Critical Numbers

Many people think annual reviews are so destructive they should be abolished. It's hard not to agree

I hate annual performance reviews. I hated them when I used to get them, and I hate them now that I give them. If I had to choose between performance reviews and paper cuts, I'd take paper cuts every time. I'd even take razor burns and the sound of fingernails on a blackboard.

I'm not talking only about the bad reviews, either. I have one young general manager who just had a fabulous year. His division was supposed to do $12 million in sales; it did $15 million. It was supposed to have a 5% pretax profit; it had 7.5%. And this kid was in there with his team every weekend, making it happen. He is a wonderful person with a great attitude, and I've done everything I can to see he gets the recognition and rewards he deserves. But when I sat down to do his review, I had to take into account that he had failed to achieve one of his most important goals: diversifying his customer base.

I agonize over that type of discussion. I wonder whether we've given him enough support. I wonder if we're asking too much and pushing too hard. Does he spend enough time with his family? Is he the type of kid who drives himself to the breaking point? Will we look back one day and kick ourselves for not recognizing the symptoms? Or will we kick ourselves if we have to lay people off because we lose a big customer that represents so much of our business that we can't afford to keep them employed?

You have to ask such questions if you take your responsibilities seriously, and the questions get tougher when you're dealing with people who've failed. I know of no way to make the review process easy or fun. All you can really demand is that it be constructive, that it strengthen the organization. Unfortunately, that's where most annual performance reviews fall short.

I myself don't go as far as those who say performance reviews are inherently destructive and ought to be abolished, but I agree that the typical annual-review process does nothing but harm. It creates divisions. It undermines morale. It makes people angry, jealous, and cynical. It unleashes a whole lot of negative energy, and the organization gets nothing in return.

That happens partly because the process is often designed to set one person against another but also because people don't buy into it. They see it as a sham, and they're usually right. Most companies use performance reviews for ulterior purposes--to cover themselves against lawsuits, to justify different levels of pay, to provide once-a-year feedback, or whatever. Those may or may not be worthwhile things to do, but they shouldn't get mixed up with reviewing performance. There is only one good reason for having annual performance reviews: to hold people accountable for the commitments they make to the other members of the organization at the beginning of the year.

Let me tell you about my own system for doing performance reviews. The process actually begins the year before, as we put together our annual plan. I work hard for three months, establishing standards, setting goals, and determining accountabilities for about 25 key people in the company. It's what we call "high-involvement planning." We decide together what expectations we'll have about their performance in the coming year, and we try to quantify as many of those as possible. If we can't quantify something, we define as clearly as we can what the contribution is and how it affects the performance of the organization, so that we can then use our overall results as a guide to evaluating how the individual has done.

By the time we finish, I want all of these people to know exactly what responsibilities and accountabilities they have for the coming year. I want the accountabilities to be very specific, at least 80% of them defined by financial ratios relating to things over which the person has total control. And I want everybody to sign off on the plan, not only as individuals taking responsibility for their part of it but as members of a team with mutual obligations. The final plan must not be just my plan. It's an agreement between consenting adults, and we submit it to the board of directors with that understanding.

The next stage of the process is in some ways the trickiest because it involves leaving well enough alone for nine months. You need to give people that much time to see what they can do. I've watched too many managers stumble at first and then go on to have a great year, and it often takes three full quarters before you begin to see the results. The last thing I want to do is to screw up a turnaround by acting too soon.

Then again, I do keep a close watch on things during those first nine months. Thanks to our open-book management system, I receive a ton of information every week about what's going on in the company. If managers get into real trouble, I can always step in before they hit the concrete.

For the most part, however, I restrain myself. I watch. I listen. I solicit a lot of opinions. I voice some of my own. But I generally don't take action until we get to the fourth quarter.

It's then that the real hard work begins. For nine months I've been monitoring how people have been doing on their accountabilities. I've talked with them and the members of their teams. Now I have to draw some conclusions about what happened, and why, and what to do about it. This is the most difficult time of year for me. I go through each failure and ask what went wrong. Was I myself responsible in some way? Did the people have the tools to do the job? Was there a problem with attitude? Or motivation? Or lack of ability?

For a month, maybe two, those questions are constantly on my mind. I think about them in the car, in the shower, at my kids' ball games. It's as if I'm doing my annual Catholic soul-searching before going to confession with the people in the organization.

Of course, we're not dealing with sins here, and no one is looking for forgiveness. My only purpose is to put the right people in the right jobs. I want to understand their strengths and weaknesses, so I can match them with opportunities they're capable of handling. I'm not interested in punishing or blaming anybody. And while rewards and recognition are important, they don't belong in this part of the process. All I'm concerned with is understanding what really happened, so we can make the necessary changes and start putting together a new set of accountabilities for the next year.

The performance reviews come at the tail end of this process--after I've done my soul-searching and reached my conclusions, often after I've already begun to make changes. At some point during the fourth quarter, I sit down individually with those 25 people, and we talk about their performance during the past year and their responsibilities during the next.

Nothing about our process makes those conversations easy. Granted, because we quantify so many accountabilities, we have little trouble identifying successes and failures, but explaining them is a different matter. I give my analysis. Then the person I'm evaluating has his or her say. Believe me, I get my share of criticism, and it always hurts, whether it's justified or not, but a review has to be a two-way street.

And then it's over. I don't write anything down. I don't put any reports on file. There's no reason to. I'm not building up a record for the lawyers. I'm trying to help people take an inventory of their strengths and weaknesses. When they leave, I don't want them thinking about what's going into their file. I want them to walk out knowing they've received a fair evaluation and focusing on what they can do better in the year ahead.

Do I succeed? Sometimes I wonder, but then I think about that hardworking kid who started out as a customer-service representative and is now running a $15-million division. And I think about all the other people who have come up through the ranks and are now key members of our management team. They remind me that you have to judge the process by its long-term effect on the people and the company. And I realize that, as much as I hate those annual performance reviews, I'll just keep on doing them.

Jack Stack is the president and CEO of Springfield Remanufacturing Corp., in Springfield, Mo., and the author, with Bo Burlingham, of The Great Game of Business (Doubleday/Currency, 1992).