Why Performance Reviews Fail (And What You Should Replace Them With)

Reinvigorating Your People by Transforming Performance Management

In many companies, the annual or semi-annual performance review is a rite of passage. Managers and employees alike dread this often-uncomfortable session of judgment and feedback. But why? Aren't these reviews supposed to uplift the employee, guide their growth, and contribute to the company's success? In theory, yes. In reality, traditional performance reviews often fall short of these goals. Here’s why performance reviews often fail and what progressive organizations are replacing them with.

1. They're Retrospective, Not Forward-Looking - Most performance reviews look backward. They focus on what an employee did over the past year rather than considering what they could achieve in the future. This retrospective lens can be demoralizing, especially if there were challenges. It doesn’t empower employees to grow, change, or innovate. By looking at the past, we are missing out on opportunities to create psychological safety for your people to drive change and grow themselves and the business.
2. Infrequent Feedback Isn't Effective - When feedback is reserved for a once-a-year occasion, many opportunities for growth and correction are missed. Employees might continue with undesirable behaviors or methods simply because they're unaware that there's an issue.
3. They Encourage Short-Term Thinking - Knowing that a performance review is looming, employees might prioritize tasks that are immediately measurable or visible over long-term projects that could have greater value but won’t be completed before the review. Annual reviews are usually directly tied to compensation outcomes like pay raises and bonuses. This pushes both managers and employees to focus on short-term results rather than long-term skills development and career growth. It misaligns incentives - you want employees thinking about how they can perform better, not just chase a higher rating for more pay.
4. Bias Can Skew Results - Human biases, whether conscious or unconscious, can heavily influence performance reviews. From recency bias (only remembering recent events) to confirmation bias (only noticing things that confirm one’s existing beliefs), these psychological factors can paint an inaccurate picture of an employee's performance. Performance reviews typically involve a manager assessing an employee's overall performance over the past year and rating them on various competencies. However, research shows that these ratings are often highly inaccurate. Managers have a natural human tendency towards recency bias - they remember and base their review on events and accomplishments that happened most recently, while forgetting earlier achievements and shortcomings. This skews the final rating. Reviews also suffer from personal bias - some managers simply like certain employees more than others or have preconceived notions about them, influencing the review.‍
5. They Can Be Demotivating - Ironically, instead of motivating employees, performance reviews can lead to decreased morale. If an employee feels that they're unfairly judged or that their achievements go unrecognized, they can become disengaged. Because of their once-a-year structure focused on criticism and ranking employees against each other, traditional reviews often leave even high performers feeling demotivated and defensive. Employees tend to dislike having their work and growth quantified on simplistic rating scales. The emphasis on criticism can negatively impact morale across the organization.

So, What Should We Replace Traditional Performance Reviews With?

Forward-thinking organizations are recognizing the inherent problems of traditional reviews and are seeking alternatives.

1. Continuous Feedback - Instead of waiting for a formal review, managers should provide feedback in real-time or at least more frequently. Regular check-ins allow for immediate course correction and are often more relevant to an employee's current projects and responsibilities.
2. Focus on Development - Shift the conversation from what went wrong in the past to what can be done in the future. Concentrate on how an employee can grow, the skills they can acquire, and the paths they can pursue.
3. 360-Degree Feedback -Include feedback from peers, subordinates, and other colleagues. This provides a more holistic view of an employee's performance and reduces individual biases.
4. Objectives and Key Results (OKRs) - Many organizations have turned to OKRs as a way of setting and measuring performance. OKRs are collaborative, transparent, and focus on setting clear objectives and measurable results. Then, you can tie employee goals directly to organizational objectives and give individuals autonomy to set their own SMART (specific, measurable, achievable, relevant and time-bound) goals. Ensure goals adapt to changing priorities rather than being rigid.
5. Encourage Self-Assessment - Allow employees to reflect on their own performance. This not only helps them take ownership of their growth but also highlights areas they believe they need to develop.
6. Regular Training and Learning Opportunities - Instead of just pointing out weaknesses, provide opportunities for employees to build on them. Regular workshops, training sessions, and online courses can be ways to bolster an employee's skills. Make reviews more focused on an employee's skills growth and future capabilities rather than just historical performance. Have them create personalized development plans tied to career goals. Managers act as mentors rather than judges. Make reviews more focused on an employee's skills growth and future capabilities rather than just historical performance. Have them create personalized development plans tied to career goals. Managers act as mentors rather than judges.

The Path Forward

Organizations that ditch broken performance reviews in favor of continuous developmental feedback and goal-setting see much better business results, increased employee engagement, and stronger talent retention.

While changing such an entrenched process requires commitment and leadership, the benefits are well worth the effort. Employees will be motivated to always improve rather than stressed to meet arbitrary review deadlines. And managers can focus on what they should be doing all along - coaching and growing team members.

There are many innovative models out there to draw inspiration from. But the common thread is focusing on frequent feedback and development rather than annual ratings. With some flexibility and willingness to experiment, any organization can build a performance management approach that actually works.

In addition to the alternatives mentioned above, here are some other things you can do to improve your performance management process:

• Make sure that the goals and expectations for each position are clear and measurable.
• Provide regular feedback to employees, both positive and negative.
• Create a culture of continuous learning and development.
• Empower employees to take ownership of their own performance.

By taking these steps, you can create a performance management process that is effective, fair, and motivating for employees.