Annual performance reviews: Do we still need them?

By Catherine Moyen, Alight Research and Advisory Centre

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Over the years, numerous surveys and studies have highlighted the dissatisfaction of employees, managers and HR with the traditional annual performance review cycle. Causes of dissatisfaction include:

Recency bias: Often, managers evaluate performance based on recent events, rather than considering the entire year.
Unconscious biases: Biases tied to gender, race and age, as well as the halo/horns effect, can influence performance assessments.
Enforced rating distribution: If the manager is required to distribute employee ratings in a specific manner, this can result in inaccurate evaluations.
Negative impact on employee and manager’s self-esteem: Annual performance reviews can have adverse effects on both employee and manager morale.
Cumbersome, misunderstood and irrelevant process: Often the performance review process is difficult and confusing, and may not apply to the employee’s role in the organisation.

Some have even described the annual performance review as a pointless exercise. The question is: Should we completely eliminate the annual performance review process? The answer is not straightforward and depends on various factors.

Performance management and compensation management

Several companies have tried different approaches to address the issues with annual performance review cycles. However, focusing exclusively on annual performance reviews carries inherent risks, primarily due to the traditional connection between performance assessments, salary adjustments and bonus reviews.

When deciding if annual performance reviews and ratings are still relevant to your organisation, consider the impact of individual performance on compensation and bonus decisions.

By removing annual performance reviews and ratings, companies that link performance and compensation under ‘Pay for Performance’ policies would push the issues encountered in the performance review process to the compensation process.

‘Ghost Rating’

Managers will still need to evaluate employees to decide the appropriate salary increase and bonus they should receive. This process is known as ‘Ghost Rating’ and carries an additional flaw: a lack of transparency.

Abandoning the annual performance review or rating system eliminates the opportunity for a manager and employee to discuss their assessments. This absence of dialogue can fuel mistrust in the process and impact morale even more negatively than a traditional performance review rating.

‘When […] organisations scrapped the performance ratings, they found a need for a form of annual documented administrative evaluation to make employment decisions, such as promotions and raises. To address this need, these organisations often implemented “ghost” ratings — a system of evaluation that is, ultimately, just another annual performance rating.’

(Source: Bryan Hancock and Bill Schaninger, Why we all need performance ratings on a regular basis)

Link between performance management and career development

Conversations held during the performance review cycle or annual processes, such as talent identification, are often used to identify employee development needs. Should companies shift away from annual performance reviews, they must ensure the creation of a platform for discussions related to career development.

Should you keep annual performance reviews?

There is a lot of research and analysis on the effects of performance management processes, and it can be difficult to decide which direction to take.

However, there are a few points that are clear:

Enforcing a fixed rating distribution is an undesirable practice.
Relying exclusively on an annual performance review is no longer sufficient. It should always be accompanied by regular performance and development discussions.
Performance ratings serve as valuable tools in driving integrated processes and directing conversations towards past and future performance.
Providing training for managers, and to a lesser extent, employees, in using these tools and understanding the processes is pivotal for maintaining trust and engagement.

Whether or not you choose to keep an annual evaluation process, the goal should be to design a strategy that aligns with your company’s culture.