Zugata Blog

Thoughts, trends, and research for designing
high-performance cultures


What Are Annual Performance Reviews Really Costing You?

Posted by Melissa Suzuno

on Nov 21, 2017 1:35:00 PM

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There’s one aspect of the employee experience that consistently makes headlines and sparks heated debate—and no, we’re not talking about who really won the office ping pong tournament last spring. It’s the annual performance review process.

Over the past few years, a number of Fortune 1,000 companies—including Deloitte and Accenture—have made headlines for their decision to get rid of the annual performance review, and CEB found that the number of employers ditching numerical rankings (or even the entire review process) had grown from 4% in 2012 to 12% in 2014.

This shift away from performance reviews reflects changing attitudes among HR leaders as well—only 4% of HR leaders believe that their organizations accurately assess employee performance and 83% agree that performance management must change, according to research from CEB.

So is the solution as simple as throwing out the performance review altogether? While some HR leaders are considering this approach, it’s actually proved to be quite unpopular with employees. In fact, when Facebook experimented with eliminating performance reviews
, they found that 87% of employees wanted to keep them. 

These numbers show us is that performance reviews are just as multi-layered and complex as the people they’re meant to evaluate. While employees may want to keep a review process, there are clear indicators that the traditonal performance review isn't delivering the value they're looking for. In this post, we’ll dig in a little more to the various ways traditional annual performance reviews can impact your organization.

Time

Time is the most obvious resource required by performance reviews, and most of the estimates about how much time is spent on an annual basis are pretty staggering: CEB found that managers spend up to 200 hours per year on performance documentation. Gap Inc. found they were spending 130,000 hours on the review process and yet all that time was not driving any tangible change in performance, according to their head of Talent Planning and Performance, Rob Ollander-Krane.

One way to cut down on the time it takes to conduct performance reviews is to replace the hefty annual review with lighter, more frequent sessions. By replacing the annual employee review with more frequent check-ins,
Adobe saves an estimated 80,000 hours a year—the equivalent of 40 full-time positions!

Money

When you look at the sheer number of hours spent on performance reviews, it’s only natural to consider what sort of financial cost is associated with them. Gap, Inc. estimated that the performance review process cost them $3.3 million in payroll and CEB estimates that a company of 10,000 spends around $35 million a year (accounting for the time managers and employees spend on reviews).

Obviously these numbers will vary given the size of your organization and the number of direct reports each manager is responsible for. If you’re interested in calculating the time and money spent at your organization,
CEB has a handy calculator you can access here.

Employee Engagement

Once you see the cost and time involved in performance reviews, you have to wonder about what sort of impact this process has on employee engagement. Do employees feel it’s worth the time and effort? Are they gaining insights that will help them perform better in the future? Unfortunately, the answer for the majority of employees is a resounding no. SHRM reports that 66% of employees feel that the performance review process interferes with their productivity, and 65% say it isn’t even relevant to their jobs.

Similarly, a report from Deloitte found that 58% of executives believe that their current performance management approach drives neither employee engagement nor high performance.

Employee Happiness

Employee happiness may not be easy to put a number on, but it’s still important to consider. It turns out that the review process can have a substantial psychological impact on employee wellbeing. In an article on SHRM, David Rock, director of the NeuroLeadership Institute, outlines five factors that can have a significant impact on human emotion:

Status: Am I considered better or worse than others?

Certainty: Am I certain my hard work will get me a higher rating?

Autonomy: Do I have any control over what will happen?

Relatedness: How do I make myself look better than others?

Fairness: Am I being treated fairly?


Performance ranking systems generally prompt negative reactions in several of these areas.
“We put these systems in to hopefully motivate everyone, but it turns out a very large number of people are significantly demotivated,” writes Rock.

The Washington Post also reports that “even employees who get positive reviews experience negative effects from the process. It often triggers disengagement, and constricts our openness to creativity and growth.” So rather than pushing us to perform, the traditional approach to performance reviews may be having the opposite effect!

Putting it all together

As we’ve seen, the annual performance review is a huge strain on resources, and in most companies there’s no clear connection between performance reviews and employee performance. There’s a growing realization that this enormous expenditure of time and effort isn’t really driving any significant change. In fact, it was this type of realization that led to Accenture’s decision to overhaul their performance review system. The Washington Post reported: “performance management had to change from trying to measure the value of employees’ contribution after the fact. It needed instead to regularly support and position workers to perform better in the future.”

Here at Zugata, we’ve observed this shift as well. A number of companies are moving away from performance reviews that simply evaluate past performance and are changing their approach to drive high performance in the future. Want to learn more about what this new approach to performance management looks like in practice? For practical tips and examples from forward-thinking companies, download a copy of our eBook.

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