As published on Switch & Shift on December 17, 2015. What do Accenture, Adobe, Gap, Microsoft and Netflix have in common? They all eliminated their annual performance review practices. In fact, 6 percent of Fortune 500 companies have already put a stop to their rate-centric performance management culture. And this percentage is expected to grow to 50 percent over the next 3 years. The reason is simple: some say that if performance reviews were a drug, they would never pass the Food and Drug Administration given their wide range of vile side effects.
So I am proud and relieved to say we’re putting an end to our current annual review practice as well. Since we started our company, InSites Consulting, (almost 20 years ago) we’ve worked hard to craft the perfect performance management process, integrating every single best practice: objective setting, self-assessment, bottom-up and peer-to-peer feedback, calibration meetings, you name it, we did it. However, this rule-based and bureaucratic process brought us farther from our goal than we could have possibly imagined.
If you’re not yet convinced about the detrimental effect of annual performance reviews, here’s a quick overview of reasons to make you think differently:

Nobody likes them

According to a Deloitte University Press report, less than 50 percent of CEOs are convinced their performance management approach helps them drive employee engagement or business results. And less than 4 percent of employees feel annual performance reviews are the best way to motivate and engage them, which even holds for avid learners. And HR managers? Well according to a research report by the Society for Human Resource Management (SHRM), 75 percent of them recently rated their company between a B and a C when it comes to handling reviews.

They are downright wrong

It is not realistic to think humans have the capacity or memory to translate every possible action of an employee in the last 12 months into one single, one-dimensional score. Did you know that 62 percent of the variance in performance ratings is explained by individual raters’ biases and prejudices and only 21 percent by actual performance? For example, it is well known that supervisors generally tend to inflate scores because they are concerned about de-motivating their staff by giving them low ratings.

They create the opposite effect

More than a third of the time performance appraisals have a negative impact on performance, causing at least as many problems as they solve. While they can be useful for the 2 percent or 3 percent of people who are not performing adequately, everyone is wrongfully put through the same process with more adverse than intended effects. Many employees even misinterpret the most positive feedback, leaving them with a feeling of emptiness and frustration.

They are not future-proof

Traditional performance appraisals are incongruent with today’s value-based, purpose-driven and collaborative work environments. GE’s head of human resources Susan Peters said: “The world isn’t really on an annual cycle any more for anything.” Especially looking at younger working generations, their here and now, snappy and always on mentality is in sharp contrast to the slow-paced and time-consuming annual performance cycle.

They eat too many resources

When Deloitte started counting, they realized that the 2 million hours invested in yearly performance discussions behind closed doors were not well spent. Instead of directly injecting those hours into nourishing human bonds, the company felt it got lost in managing scores, not people.
An evident solution to deal with the above mentioned pains is to abandon the complete philosophy of annual performance reviews. But what is the alternative?
Here is what we changed at InSites Consulting, in an effort to take away the grief caused by performance reviews and come up with something better:

1. Redefined what is a fair salary

As we abandoned ratings, we could no longer directly tie them to salary increases as before. Instead, the same way Netflix bases pay rate changes on the market value of each position, our aim is to pay more-than-average versus relevant external salary benchmarks. By taking an outward versus an inward-looking perspective, we anticipate to limit peer-to-peer salary benchmarking and, by consequence, unhealthy internal competition and envy.

2. Turned one rating into many conversations

The classic performance review approach typically takes a top-down perspective, looks back, tries to spot weaknesses and bundles all of that in a yearly rating. We are replacing this annual cycle by a continuous practice of timely, short, informal and frequent check-ins between coaches and coachees.
These check-ins have no prescribed format, can be initiated by either coach or coachee and are meant to be a two-way dialogue. They should leave room for listening to problems instead of sharing solutions and should focus on cultivating strengths rather than tackling weaknesses.
There is ample proof that it works. According to BetterWorks, people checking in on a weekly basis with their managers are no less than 24 times more likely to achieve their goals. We apply a similar approach to promotions, which can be initiated twice a year by either the coach or coachee and are to be approved by a small promotion committee.

3. Allocated bonuses based on team performance

Traditional performance reviews do not take into account team dynamics. Yet we all know great companies are built through collaboration and teamwork. That is why we stopped applying a bonus system to individuals.
Instead, every team in our company can choose to define a team challenge in line with our corporate strategy. That same team also suggests and defends how valuable the challenge is to the company by making a suggestion to management as to the bonus size. In addition, all teams communicate their team challenge to the rest of the company in an online webinar, driving identification and pride.

4. Redistributed company profits to everyone

Independent of performances by individuals or teams, we believe success is the result of the unique interaction between all the people working for our company. By consequence, we redistribute a significant share of our profits to everyone, irrespective of their role, level or tenure.
Should you not have given up on annual performance ratings yet, I hope this blog post has triggered you to start considering the idea. If you’ve already taken the bold step, I am very interested to learn more about your experiences and ideas for a rating-free performance culture!