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.

Many HR experts recommend beginning the annual performance review with a self-appraisal from the employee, which reinforces the process as a partnership with an employee investment. But Julie Freeman, a consultant in Montreal, sees a pitfall. "I can't imagine anything more demoralizing than an employee telling his manager that he thinks he does something well, only to have the manager disagree with it," she wrote in an article for the website of SHRM. "It also puts the manager in an awkward situation." This should not be a problem when the manager is meeting with the employee periodically, but as a precaution, you can ask the employee to submit the self-review in advance.

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


The Society for Human Resource Management (shrm.org) offers members a tool kit (including sample policies and forms). Membership costs $160. Nonmembers can search for consultants at no charge.

Small Business Development Centers can refer you to local HR consultants. A directory of SBDCs is available at the U.S. Small Business Administration's website, at sba.gov.

WorldatWork (worldatwork.org) offers a Contact Roster with links to each state; you can find detailed business-structure information and forms and instructions, and often submit paperwork online.