If Your Performance Reviews feel Broken, this Could be Why

The Manager Guide

Performance Management

Article Summary

Overview: people have had the same frustrations with performance processes for decades (see Andy Grove’s comments from 1983) so fixing them is clearly easier said than done. However, some companies have recently found success decoupling discussions about pay from conversations about performance and development. This article explores why and offers some practical tips for those looking to do the same.

Breaking down the problem: many dysfunctional performance processes try to combine discussions with employees about their development with assessments of what they should be paid. It’s crucial for businesses to do both these tasks well, but doing them together means that they compromise each other. Honest discussions about development areas are impossible when money appears to be on the line, and conversely suggesting these discussions are linked to pay can make it less clear how companies calculate salaries, leading to further employee dissatisfaction and inefficient compensation processes.

How did we end up here: if this is such a bad idea, why do so many companies do it? One possibility is that it seems efficient. If you’re reviewing performance data to calculate pay, it seems convenient to also use this moment as a learning opportunity, when in fact it’s the worst possible time. That’s before we even get to the problem of trying to ‘pay for performance’ which can create other issues of inefficiency and inaccuracy.

How can we fix it: not by tinkering around the edges. Many companies have tried to ‘streamline’ these processes by introducing new metrics, ratings systems etc. when the issue lies deeper. Instead let’s go back to first principles and think about why performance reviews happen in the first place - that combination of development and compensation. Rather than being constrained into doing both at once, start by asking yourself what the best way to help your people develop would be, and what would be the best way of working out what to pay them. We’ll guarantee your answer won’t be annual performance reviews.

____________________

It’s no secret that lots of people don’t like performance reviews.

Here’s some of our recent conversations:

‘Our process is unclear and it’s a complete joke.’

‘We come up with all these metrics but that’s not how we judge people anyway, so they don’t seem very real.’

‘Honestly as a manager the time I spend on these things is insane’

What’s more interesting is that this is nothing new.

Former Intel CEO Andy Grove published his seminal High Output Management in 1983. He recalls how he asked a group of frontline managers what they thought was wrong with performance reviews. Here’s a selection of their answers.

Review comments too general

Mixed messages (inconsistent with rating or dollar raise)

No indication of how to improve

Negatives avoided

Supervisor didn’t know my work

Only recent performance considered

Surprises

That list could have been written yesterday.

The fact we’re still sitting here talking about the same issues nearly 40 years on tells us that whilst the symptoms of bad performance processes are well known, diagnosing the root cause and finding a cure is somewhat harder.

But progress is being made.

You may have read about various firms (e.g. Netflix, Buffer) that have moved away from more ‘traditional’ performance review processes. Although they’ve implemented different models, the fundamental change they’ve made is decoupling discussions of improving performance from conversations about pay.

We wanted to explore this topic in more depth. Why is it that grouping pay and performance together is so damaging? How does it happen? And crucially, what can companies do to change course (or avoid these mistakes in the first place)?

The last question may be the most important.

Disentangling an established review process feels like a lot of work, but we think there’s some simple steps you can take to get started. Not to mention that it may be one of the most impactful things you can do for your team/company.

If you’re looking to improve performance management, reduce wasted hours on paperwork, and focus more on career development, this piece is for you.

Another Relevant Read: 5 Steps to Help Manage Underperformance

Breaking Down the Problem

Many companies set up performance management processes with the best intentions. Often some combination of:

We want to help our people improve performance and get better at their jobs.
We want to work out what we should pay people.
We want to fire people without being sued.

Ok so maybe the third one isn’t that well-intentioned.

But for the majority of employees, their experience of performance reviews is motivated by their companies’ approaches to points 1 and 2. The processes they design to do this are usually some combination of assessments, ratings and feedback.

Now, few would dispute that improving performance and compensating people are crucial to the success of any business. We’re not suggesting that you should stop doing them.

The problem is that discussing them with employees in parallel is an absolute disaster.

First, it’s impossible to have an unbiased conversation about performance if employees believe that whatever they say will have an impact on their paycheck. People will always be tempted to present what they think their manager wants to hear, rather than a genuine reflection on their areas for improvement.

This comment from a manager using one of these processes is a classic of the genre:

‘The person being appraised is not very genuine about their strengths and their weaknesses and their areas of development, and I think that’s mostly because of fear and not wanting to give managers information which could be used against them.’

Second, lots of the information collected to assist development conversations (self-assessments, 360 feedback) often isn’t taken into account in the process to work out what to pay people. If it’s unclear what information is being used for what, at best this creates inefficiencies and at worst makes pay processes appear opaque or even unfair.

Third, trying to put the two together creates a dysfunctional monster trying to pull in several different directions at once. This means it can take six months from asking employees to ‘reflect on their performance’ to anyone actually getting paid more.

Although the initial aims are valid, by doing them together, both inevitably compromise each other.

How did we end up Here?

If this is such a bad idea, why does it happen in so many organizations? Why are companies so keen to succumb to an arrangement which means doing two crucial jobs so very badly?

Here’s a couple of theories which may resonate.

Pay for Performance

As organizations address question 1 - what they should pay people - someone, somewhere will likely say:

‘I want to pay for performance’.

And, in theory, that sounds great. Higher pay for higher performance should incentivise staff to work on the areas with the greatest value and impact and compensate them fairly for it. Right?

In practice, particularly in knowledge work sectors, measuring impact and linking it to pay has been, shall we say, challenging.

‘By all available evidence, formal attempts to rate employees don’t seem to meaningfully improve employee performance or give companies any sort of competitive advantage… Performance ratings have no relation to organizational performance whatsoever.’ Elaine Pulakos

But this hasn’t stopped companies trying.

The past several decades have seen companies use all manner of data and processes in an attempt to measure performance and slice employees into different pay grades, from simple manager assessments to ratings, surveys, stack rankings and more.

As discussed, the benefits of companies going ever deeper down this wormhole have been decidedly mixed. But they have been a boon for the performance review industrial complex, generating ever more time-consuming processes for teams to go through in valiant pursuit of whether someone should receive an additional $500 next year because they achieved 70% rather than 68% of their OKRs.

But that might not be the worst of it.

Career Development by Convenience

Devising a process to work out what to pay people involves collecting a lot of information about the work they have done over the previous year.

Surely, someone might say, we should use all this information not just to think about pay, but as a learning opportunity for staff so they can improve. Wouldn’t that be an efficient use of time?

Again, in theory, it sounds good. But in practice, as discussed above, the combination of development conversations with pay discussions should be a non-starter.

We’ve arrived at a career development discussion by convenience rather than design - for perceived efficiency rather than genuine effectiveness.

It’s unsurprising when it falls flat. It was never designed to be the best solution, just one that seemed worth doing at the time.

What’s most frustrating to see is that in many companies these conversations then become the set piece career development chat. Regular feedback and coaching is left by the wayside or ‘saved up’ for mid-year and end-of-year reviews.

In the name of efficiency, your ongoing development conversations have ground to a halt.

Ironic if utterly tragic.

Tinkering rather than Tearing Down

Once companies are in a certain rhythm of performance reviews, it can be hard to break out of it.

Structural change looks and is challenging.

Plus, those tasked with looking at this issue are often under-staffed and under-resourced People/Ops teams. The past years, more than any others, they’ve had plenty of other priorities to be dealing with.

Also, whilst everyone complains about performance processes, they often look like they ‘kind of work’. It’s hard to judge the hours lost through inefficiency or the opportunity cost in employee development and morale.

All of which adds up to a reluctance to tackle this underlying structural issue. Instead, companies typically look to short term fixes.

‘Streamlining’ rather than ‘overhauling’.

A new metric, or a shorter assessment form, when the issue lies much deeper.

How can we fix it?

Ok so far, so bad.

Let’s talk about some practical steps you can take to either make improvements or stop this from happening in the first place. Particularly if you’re a startup/SME without a well-resourced People function.

Many of the sins of bad performance processes seem to result from a lack of attention to the core jobs these processes were originally intended to do.

Of course, a lack of attention to this area is pretty forgivable. There are more interesting ways for companies to spend their time. Particularly when you’re growing quickly, and there’s a vital customer/new hire/global pandemic which you’re attending to.

However, this is exactly what allows performance management processes to drift and become that dysfunctional mess which everyone has to tolerate once or twice a year.

Let’s go back to those two initial aims, and ask what would it look like to implement the best solution.

How best can we help our people improve performance and get better at their jobs?
How best can we work out what we should pay our people?

Because once you’ve acknowledged that trying to answer these together is self-defeating, asking them separately becomes pretty liberating.

You get to come up with a development framework which is focussed on improvement, not when your financial year falls. You also get to think about a clear compensation framework which isn’t muddied by the minutiae of who did what last year.

Most of all, you get to think about what would be best for your people. Not trying to shoehorn someone else’s performance management template into your culture and operations.

And you’ll almost certainly make your company more efficient whilst doing it. It’s well-documented that what pushed large companies like Deloitte and Adobe into reforming their practices was the sheer number of hours spent on it (2 million and 80,000 hours respectively).

Think what your people could do with all that time.

For People Teams/Decision-Makers

If you’re reading this piece, and you feel your performance management processes could be improved, and you have the power to change them, hopefully it’s given you some food for thought.

As a practical first step, we’d suggest setting up a working group to consider those questions we just posed:

How best can we help our people improve performance and get better at their jobs?
How best can we work out what we should pay our people?

We’ll guarantee the answer isn’t ‘reviews every six months’.

Instead, you’ll probably start developing some great ideas for how you can better support your employees now you don’t have to try and do these two things at once.

We don’t want to pre-empt your discussion, but if you need some inspiration, setting better expectations through career progression frameworks, supporting progress through regular feedback, check-ins, and goal-setting, and helping managers have career conversations with their teams might be some options to consider for question 1. For part 2, options like role-based pay, changing bonus/salary/equity structures, and salary transparency might all lead to fruitful debates.

For Frontline Managers

If you’re a manager reading this and you don’t have any power to change your existing processes, there’s still plenty of scope to help your team.

First, you can forward this article to whoever you think needs to hear it.

Second, let’s talk about question 1 (we accept you might have limited influence over compensation processes).

Just because your company does a lousy job of thinking about employee development in between review cycles, doesn’t mean you have to. Start thinking about how you can make your existing reviews a feature of your ongoing support to your team, not the focus.

Ask yourself the question: