Performance review in transition: useful insights for future-oriented companies

Arguably, one of the currently most controversial HR practice is performance review. For years, employees and managers have become more vocal with their criticism of the relevant processes.

According to a survey by Accenture, 94% of surveyed managers believe that performance reviews “help improve business results” (Bildungsspiegel, 2016). But, only 39% of the managers believe that performance reviews, as they’re currently conducted, achieve this goal (ibid.). And for 58% of employees undergoing surveys, traditional performance reviews even represent a “negative experience” (ibid.)!

But, why is it like this? Quite simply (or rather, extremely complicatedly), traditional performance reviews are simply no longer sufficient to keep up with the fast-paced business environment. The increasing complexity of today's workplace requires more than annual reviews from direct supervisors who can't keep up with the many projects, demands, and transformations of the individual employees. So, these performance reviews hardly enhance business results by, for example, providing feedback on teamwork and projects.

That's why some American companies, such as Adobe or Microsoft, have now replaced traditional forms of performance review with newer tools.

Is your company also interested in developing a timely, fair and efficient system for performance reviews? We’re convinced: it’ll be worth it! But in the heat of the moment, it's easy to lose sight of the bigger picture:

What kind of performance review is worthwhile and fits our needs? Where should we even start? What should we stop doing as soon as possible? And how do we properly implement the optimised process?

If you feel the same way: read on because these are the specific questions that’ll be answered here!

Performance review: definition and goals

To avoid misunderstandings, we should first clarify: what is a performance review?

As we use the term, the performance review is a tool for managing and evaluating the performance of employees (including managers!). Assessment criteria include achievement of target agreements and growth potential beyond annual goals.

Despite the criticism of current processes alluded to above, the relevance of performance reviews for corporate success shouldn’t be underestimated. On the one hand, performance reviews allow companies to uncover practices that have been functioning among top performers and identify gaps in overall leadership abilities (Crisand & Rahn 2011). Performance reviews also provide important information that HR and/or management can use to make decisions about talent retention, promotions, or employee development needs and desires.

On the other hand, employees also individually benefit from a performance review. Feedback can help them identify their strengths and where there’s room for improvement, areas for which they may have developed blind spots. As a result, a path towards continuous development is cleared.

Typical mistakes & efficient solutions

However, if a growing number of surveys and studies (e.g. Bildungsspiegel, 2016) are to be believed, the potential of performance reviews isn't being fully exploited in the current business environment. But, what exactly is the problem?
As it’s so often the case, there’s not just one determining factor, but rather a web of practices and unfavourable conditions. In our opinion, the most important reasons for ineffective performance reviews are as follows. The company's performance reviews ...

... take place too infrequently
... are perceived (with good reasons) as unfair
... aren't focused on the company’s individuals
... overstrain executives
And here you’ll find an execution of these points—including solutions that are easily implemented in most cases!

Too infrequent performance reviews

A Questback study (2015) found that the majority of companies only conduct one performance review per year (48%) or even every two years (42%). Unsurprisingly, one out of two professionals criticise the fact that there’s too little feedback in their company (Galais, 2015).

To promote the further development of employees, a constant comparison should take place: how do individual employees perceive their performance, and how is that performance judged by others? If the comparison between self-perception and that of others happens too infrequently, the gap between the two increases. This results in declining self-esteem, increasing pressure, and an aversion to performance review.

In addition, the company's processes, task areas and project progressions change so much within a year, and even more in two years, that infrequent performance reviews can have little to no direct impact on their success.

Solution: The solution to this problem is obvious: more frequent feedback is needed! Quarterly or semi-annual feedback rounds keep the gap between self-perception and external perception small. Constant exchanges about difficulties and bottlenecks are perceived as natural, and potentials and strengths can be continuously identified and appreciated.

Too much effort? Not necessarily: with our digital feedback tool Peer Feedback, the implementation, and execution of such a feedback culture is child's play!

Be aware: on a standalone basis, annual performance reviews aren’t enough. However, that doesn't mean we recommend completely scrapping your annual reviews—you'll learn more about that below!

Performance reviews are perceived as “unfair”

“My boss just doesn't like me” — no company wants to cause reactions like that. And yet, these opinions often circulate among employees who can't make sense of a negative performance review.

This is often due to non-transparent reviews. According to surveys, just under 70% of employees who undergo surveys would like transparency to be omnipresent during the performance reviews. However, only 30% of the employees see this wish does come true (Personio).

Therefore, this leads to performance reviews being perceived as unfair (ibid.). A huge problem, as the same studies underpin. For example, “fair behaviour” during performance reviews was found to have a greater impact on employee satisfaction than the review itself, or even the incentives attached to it (ibid).

Solution: One possible measure to make performance reviews “fairer” is for evaluators to align with each other (HR Today, 2019). They (mostly the managers in traditional performance reviews) compare their previous reviews and share their guidelines and benchmarks with each other.

This way, typical assessment errors can be avoided, for example, those caused by prejudices or by making assumptions about others based on their personalities (HR-Heute, 2019). Only after this tally is the final result communicated to the recipients of the performance review.

Another critical measure is the definition of clear goals. This process also helps to avoid assessment errors and the resulting “my managers don't like me” statements. We’re probably not telling you anything new here: agreements on targets that are SMART or QUBA (Krapf, 2018) should at least be part of the Performance Management process and take place well before the performance appraisal.

At Pulse, we’ve also had excellent experiences with the OKR (Objectives & Key Results) management method for goal agreements (Wolf, 2021), which is becoming increasingly important, especially in agile Performance Management.
In short, employees should have the opportunity to understand the reasons for their performance review — regardless of whether it’s negative or positive.

Lack of personalization

According to companies such as Accenture — which is revolutionising Performance Management processes and performance reviews — increasing diversity among employees calls for greater individualisation of performance reviews (Personio).

Employees and managers surveys confirm this. 65% of employees surveyed in Accenture's aforementioned study said their performance isn’t currently accurately or objectively assessed (Bildungsspiegel, 2016). 77% of respondents (including managers) felt that personalised performance reviews were needed (ibid.).

However, increasing diversity in the company isn’t the only reason to advocate for personalised performance reviews. Employees’ needs have changed! Therefore, in more modern systems and especially in agile business processes, the focus is on “the individual” instead of “the workforce”. Whereas in traditional performance management systems, the supervisor, or managers were held responsible for the development and performance management of employees. With agile performance management, the responsibility lies much more with the individual employees and their teams.

We value individuals and interactions more than processes and tools

First value of the Agile Manifesto (Agile Compass, 2017)

But where does the need for greater individualisation — spreading among professionals and rapidly being implemented by agile companies — come from? Spoiler alert: the increasing complexity of the working world isn’t the only factor.

Maslow's pyramid provides insight: this model, established by the American psychologist Abraham Maslow, divides our human needs into five levels. The resulting pyramid of needs applies well to the concept of employee satisfaction (Franz, 2011):

1. Basic needs: apart from salary and minimum holiday, the company offers me nothing.
2. Security needs: my job is secure, and I get acceptable pay.
3. Social needs: I can identify with the company and get along well with the team, even if the work itself could be better.
4. Individual needs: I do a meaningful job with some degree of autonomy. I receive regular praise for successes.
5. Self-fulfillment: my job offers plenty of variety, as well as opportunities for further education and (personal) development.

Needs pyramid according to Maslow

Adapted from Franz (2011)

According to Maslow's pyramid, the respective “higher levels of need” are sought after the “lower levels” have been reached.

In a labour market that's scrambling for qualified employees, skilled workers have little to worry about in terms of their security. Therefore, their needs tend to shift towards the higher-levels of the pyramid of needs: the desire for self-actualisation, development, and autonomy are at the forefront (e.g., Fassnacht, 2016).

Solution: To ensure that your performance reviews aren’t merely an end in themselves — but motivate employees and thus drive business processes – we recommend individual goal agreements and reviews. This means that different review systems should be developed depending on the function, instead of imposing general guidelines on employees.

This is the only way employees can find out whether anything has changed in terms of opportunities for improvement (Personio). Furthermore, they’ll have more confidence when it comes to discussing prospects for professional development — because they feel that they’re considered as a person with individual strengths and weaknesses.

To achieve this, performance reviews — that provide individual feedback from different people — are particularly useful. 360-degree feedback is a good example of this. After all, an all-around assessment of employees, supervisors, and team members naturally provides a more holistic and realistic picture than an assessment of a single person.

But, despite its advantages, 360-degree feedback is used “only sporadically” (FBM GmbH, 2020) by companies. The reason for this isn’t simply the effort required for this type of performance assessment, but also the anonymity and top-down mentality of the classic approach. Here, we also have a solution for you —and we've even developed it ourselves! Peer Feedback is a tool that allows everyone in the company to get ongoing feedback from people who are relevant to them so that they can further their development.

In turn, this also meets the increasing needs for autonomy, further development and self-actualisation experienced by employees!

Overstrained managers

And finally, we mustn’t forget: the multiple transformation of the business world are also challenging for leaders! New work structures are one example:

Flat hierarchies are supposed to increase agility, facilitate communication and speed up decision-making processes (Harbinger). In addition, due to the shortage of skilled workers and increasing technology, companies have to achieve higher goals but with fewer employees. Managers are also constantly confronted with new communication tools and software. Furthermore, the increasing self-management of employees and their expanded and flexible scope of responsibilities are other factors in the growing complexity of leadership roles (Harbinger).

With all these changes that managers must not only accept but also motivate, the development and implementation of efficient leadership methods often fall out of consideration. As an example, according to a study by RainmakerThinking (Tulgan, 2019), 90% of leaders don’t get sufficient opportunities to further their education in the fundamentals of leadership.

In this context, if multiple annual reviews have to be prepared and conducted in a short time-span, it’s hardly surprising that this process turns into an assembly line job in many companies. But such performance reviews are naturally ill-suited as an instrument of employee motivation and business optimisation.

In short, managers have to manage ever broader projects and larger teams, and reconcile the complexity of agile processes with the individual needs of their workforce. No easy task! So, how can companies manage to create targeted, and effective performance reviews while maintaining an acceptable workload?

Solution: First, it's worth considering that agile processes may (we mean: definitely!) need more than the traditional annual reviews with the supervisor.

360-degree feedback and peer feedback take the pressure off managers to work through everything that has happened during the past year, down to the last detail, with one conversation. In our opinion, this isn’t even possible — on the one hand, due to time constraints, and on the other hand due to the autonomy and self-management of employees in their flexible work roles, as already described.

In fact, our experience shows us that: the perfect mix makes the difference! In other words: we recommend using different forms of performance review in your performance management system.

The perfect mix for the ideal performance review

Above, we’ve already presented — or at least mentioned — different types of performance review. For an overview, here are the three most important forms of assessment (in our opinion):

  • Peer feedback
  • 360-degree feedback
  • Annual reviews between supervisors and employees

As described above, there mainly are criticisms of the latter form. More and more companies are therefore favouring peer feedback or regular feedback rounds, and some are completely distancing themselves from annual reviews or annual performance reviews (HR-Praxis, 2015).

Peer feedback not only fits very well with the dynamic of today's work relationships, but is also considered more effective because it focuses more on the further development of personal strengths and the individual professionals’ career goals. In other words, the manager increasingly assumes a coaching role instead of merely assessing and assigning tasks (HR Practice, 2015).

We're also convinced by this approach. At the same time, we also think that one shouldn’t see this state of affairs as black and white! Just because it makes sense to talk to employees more often than once a year about their work issues doesn't mean that annual reviews can't add value—both for employees and business goals!

At least, this is the case if the annual review isn't a frontal lesson during which employees are lectured, praised and reprimanded like children. Annual performance reviews can and should, in our opinion, function to summarise what has been learned during the year, set goals for the next year, and plan professional development. In our experience, the following items are part of an annual performance review that makes perfect sense and deserves a place in performance management (HR Practice, 2015):

  • Conclusively outline performance observations
  • Recapitulate feedback discussions
  • Come up with a catalogue of actions
  • Plan further training requirements
  • Specify support measures and goals
  • Taking stock with future-oriented optimisations

But what about 360-degree feedback, which can independently be conducted, if required and desired? We’re convinced that this type of performance assessment is terrific as a preparation and for support of the annual performance review. This is because feedback provides deep insights and impressions from all perspectives, i.e., team members, employees, and supervisors.

Comparison of traditional vs 360 degree feedback

Image from: Pelz, 2014

Hence, the evaluating manager has a much better overview during the annual review and can ensure that the assessment is absolutely fair. As you can see, the addition of 360-degree feedback can help in eliminating one of the difficulties mentioned above — namely perceived unfairness — during the annual review.

We recommend several rounds of 360-degree feedback before the annual performance review. This way, it’s possible to assess whether anything has changed or what has changed with the appraisee as a result.

The result: the annual performance review is actually used for an informed conversation at a meta-level. This achieves much more than a one-off assessment of the employee's daily tasks and processes. Firstly, they're long and irrelevant, and secondly they're seamlessly assessed by the employee's team.

Get the right software: easy with Peer Feedback

A Performance Management system based solely on annual top-down performance reviews no longer meet the needs of today's workforce and the demands of an increasingly complex and fast-paced corporate world.

The reasons for this are complex: in addition to the fact that an annual cycle is too lengthy to provide effective feedback, traditional performance reviews are often perceived as unfair. Furthermore, they’re not focused enough on the individual, and managers are overwhelmed with the challenge of a targeted, personalised assessment.

That's why, in addition to optimising their annual reviews, we advise companies to promote open, regular feedback as well as 360-degree feedback.

However, although 360-degree feedback offers many advantages, many companies consider it “too costly” (FBM GmbH, 2020). The problem is quickly apparent: no suitable tools are being used! After all, one third of companies in Switzerland, Austria and Germany still use Excel and similar software (FBM GmbH, 2020).

At Creaholic, we've been actively working for years to help companies develop a good feedback culture. That's why we’ve developed Peer Feedback. An efficient tool with which 1:1 feedback is easily created, collected and given! Take a closer look here:

Learn more about Peer Feedback


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