How to Conduct Annual Employee Reviews

The system ultimately has to reflect your culture. "For example, if an organization has an informal structure and hires employees who embody that philosophy, a formal and complicated appraisal process is less likely to be taken seriously," says Berg. "On the other hand, if the process is developed in the spirit of the company culture, compliance will happen without complaint."

3. Hold an Effective Meeting

A good annual review usually requires from 40 minutes to an hour. "Give the employee your full attention -- no interruptions," says Elaine Tweedy of the University of Scranton SBDC. "Sit in a comfortable environment, preferably without a desk between you and the employee."

Start with the good news. "When bad news is delivered first, you run the risk of the employee shutting down or fretting the rest of the time," says Barnas. Be honest when delivering the difficult news -- but "there is a difference between honesty and negativity," says Tweedy. "Tact and professionalism are essential."Strive for objective judgments. HR pros frown on subjective appraisals such as "you are lazy" or "you have a bad attitude." Such statements tend to be ambiguous, hard to act on, and inflammatory -- and, says Jensen-Welch, can get you into legal trouble. Practically speaking, of course, subjective judgments are sometimes unavoidable. Freeman recommends staying away from negative impressions and instead focusing on specific behaviors. Have examples ready, but don't enumerate them unless you have to. "There is no need to throw these in the employee's face unless you are challenged to do so," says Freeman. And avoid criticizing the employee for negative behavior; instead, recommend alternative ways to handle the kinds of situations involved.

The meeting should close with the setting of goals and expectations for the next year. "When employees walk out of a performance management review," says SHRM's Miranda, "they should feel energized that the boss appreciates their strengths, values their contribution, and sees their potential."

Performance Pay

Experts and CEOs alike love the concept of pay for performance, but making the most of such a system requires some finesse. If you have established a robust process for reviewing your employees, you have already tackled the hardest part of performance-based raises and bonuses. But here are some additional tips:

Don't surprise anyone. If your employees' raises or bonuses depend on hitting certain performance benchmarks, communicate that well in advance. It creates an environment of fairness, and you will be more likely to get the performance you want. And, of course, if you tell them you are going to tie pay to performance, be sure to follow through.

Start with raises. Rick Galbreath recommends mastering the performance-review process and merit raises before moving on to incentive bonuses, which are harder to calibrate with any precision.

Be a little extreme. The greater the disparity between what top performers and underperformers get, the more effective the system. More companies are withholding merit raises, bonuses, and even cost-of-living increases to those who score poorly. But that rebuke should come with a carrot: a remedial period followed by reevaluation. If the employee improves, he or she gets a raise after all.

Rise or fall together. Rewarding individual efforts is essential, but it's also worth tying a portion of the bonus pool to the overall profitability of the company. That puts everyone on the same team; prevents workers from focusing on their own tasks at the expense of the bigger picture; and inspires people to contribute good ideas, even outside the scope of their jobs.

Rater Wrongs

HR pros speak a language all their own. Here's how they describe some common mistakes you can make while reviewing the troops:

Contrast effect: Comparing one employee with another, rather than against performance benchmarks or other criteria

Halo (or horn) effect: Allowing performance in one or two areas to color the overall review unfairly

Similar-to-me effect: Being more generous to those with similar backgrounds or beliefs

Central tendency: Giving everyone an average score regardless of performance

Leniency/desire to please: Granting a better review than warranted in order to avoid confrontation

Recency effect: Giving excessive weight to the most recent part of the evaluation period

First-impression bias: Allowing your initial judgments to color all subsequent information

Rater bias: Allowing personal biases to infect the evaluation