The only truly effective annual review may be the one Santa conducts on children, and even that rarely influences behavior for more than a month before the holidays. In the business world, human resources executives and line managers consider annual reviews largely a waste of time, according to a survey from OnPoint Consulting, a human resources firm based in New York City. Employees aren't sold, either. A recent study by Salary.com found that more than 60 percent of workers doubt reviews boost performance. The criticisms are legion. Annual reviews fail to motivate people long term; assessments are often perfunctory; problem resolution gets postponed; and the ritual is painful for all concerned.
In response, some CEOs are starting to rethink the process, emphasizing more frequent feedback and in-depth evaluations, says Steve Gross, who heads the performance and rewards consulting practice at Mercer Human Resource Consulting. "Employees want the feedback, and companies want a better sense of whether an employee is at risk of leaving," Gross says.
Here's how two companies scrapped their blunt-instrument reviews and created in their place precision tools for performance management.
The Point System
The company: Trufast, a $40 million manufacturer of fasteners in Bryan, Ohio
The problem: Staff turnover had hit 30 percent, and unmotivated employees were keeping profit margins stuck in the single digits. CEO Brian Roth needed to retain his best workers and boost everyone's productivity, but traditional annual reviews weren't helping. "The only thing the review did was cover the previous two weeks of performance," says Roth. "Then it motivated the employee for another two weeks with a 3 percent raise. Basically, it was worthless."
The solution: Last spring, Roth decided to assess and reward more frequently. Working with Gary Harpst, CEO of the consulting firm Six Disciplines, he launched a quarterly review system for his 80 factory employees. At the end of each quarter workers meet with their managers, who award them up to 25 points in each of four categories: initiative, aptitude, flexibility, and attitude. Those with a score of 70 or higher receive incentive pay from a pool funded with 10 percent of pretax profits. The higher the score, the higher the bonus. The average recipient collects about 75 additional cents for every hour worked during the previous quarter, but some top-tier performers land an extra $1.50 per hour. More than 90 percent of Trufast's line workers now receive some bonus, but there's a stick with that carrot: Those who score below 70 two quarters in a row are terminated. The bonus program costs Trufast $250,000 a year, and Roth calculates a return on investment of 15 percent to 18 percent.
The results: The new system has been well received, says Chris Whalen, a material handler at Trufast for three years. "Truthfully, a review once a year didn't mean anything," Whalen says. "Quarterly reviews are more targeted with reality. We get a clear view of what's expected, we know where we stand, and we get more money if we do a good job."
The system is still too new to measure its effect on turnover. But Roth's profit margin in July hit 10.6 percent, up from 5.6 percent the previous year, an improvement he attributes partly to the motivational bonuses. He'd like to use them elsewhere in the business but says it's tricky for jobs in quality engineering or management, where the duties aren't easily defined. "My employees keep asking when the next review is and what they need to do to score well on it," he says. "That tells me all I need to know."
The Rhythm Method
The company: Pulse220, an $11 million experiential marketing firm with 30 employees in Southfield, Michigan
The problem: Companies like Pulse220 "are all about the people, the passion, and the ideas," says CEO Craig Erlich. He worried that a 20 percent turnover rate was hurting organizational memory and the morale required for top-notch creative work.
The solution: Erlich believes in rhythm. His company moves to a constant beat--a pulse of meetings, milestones, and activities. So in 2005, he began working performance evaluations into that rhythm by replacing standard year-end sit-downs with self-evaluations, quarterly discussions of goals, 360-degree reviews, and twice-a-year performance reviews designed to emphasize the ways employees can add value to the organization (such as by spending more time training others or creating metrics for the sales team). That's a lot of reviewing, but the effect is continual feedback in a variety of forms, so employees always know how they're doing and are focused on continuous improvement (as opposed to one-time, end-of-the-year pledges to do better). Raises are never a surprise, says Erlich, "because we've been talking about performance all year long."
During reviews, Erlich goes over the usual things: strengths, weaknesses, above-and-beyond efforts, and contributions to the company's core values, including hard ones like profitability and soft ones like passion and pride. (Erlich agrees that passion is an amorphous metric, but "it's important to us, and having it in the review keeps it top of mind with employees.") What he doesn't talk about is money. Raises are given on employees' anniversaries, events that are seriously celebrated at Pulse220. "By not talking about performance and compensation at the same time, you cause the review to be as meaningful as possible," says Erlich. "When you have the noise of compensation in that room, a lot of other stuff gets ignored."
The results: Erlich wanted to reduce turnover, and he says the system has helped him do so 50 percent. Beth Kobeck, the company's vice president of finance and administration, likes the fact that reviews no longer feel rote or impersonal. "At first it seemed cumbersome and another task to complete, but after I developed a rhythm with my manager, it provided a more qualitative and actionable measure of my performance," she says. "The evaluation is interactive and feels like you are having a conversation with your employer versus being talked to."