Chapter 1

The Problem: Why Annual Appraisals Don’t Work

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For­eword 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.

Stu­art Hearn

Co-Founder, Clear Review

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.

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.