Annual Performance Reviews Do More Harm than Good

An NPR story today on a new book reminded me how little value there is in annual performance reviews.  In most cases the annual performance reviews I’ve witnessed, carried out, or been subjected to have produced more demotivation and outright anger than positive value.  I can think of a couple of examples:

At one employer the budgeting system didn’t support the annual review process, creating feelings of anger and hopelessness among the employees.   It had been a challenging time for the organization over the previous year, and management had asked for extra hours and effort, and gotten it.  We all worked extra hard and put in extra hours without overtime, and many great things were achieved.  In the last quarter of the year we all went through our annual reviews, yielding an overall rating on a one-to-five scale.  My supervisor told me (and everyone he had to review) that he could only give me a 3 because, even though he recognized I had put in 5-level effort, the budget for raises was fixed and tied to our ratings.  He explained that he couldn’t give everyone a 5, even though they deserved it, because he would break the budget.  He said if he gave me a 5 he would have to give someone else a 1 (and a 1 would endanger one’s career with the company if they received more than one such review).  I and nearly everyone else had to accept a rating of 3 in spite of our efforts and commitment, and the rating would stick with us while our “merit raises” would be mediocre.  Needless to say, everyone I spoke with was angry about this situation and many said “I’m not putting that kind of effort out for these <insert expletive> again.”

At other employers the annual review was a waste of time.  At more than one employer the annual review was a requirement, but there was no relationship with compensation.  Whether one got a raise was up to their supervisor or the manager above them, and seemed to have no particular traceability to performance, at least not one that I or my colleagues who discussed the situation could see.  The human resources department sent email reminders to supervisory staff when it was near the anniversary of a particular person’s employment, and the supervisor was expected to fill out forms and have a review meeting with the employee to discuss what had gone right and wrong in the previous year, and what might be changed to make the next year go better.  The tone of the review meeting depended on the personalities involved.  Some supervisors were “hard-asses” who tried to go by the book, and employees (and often supervisors) were unsatisfied and often angered by the experience.  Some supervisors were personable, and the reviews tended to be gripe sessions or to discuss systemic issues the supervisor had no power to address as often the authority and oversight needed to address it was only available quite a few levels above them with a person they might have never even seen.  In those cases the politics involved in escalating an issue high enough for it to have any chance of resolution was often truly daunting.  In the end, the annual reviews tended to be an aggravating waste of time with the potential for decreasing employees’ job satisfaction and motivation.

At one employer what seemed like a very progressive approach to annual reviews went horribly wrong.  I had one manager who came to me after I had been with the company for a number of months and explained that it was time for annual reviews, and the way they did it was that each person wrote their own review.  Then they could review it with their manager and modify it to their mutual satisfaction before it was submitted to the next manager up the org chart.  I hadn’t heard of this sort of process before (this was 1985) and accepted the assignment with a note of hope.  As he approached the office door my manager turned back and said “Oh, by the way, I didn’t have anything to do for a while last weekend so I filled out a review form for you.”  Now suddenly confused, I asked “Does that mean I don’t have to do it?”  He said “Oh, no, you still have to fill out the review form yourself.”  I responded “Well … what if the two reviews don’t agree?”  My manager curtly said “Then, WE have a problem.” and left without saying anything more.  This put me in a no-win position where I would have to try to anticipate what he wrote or face his apparently-stern disagreement.  Since there was no way to do that, I was extremely frustrated and angry at being treated that way.  I filled out the form and went through the exercise, but was quite demotivated and hoped to be re-assigned to a new boss as soon as possible.  I felt only anger, and no respect, for my manager after that, and hated him for bullying me in that way.  This illustrates that annual review processes, no matter how well designed, always have the risk that a manager administering it will be able to misuse it and create more harm than good.

W. Edwards Deming, the great guru of statistical process control and total quality management, also found annual reviews to be of little value.   I haven’t dug for the reference yet, but remember from my study of Deming’s work that he found individual performance reviews to be of little value since the results produced by any employee in an organization are far more the result of the systems and expectations involved than of the individual’s efforts.  His famous Red Bead Experiment clearly demonstrates that in many situations the employee’s results are almost entirely a result of the tools and processes they are given, and that many employees have only a little influence on the quality of their output.  Deming describes in one of his books that the simplest, lowest cost method for handling raises and reviews is to decouple them completely, tie raises to years of service and level of responsibility, and use reviews to identify systemic issues and create collaboration between the employee and management aimed at improving processes, tools, and results.  Total Quality Management and the use of statistical process control were aimed at maximizing the employee’s ability to measure and track results of their work, and then improve processes and tools to create greater value for the organization.  This isn’t really a performance review at all, of course, but has much greater potential to help the firm do better.

Unfortunately old habits and cultural “knowledge” die hard.   In spite of much research and some great publications, many if not most people (in the North American business world at least) think that annual reviews and related raises and promotions are the way business is done.  Small wonder that so many companies struggle and flounder, muddling along with neither significant success nor failure, a scenario that generates the maximum misery for the greatest number of people, in my humble but experienced opinion.

As always, I welcome your comments. — Tim


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