Why the Annual Review Survives Even Though Everyone Hates It

The annual review survives because it does several jobs for the organization that are hard to do any other way. It gives the company a once-a-year rating to turn into raises, along with a written record it can produce if a firing or a pay decision is ever challenged. It does a poor job of helping people get better at their work. Improvement comes from frequent conversations about specific pieces of work. A company can keep the paperwork it needs and move development into those conversations.

The Review Rarely Changes How People Work

The people being reviewed say the yearly review does little for them. In a 2019 Gallup analysis, only 14 percent of employees strongly agreed that their performance reviews inspired them to improve, and nearly half said they heard feedback from their manager a few times a year or less.

The ratings are less reliable than they look. When Deloitte rebuilt its performance system, its leaders cited a 2000 study by Michael Mount, Steven Scullen, and Maynard Goff, in which 4,492 managers were each rated by two bosses, two peers, and two direct reports. The study found that 62 percent of the variance in ratings came from the quirks of the person doing the rating, so a rating of "meets expectations" often says more about the manager's habits than about the employee's work. Deloitte also added up the time its old process took and found it was close to 2 million hours a year.

Feedback can even make performance worse, which Avraham Kluger and Angelo DeNisi found when they reviewed 607 measured effects of feedback in a 1996 study. Feedback helped on average, and it reduced performance in more than one third of the cases. Their explanation was that feedback hurts when it turns a person's attention from the task to themselves. A year-end meeting where a person learns their rating and their raise in the same half hour invites that turn, because someone waiting to hear about their pay is thinking about their standing and has little attention left for the work.

What Keeps the Review Alive

Pay decisions are one reason the review stays in place. A company that sets raises once a year, on the same calendar as the budget, needs a rating that can be turned into a percentage. The rating and the raise then go out in the same meeting. A manager with forty people and a fixed pool of money has to divide it somehow. A rating scale gives them a method that looks fair.

The company's lawyers have reasons to want it kept as well. A lawyer quoted by the Society for Human Resource Management worried that companies without performance reviews would have a harder time defending themselves in discrimination disputes, and another cautioned that regulators look closely at pay when managers set it without clear criteria. A signed review in a personnel file is evidence that a concern was raised before an employee was let go.

Managers have reasons of their own to keep it. One difficult conversation a year is easier to schedule than fifty short ones, and a manager with a dozen direct reports can get through the whole cycle in a few weeks each December and then set it aside. A manager who was never taught to give feedback in the middle of a project also gets a script from the form, with headings and a rating scale to follow.

The hours the review consumes do not appear on any budget line. The 2 million hours at Deloitte were spread across many managers' calendars, and no single leader had to defend them. A process whose expense is invisible and whose outputs feed payroll and the legal file can go on for decades after the people inside it have stopped believing in it.

Companies That Dropped It

Adobe ended its annual reviews in 2012, after estimating that the old process took about 80,000 hours a year from its 2,000 managers, roughly the work of 40 full-time employees, and replaced it with regular check-ins between managers and employees that required no form. Adobe named the new system Check-in, after the conversations themselves. Voluntary turnover at Adobe dropped by 30 percent afterward. Involuntary departures rose by 50 percent, because managers were having hard conversations with struggling employees during the year and acting on them.

Deloitte moved to weekly check-ins between team leaders and team members, with a short snapshot of each person's performance recorded at the end of each project or quarter. It also gave people a tool for assessing their own strengths. Deloitte planned to use the snapshot data as the starting point for pay decisions, so the firm kept a record, and its managers and employees also talked about the work every week while it was still underway.

Development Happens on a Shorter Cycle

People improve when they hear about their work while it is still fresh enough to adjust. Gallup found that employees whose managers gave them feedback weekly were 2.7 times as likely to be engaged at work as those who heard from their manager once a year, and 3.2 times as likely to strongly agree that they were motivated to do outstanding work. A manager who notices in March that a project update confused the client can talk about it that week, and the employee can try a different approach on the next update. If the manager saves the same observation for December, it becomes a line on a form about an update the employee has long forgotten.

Our Purpose, Outcomes, and Methods (POM) gives those frequent conversations something specific to discuss. The Methods end in operations, which are specific actions with an owner and a date. Each person on a team owns some of those operations. A weekly or biweekly conversation can then cover whether those operations happened and what the person learned from doing them. We call our working sessions on a POM progression sessions, and they give a manager a regular look at each person's progress tied to the Outcomes the team agreed on.

The annual paperwork can stay where a company needs it, for pay and for the file. Leaders who want people to get better can start by scheduling the next conversation about one person's operations for this month, with no rating attached, and have the next one a few weeks after that.