Nicolas Embleton

August 5, 2021

What is annual appraisal or annual review for? Should you keep it?

Recently, I had to think about how to help an organization improve the way individual performance was assessed for an employee, and how it was to be linked with compensation. 
This topic has always been a personal struggle because I feel in my guts that the basic premise of how it works is wrong, but finding a model that addresses all shortcomings is very challenging, and oftentimes impractical. Let's dig into what these characteristics are, why annual reviews exist, and if we can identify a better model or not.

First, why does the process even exist? 

It turns out that our Taylorist heritage biases us into thinking that "higher reward = higher output", and that there is a linear correlation between how much you give to someone and how much value this person will deliver to the organization.
Of course, while this has been verified to be true in some manufacturing lines, it is also well known that this breaks down in knowledge work. Yet, the thinking remains, possibly for lack of alternatives?

The fear of the poor performer

I once had a discussion with an HR manager about these annual reviews and "why" they were being deployed at a startup, and the answer was very simply "so we can root out poor performers".

We're getting closer. So, take the linear thinking of higher reward = higher output, and filter out the poor performers, so you are sure to not waste your dollars on people who would just not produce more, and you have a lot of what traditional HR is about. Policing employees to figure out who NOT to give bonuses, assuming that most people don't actually deserve them because they won't produce more if they are given additional rewards.

The human approach

However, it's pretty clear that nobody likes this process. People who decide don't really care because they care about output more than they care about how people feel, and they need to have a leverage on their people anyway, don't they? Add to that that most review systems actually try to optimize how many people do NOT get the bonus, or get as little as possible, to save cost - and make the finance team happy, and you get a pretty awful process, designed for the wrong reasons, and ultimately achieving the opposite of what is desired. People who don't like a system are not going to be excited by it, they will just take the reward if they can, try as hard as they can to game the system so they get more reward, and mind their own business, probably without actually producing more, if not less just because the system told them "you have produced to our satisfaction already, you're good to go".

Now, here's a crazy idea. Instead of using punishing psychology - that poor performers don't get a bonus and that good performers have to fight for their carrot, could we think about a system that actually boosts everyone's state-of-mind and engagement, and increase their workplace satisfaction while actually generating better outcome most of the time?

The answer is that we can. But of course, the *exact* answer will differ from organization to organization, since every culture is different. But here's the crux of it:

  1. Don't link output and outcome to reward. The moment you do this, you send the message that we're back to a linear thinking and everyone will start thinking about what they need to do to get the better payout with the least amount of effort. Basic game theory
  2. Remember that everything you do has a cultural impact. You WILL promote some values and discourage others, so you need to be meticulous on how you choose what happens
  3. Remember that the people that can rate how others perform BEST are those who work together with these people
  4. If you *really* need to measure performance, measure it at a team level, or even better at the company level
  5. If you *really* need to reward, reward at a team level, or even better at a company level with revenue sharing
  6. If you *really* need to incentivize individual behaviors, don't do it yourself, crowdsource it. Find a way to let your people reward the *real* performers, and build a culture of caring, generosity and attention in the process. For example, give everyone a $500 reward envelope, but NO ONE can keep it, they have to give it out to either a co-worker of their choice, or a charity, and see how it gets distributed. Or give a reward per team or project and let the teams decide how to split it up with the only requirement that the outcome must be public

One word about the points on *really* needing to measure performance and reward / incentivize people. If you have to underpay your people so you can save money on poor performers and provide rewards to incentivize high performers, don't you think something is wrong in the logic?
Instead, what if you:
  1. Pay everyone better
  2. Provide yearly, predictable pay raise as everyone is assumed to be doing the best they can, building a culture of trust in the process
  3. Groom a strong culture of feedback so everyone has a chance to improve, all-the-time
  4. Be very strict about letting people go if they are consistently seen as not being valuable team members
    • Assess this through crowdsourced feedback
    • Always give people second and maybe even a third chance, as a good way to build a stronger culture
    • offer re-orientation possibilities if you can afford it - remember that a successful reorientation is a huge culture booster and a great cost saving versus hiring
    • Make everything public, clear and transparent, so that nothing is left to the emotional, everything is simple, open and unbiased, log out feedback, public acknowledgements, decisions, milestones, outcomes, etc... Not with the intent of policing, but with the intent of journaling, so everyone feels a high degree of transparency, and therefore engagement, alignment and empowerment

Also consider that IF people really are poor performers in your organization, what message are you sending by not letting them go? You are basically saying, "it's fine to be mediocre, but we only care about the greats". 
More importantly, what cultural values are you building by wasting both sides' time? Your organization's time by having someone who's clearly not a fit, and their time by working in places where they won't grow and thrive. Adding the team's time as they are trying to figure out how to make things work, and it's a lose-lose-lose in any case, and nobody enjoys it. Why maintain it?

Conclusions

  1. Don't do Annual Reviews / Appraisals, they're more often than not just useless and culture, morale and focus destructing (especially if you do them calendar-based with a "review month", gosh...)
  2. Instead, promote 1:1 coaching, weekly plannings, team-reviews, peer-feedback, and foster a culture of feedback that provides everyone with REAL-TIME feedback when they do not perform - or that celebrates when they do, not YEARLY, where you will have forgotten what happened 354 days before the review
  3. Promote internal and external values within the organization through gamification (badges), fun events (hackathons, public charity events, internal fail-con, value days, etc...), possibly some of these could even be great for your external image, whether marketing or hiring image. Avoid as MUCH as possible - as in really avoid it - to link it to compensation, it would send a really awkward message
  4. If you *really* need to reward your people, do this fairly and let people figure things out, but make everything public - or pay them better to begin with
  5. Be strong about letting people that won't grow within your organization go as early as possible, you'll do both sides a service - and their team's, but give them plenty of support, feedback, and always give people at least a second chance, seek re-orientation whenever possible
  6. Remember that everything you do or do NOT do will promote some values and discourage others, make sure you choose carefully and that you do not let the wrong vibe build-up just because you are afraid of making decisions

Let me know what you think. Would love to hear your feedback.