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What are the alternatives to annual performance reviews?


By Catherine Moyen, Alight Research and Advisory Centre
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Annual performance review

To paraphrase Benjamin Franklin ‘in this world nothing can be said to be certain, except death, taxes and annual performance reviews’. Many companies still employ annual performance reviews, but many are now questioning the wisdom of using this to measure performance. What alternatives are there to annual performance reviews?

In this blog, we will explore three different approaches:

  1. Removing the need for performance evaluations or ratings
  2. Fixing the flaws of the performance evaluation
  3. Hybrid approach

1. Remove the need for performance ratings and annual performance reviews

This can be partially achieved by removing the link between compensation and performance. Instead of rewarding individuals who contributed to company performance, reward all employees equally. Compensation and bonuses are solely linked to company results and manager input is not required.

All employees are clear that contributing to better company results will impact the salary increases and bonuses for all. This could improve team spirit and collaboration as well as helping to smooth pay gaps. For this approach to work, its essential company results are communicated clearly and regularly to all employees.

Rewarding exceptional actions

Rewarding exceptional actions, using spot bonuses allows you to keep an element of the ‘Pay for Performance’ approach.

To ensure the workforce doesn’t lose motivation the following needs to be clearly communicated:

  • Everybody is rewarded equally
  • Pay ranges and criteria required to reach next paygrade

 

Continuous Performance Management

To make space for performance and development conversations, processes such as continuous performance review should be put in place. This is used together with process management dashboards or surveys, to monitor usage and level of satisfaction.

It can be argued that the process of identifying talents is a kind of performance rating. Employees might feel frustrated if they cannot contribute to the process, decreasing employee engagement.

Clearly defining these processes and communicating the outcomes transparently is key to maintain employee engagement and trust.

Moving away from a ‘Pay for Performance’ approach requires careful and extensive change management, so be sure to involve experts in the field.

Research shows only 14% of employees feel strongly inspired to improve after a performance review and there are many reasons why. Manager reviews often reflect a recency bias, meaning they focus heavily on your most recent performance, not your performance from six to 12 months ago.

Katie Evans-Reber
Here's What Can Happen When Companies Get Rid Of Performance Reviews

2. Fix the flaws of the performance review process

The above quote lists one of the main issues with evaluation processes, but the need for a rating system is present in many organisations. This is because of interdependencies between ratings and processes such as succession or compensation planning.

If you want to retain a ‘Pay for Performance’ approach but have identified flaws in the process, work to fix the flaws. Below are some common flaws and ways to prevent them:

Recency and other unconscious biases

The fact that the decision on the final performance rating of an employee often lies solely on their manager means that biases often play a part in the decision.

To counter this, managers need various opinions about an employees’ performance, constructive feedback between peers and tools to view feedback when evaluating their team. Many employees and managers may not feel comfortable with this approach at first as they may be more accustomed to anonymous feedback or no feedback at all. Training is vital to overcome this.

A change in company culture is also needed, so engaging with change management specialists can be very helpful. It is also important to ensure all employees and managers know what a good performance looks like. Defining a consistent approach with meaningful definitions for performance ratings is vital. A calibration review process can also ensure fairness and removal of biases.

In a bell curve model, you tend to reward and create lots of people in the "middle." People can "hang out" in the broad 80% segment and rather than strive to become one of the high performers, many just "do a good job.

Josh Bersin
The Myth Of The Bell Curve: Look For The Hyper-Performers

Negative impact of forced rating distributions

In many companies, when a performance calibration review takes place, the focus is on attaining a bell curve distribution of performance ratings. Often the goal is to protect bonus and salary review budgets.

This has many adverse effects, the most obvious being the frustration of managers who feel they must unfairly rate some of their team members. It can have a negative impact on employee morale and foster an unhealthy competitive spirit in the workforce. But surprisingly, it also has an adverse effect on employee performance.

Instead of focusing on the distribution of performance ratings, the calibration process should be used to fairly evaluate employees, remove biases and provoke discussions on high and low potential employees.

Separating conversations on performance and compensation can also help reduce the need for forced performance rating distribution.

Often, compensation budgets rely on the fact that the performance ratings follow the bell curve. Working out the compensation budget independently of any performance rating distribution can help. A formula can then be used to link performance and bonus, or salary increases, without any additional input from managers.

The target bonus of employees is determined as a portion of the bonus budget, rather than a percentage of salary. This increases the perception of fairness and can encourage performance improvement. If all employees contribute to the financial success of the company, the rewards budget grows and everybody has an equal chance to get a proportion of this budget.

Cumbersome, misunderstood and irrelevant performance process

Not all steps of a process need to be documented formally in a system of record. For instance, if you implement continuous performance reviews alongside annual performance evaluations, there is generally no need for goal settings and approval steps to be defined. This is so long as you trust employees and managers to own the process.

Relevance of the process can also be increased by allowing goals to evolve over the course of the year, rather than being set a year in advance.

Rewarding in a timely manner is another way to increase the process relevance. Allowing managers to distribute rewards during the year and not only during the bonus review can help engage employees and managers with the process.

Common understanding of performance rating scales is also important to ensure fairness and buy in of users. Instead of a simplified rating scale for all items rated, define rating scales that are meaningful for different types of items.

For instance, the rating scale linked to goals evaluation might contain notions around the achievement of the goal, while a rating scale linked to the evaluation of skills or competencies might mention how often and how well these skills and competencies are observed.

3. Hybrid approach, performance review with no ranking

Some companies decide not to use ratings but continue to use the performance review process. They see it as an opportunity to reflect on longer terms than in a continuous performance approach and provide clarity to employees as to their performance.

This approach is a hybrid of the two previous approaches described and the same principles apply to designing this new process.

Conclusion

Take inspiration from other companies, but don’t take what other companies do as ‘best practice’. Always keep your company’s values and culture in mind.

Once a process is in tune with a company’s culture and values, it is easier to communicate and understand. Employees can then trust they are evaluated fairly and treated equally. Managers also feel they have the training required to give input in the process. Communicating outcomes clearly and regularly is key to improve the perception of the process in the workforce.

Modernising performance review practices might reveal a shift in company culture is needed. The importance of preparing the workforce for this shift shouldn’t be estimated. It is best to engage with experts to help navigate and implement the changes required.

Catherine Moyen
Catherine Moyen
By Catherine Moyen

Catherine has over 18 years’ experience designing and implementing talent management processes. She is part of the Alight Proserv team and our expert on performance and compensation management processes.

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