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The Future of Work

Why The Annual Performance Review Is Going Extinct

Employees don’t need annual performance reviews to know how they stack up against their peers.

Why The Annual Performance Review Is Going Extinct
[Photo: Sebastian Borg/Flickr user Media Evolution]

This summer, GE announced it was abolishing its "rank and yank" system, which assigns employees a performance score relative to their peers and results in the lowest percentile getting fired.

Other companies are rethinking their practices, too. Accenture’s 330,000 employees are undergoing what CEO Pierre Nanterme has called a "massive revolution" in which timely, personalized employee feedback is replacing annual evaluations and rankings. Whether you agree or disagree with UCLA researcher Samuel Culbert’s assessment that performance reviews are "a curse on corporate America," it's nonetheless clear that they're falling out of favor.

It's no wonder the annual performance review has persisted for so long. They've proved useful to employers to keeping employees accountable, rewarding those that excel, and tracking performance over time. But performance reviews now often cause as many problems as they solve. Instead of guiding managers to coach employees, companies train them merely to cover their bases. And the familiar incentives don't always propel the best employees forward any longer, leading managers instead to offer more idiosyncratic feedback and customized work arrangements for their top talent.

Why Performance Management Falls Short

Today's employees want frequent feedback, open communication, and collaboration with their peers. Research psychologists at Kansas State University, Eastern Kentucky University, and Texas A&M recently examined the effect on performance of negative feedback during annual performance reviews. Rather than motivating employees to improve, they found it had the opposite effect. In fact, many employees tend to misconstrue even the most positive feedback.

If organizations want to develop high performers, managers must be equipped to coach and empower them. In a recent report from UNC's Kenan-Flager Business School, scholars found that today's workers don’t see their managers as experts in certain subject areas the way their predecessors did, because all the information they think they need is readily available to them online. Instead, they look to their managers for coaching and mentorship, and find purpose through constantly learning and growing on the job.

HR expert Josh Bersin explains Microsoft’s overhaul of its own performance management process as a move in this direction. When the company compared its employees on a bell curve (without offering real-time feedback), top employees fled. The truth is that employees don’t need annual performance reviews to know how they stack up against their peers. Companies need to stop merely managing performance and start actually developing it.

Turning Managers Into Coaches

Accenture, GE, Adobe, Netflix, and dozens of other organizations are killing annual performance reviews as they aren't enough for today’s workplace. As Laszlo Bock, SVP of People Operations at Google, recently wrote, "Performance management as practiced by most organizations has become a rule-based, bureaucratic process, existing as an end in itself rather than actually shaping performance. Employees hate it. Managers hate it. Even HR departments hate it."

Why? Because reviews focus on process over outcomes, and employees need instant performance management—that is, ongoing performance development—to know when they’re moving in the right direction or how to make a positive change. As GE’s head of human resources Susan Peters recently put it, "The world isn’t really on an annual cycle any more for anything."

But simply doing away with annual performance evaluations isn't enough on its own. Managers need to adopt a coaching approach towards guiding their teams. Just by checking in more frequently, managers can increase employee productivity. In fact, some of the latest data we analyzed here at BetterWorks suggests that the direct reports of managers who check in on progress towards weekly goals are up to 24 times more likely to achieve them.

When a track team trains for a race, they first need to know the distance. Employees also need to know what they’re striving for, day in and day out. And while goal achievement shouldn’t be the only metric for measuring performance, setting regular, smaller-scale goals for employees can give managers a way to offer real-time, agile feedback that actually works.

What Comes Next

In the next three years, I believe half of Fortune 1000 companies will drop stack rankings and numeric rankings as a basis for annual performance reviews. The future of the workplace depends on how successful these companies become at building out new systems that incorporate frequent feedback, open communication, and coaching.

While it’s easy to imagine a world without the dreaded annual review, it’s more difficult to envision improved manager-employee relationships that thrive on mentorship and coaching. Yet it’s coaching that gives employees the feedback loop they need in order to continuously improve.

In the future, when annual reviews are completely extinct, managers will have a greater influence on, and more meaningful relationships with, their employees. In order to get there, we'll need to get employees working together, not competing with one another, towards achieving common goals. We may have a long way to go before performance reviews are gone for good, but changing the role today’s managers play in providing ongoing feedback and open communication shouldn’t wait another day.

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