How to Conduct Annual Employee Reviews

Many entrepreneurs struggle when it comes to providing workers with concrete feedback on how they can improve their performance. Here are tips and techniques for reviews done right.

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If you are like most business owners, you have the best of intentions when it comes to reviewing employees. But you probably dread it as well -- so much effort for something that makes everyone uncomfortable. So you put it off as long as you can and end up muddling through without much of a plan.

But done right, as part of a comprehensive process that human resources professionals like to call performance management, employee appraisal can be a powerful tool for building your business. Employees want to know how well they are doing their jobs -- even if the review doesn't come with a raise. "Some people will stay at an organization not for the money but because of the work environment," says Anne Barnas, principal at SmithBarnas & Associates in Valdosta, Georgia. "Keep them engaged, and they'll stay -- and that impacts the company's bottom line," adds Harriet Cohen, a consultant with the Small Business Development Center in Ventura, California. One recent survey found that small companies with good employee management practices had profits 23 percent higher than companies that did not.

Moreover, "performance reviews serve as important evidence in employment disputes," says Jill Jensen-Welch, an attorney in Des Moines.

These pages serve as an introduction to performance management. A good program requires an investment of time and effort. "It's like playing the piano: You just can't walk in and deliver a good performance review," says Steve Miranda, chief human resource and strategic planning officer at the Society for Human Resource Management. "It takes practice, self-reflection, and more practice."

Reviewing the Troops

1. Set Benchmarks Early

"Unfortunately, very few companies 'get' performance management," says Rick Galbreath, president of Performance Growth Partners in Bloomington, Illinois. "They think it's all about the appraisal form and the process. These are important, but good performance management starts well before the evaluation itself."

In fact, it can start before the position is even filled -- if the job description establishes benchmarks for evaluation. The job description should outline the position's responsibilities and may also detail the competencies (an HR term that includes skills, knowledge, and behavior) needed or how tasks are to be completed. "It's hard to appraise something that hasn't been quantified," says Patricia Veesart, a regional director at the Garden City Community College SBDC in Kansas. A company introducing a performance management system for employees already in place should have those employees help define their own tasks and performance goals.

Be specific. The goals, consultants like to say, must be "SMART" -- that is, specific, measurable, achievable, realistic, and time-bound. Of course, some goals are tough to quantify. Specificity is the key, says Dawn Adams of HResults in Hartland, Wisconsin. If the goal, say, is being a strong leader, "define what competencies a leader needs to have -- perhaps transferring skills, mentoring, and then demonstrating that the mentee has learned those new skills." Adds Kelly Brent Massey, a consultant with the Arkansas Small Business Development Center, "If the goal is unrealistic, or the employee can't directly impact the outcome, then the process will fail." In some cases, the goals are teamwide or a mix of individual and team goals.

Make it personal. The most thoughtful companies, says Cohen, tweak some of the goals so that they also further the employee's personal development. People have different ambitions: Some want to move into management; others want to hone a particular skill; still others see themselves as entrepreneurs, willing to take risks as they develop new ideas. "For someone who wants to be a manager, we're going to set goals that include taking on more responsibility," Cohen says. For a specialist, "we'll ask, 'What are you doing to learn more about your field? How are you developing your depth of knowledge?' "

2. Develop the Process

Virtually all HR experts say a performance review must not be an isolated event but should cap a year of regular meetings. "Managers have to continually communicate with employees," says Courtney Berg of CourtSide Consulting in Broomfield, Colorado. "There should be no surprises when you sit down with employees at review time."The periodic evaluation. This should take place at least quarterly. It's an opportunity to discuss what's working, what needs to be improved, and what needs to be changed. It doesn't require a form, as the annual review does, but the manager should take notes and refer to an ongoing log of employee performance, which mitigates what's called the recency effect.

The annual review. Evaluation forms used in the annual review should be tailored to your company's needs -- not just pulled off the Web. In general, consultants suggest that the evaluation form be divided into two sections, one for performance goals and one for competencies. Cohen recommends that the competencies be further subdivided into a handful of general attributes applied companywide (communication skills, work habits, etc.) and those specific to the job, which, like the goals, can be filled in by the rater. Consultants gravitate toward a three- to five-point rating system and incorporate comment space to elaborate on the ratings.

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