Annual Performance Reviews Are Utter Nonsense

It has become an annual ritual in American corporations with more than a few dozen employees. Managers hate writing them, employees hate getting them, and human resource departments hate chasing down all the paperwork. For all its pretensions, it almost never delivers improved performance. It is often used by unscrupulous managers to step on the necks of disfavored subordinates, and used by unscrupulous employees to chisel out undeserved improvements in compensation or perks. It is the annual performance review.

Graduates of tough performance review cultures such as that found at General Electric or Intel like to crow about how one negative review gave them the wake-up call that they needed, after which their careers became the meteoric examples of success that all should commend and emulate. Such attitudes have promoted a narrative of incremental self-improvement, where the sudden clarity of an impartial and properly administered performance review allows the recipient to build on their successes and learn from their failures. The company benefits from improved productivity and lower turnover, and the employee benefits from a second chance to show their potential.

The reality of the annual performance review is considerably darker. Companies, in an effort to build manageable statistics, force a certain amount of uniformity in the evaluation criteria of reviews, without being able to ensure that all managers apply the criteria in a uniform manner. The accumulated figures are rife with statistical invalidities.

Companies, faced with fixed merit increase budgets, often gerrymander the rewards for employee performance ratings to ensure certain outcomes. Others use the reviews to fire a fixed bottom percentage of low performers, under the theory that such employees are stupid or indigent, or both. Still others merely use the performance review process to paper their human resource files, never allow their use for either good or ill. Most companies have a way to bypass the performance review system with “out-of-cycle” rewards for favored employees.

It is common for supervisors to inject significant subjectivity into annual performance reviews. Soft criteria like peer relations, “managing upward”, and “not crossing boundaries” are used to evaluate an employee’s ability to get along and integrate with the accepted corporate culture. Corporations often include in a review the manager’s or the manager’s manager’s opinion of the employee free from any set evaluation criteria.

The truth is that the annual performance review is at best an acknowledgement of the status quo and at worst a codification of the manager’s shortcomings. Annual reviews usually come too late to rectify performance problems or reward outstanding execution that arise during the course of normal business. The high velocity of change in today’s business world means that companies can’t wait six, nine, or twelve months to steer the ship. Decisions, rewards, and punishment need to occur real-time, so employees with short-comings can be re-trained, and employees with superior performance can be redirected to more business-critical activities. Employee evaluation criterion needs to be more results-oriented, with hard short-term targets and clearly defined long-term career paths.

Emphasis on “emotional intelligence” objectives is patronizing and misguided. The harsh reality is that the anti-social assholes that the company is trying to get rid of at the bottom are the same ones running affairs at the top. At best the effect of emotional smoothing results in employees that prize conformity over that of innovation, and at worst creates an employee pool that resembles a warped Emily Post-style gladiator pit that prizes scheming and self-dealing over that of actually accomplishing anything relevant.

The soft underbelly of the annual performance review system is its ignorance of the cost of acquiring employees. Companies spend enormous sums of money acquiring employees. Costs include that of human resource recruiters, head hunters, advertising, time spent reviewing resumes, time spent interviewing, candidate vetting, and time spent getting new employees fully productive.

It has become popular for companies to attempt to reduce this cost by hiring personnel using the “square peg” theory. That is, only hire perfect square pegs that smoothly slide into square holes. Can’t find square pegs? Loudly moan to the press the lack of candidates that bear all “the right qualifications”. Companies that engage in this practice are chronically understaffed, but ironically earn a productivity windfall as the employees that they do have run themselves ragged trying to perform multiple duties without running afoul of the annual performance review system. It should be obvious that those same companies also incur substantial opportunity costs in being unable to deliver a full slate of products and services to customers, never mind the long-term inertial costs of low morale and burnout.

Unfortunately the institution of the annual performance review system and its associated injustices and inefficiencies has been reinforced by the devil’s bargain many employees have made with corporations to obtain uninterrupted and steady employment. Corporations that embrace this bargain in turn place extra value on job candidates that show uninterrupted work histories, and subject them to reference checks of prior supervisors. Those workers that buck the system and show gaps in employment, or worse, disagreements with prior supervisors, are shunned.

It is high time that the annual performance review system be retired and something more contemporary and real-time be put in its place. Corporations might just become, well, more human as well as more profitable.

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