Chapter 1

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.

© 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.

Sum­ma­ry

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.