance problems, discussing career goals, setting a personal development plan, setting objectives for the forthcoming year and rating performance for pay purposes. It is clear that trying to cover all of these in a single meeting is simply not realistic. The end result is typically that none of the components are discussed in sufficient depth to be meaningful and the process becomes a tick-the-box exercise that disengages both the employee and the manager.
(b) Discussing performance once or twice a year is not enough
If we want to improve the performance and productivity of our employees, we can’t expect this to happen on the back of one or two performance discussions a year. Studies consistently show that employees need regular feedback, recognition and guidance from their manager in order to perform to the best of their abilities. And millennials, who now make up more than half of our workforce, expect it. Getting feedback at an appraisal meeting about something that did or did not go well several months ago will have little positive impact and often leads to resentment.
(c) Appraisals tend to be past-focused rather than future-focused
Appraisals frequently focus on whether employees have achieved their objectives over the last year and whether or not they have demonstrated the appropriate behaviours or competencies. However, in order to drive performance, we need to balance discussions about past performance with regular, future-focused conversations. Such discussions should focus on strengths and how they can be leveraged, how past successes can be replicated and, where things haven’t gone to plan, what can be learned or improved upon next time.
In the first part of this eBook, we have explored why appraisals came about, the problems associated with them and why they rarely improve employee performance and engagement in today’s organisations.
In Part 2, we’ll be going back to basics and looking at what the purpose of performance management should be and uncovering the five key principles of effective performance management.