The traditional performance review has come under fire recently. According to critics, what initially started out as a simple mechanism to measure and reward performance has become an anxiety-inducing process that does little to advance the company, the manager or the employee in question. Claims that the annual appraisal format has had its day may be a touch premature, but it’s clear that many organisations are choosing not to preserve the decades-old tradition.

European CEO spoke to Kevin Murphy, Senior Research Scientist at the Department of Psychology at Colorado University, about the downfall of the annual performance review and what alternatives – if any – he’d suggest. 

Do you think the annual performance review format has had its day?
Despite all the attention given to a few large companies that have jettisoned the annual performance review, it is misleading to claim that this format has had its day. The great majority of organisations still use some sort of annual performance review, and there is no sign that this will change in the foreseeable future.

More to the point, none of the alternatives that have been proposed seem fully workable. In particular, the move to informal and simple performance reviews means that the links between what people actually do on their jobs and the performance feedback they receive are falling apart. This is a serious problem both in terms of receiving useful feedback and in terms of defending an organisation’s performance appraisal systems if they are challenged (e.g. lawsuits over claims of discrimination).

What are the main issues with the performance review format, as it stands?
There are some serious challenges to performance appraisal. First, most organisations try to do too many things with their review system, often trying to serve multiple and conflicting goals. Second, there is an almost universal finding that holds up across many cultures that creates real problems with performance appraisal – i.e. that people tend to think their job performance is better than it really is, which means that people who receive accurate feedback about their performance tend to feel like they are being treated unfairly.

Third, and in my view most importantly, there are many incentives to give people high ratings and few incentives to give them accurate ones. If I give my subordinate high ratings, he or she gets rewards, is more likely to have a good relationship with me, is more likely to be motivated to perform well in the future, and I make myself look good to my superiors, since the main job of a manager is to help his or her subordinates perform well. If I give lower ratings, even when they are deserved, the people who work for me are unhappy, less motivated, and resentful of me, and I make myself look like a lousy manager. Rating inflation is so widespread that it undermines almost everything you try to accomplish with performance appraisal.

The other interesting observation is that organisations are more willing to evaluate employees, supervisors and managers than they are to evaluate top executives. You could argue that if performance appraisal is important at all, it is more important at the top of the organisation, where good vs poor performance can have substantial implications for the organisation, than it is lower down in the chain of authority

What alternatives would you suggest, if any?
Organisations need to be clear and realistic about why they are doing performance reviews, make a decision about the most important use of appraisals (e.g. will they be used to decide about salary increases and promotions, or used to help direct training and development), and focus on that one thing.

They need to be serious about what they claim to do with performance appraisals. For example, most organisations that claim to have a merit pay system put so little money into the merit portion of their pay package that it is impossible to give meaningful raises to people who have performed well. If you are not going to have a genuine merit pay programme, pretending that you have one contributes to cynicism and disenchantment.

Organisations also have to have genuine rewards and sanctions for supervisors who either do a good job or do a poor job evaluating their subordinates. Most fundamentally, organisations need to ask themselves if they are willing to actually do something meaningful with performance reviews, and if the answer is no, they should not do annual performance reviews at all.

One reason why so many employees are sick and tired of performance reviews is that they involve a lot of time and effort (and can be stressful for both workers and supervisors), but they do not seem to have truly meaningful consequences.

Look out for a longer feature on the evolution of the annual performance review in the next issue of European CEO