The Annual Performance Review is Dead, Now What?

The Annual Performance Review (APR) and salary adjustment is a trap that pits employee and employer against each other in a awkward lose-lose dance of anticipation and disappointment. The APR is a traditional management hallmark of 20th century companies. It has no place in the modern, agile organization.

See here for an awesome infographic of the history of APR.

Don’t take my word for it. IBM, Accenture, Adobe, Deloitte, Expedia, Juniper Networks, Kelly Services, Microsoft and GE have all abolished their Annual Performance Review process. There are millions of employees at these companies. While I’m not sure I’d characterize these orgs as bastions of all things agile, I have incredible respect for their forward-looking view of the employee-employer relationship. These blue-chips have set the standard that abolishing the APR is not “radical” or “agile” or “newage” - it’s now mainstream. If your organization is sticking to its Annual Performance Review systems, you’re behind the curve.

I was going to write this post detailing the reasons why APR’s don’t work. I’ve even done some research you can click through at the bottom (you’ll need about 2 hours). But instead, let’s focus on the principles and practices that modern agile organizations use in place of the outdated practices of the past:

  1. Anything “ANNUAL” is too infrequent.

  2. Salary is table-stakes, not a motivational lever.

  3. Never establish if-then rewards.

  4. All bonus programs suck, some suck less.

Anything “ANNUAL” is too infrequent.

The pace of the 21st century economy and the constant change require every important business cadence inside your organization to be high frequency. Certainly more frequent than annual. This is especially true when it comes to feedback, performance management, and skills/mastery building, things that the APR purports to solve for. So even if you can’t really change the structure of your APR system, maybe you can change the frequency. Salary is table-stakes, not a motivational lever.

Pay people enough to show up at work everyday wanting to make a difference. Then don’t use salary in the same sentence as “performance,” or “goals/objectives,” ever again. If you as an employer use salary as a motivational lever and center the conversation around performance - then guess what, your employees will too. And ultimately, you need them more than they need you, so this tactic really isn’t in your favor, economically speaking. Instead, modern companies prefer to detach salary discussions from performance/feedback/review discussions. Some newer techniques like salary transparency can really be a benefit here as it aligns everybody in the company on how compensation really works, instead of it being a secret. Or you could simply go the Netflix route and commit to paying better than anyone else around.

Never establish if-then rewards.

Rewards that are setup as “if you do this, then you get that” are problematic. The psychology works in favor of achieving that reward at any cost, and creates a myopic focus on only that singular goal. Worse, these become addictive and offer decreasing returns over the long term. Getting that $10k bonus feels awesome the first time, and way less awesome the 2nd time. Modern, agile companies prefer to use now-that rewards. In other words, as people demonstrate specific behaviors or results that we ought to reward, we do - simple as that. “Now that you’ve done this, I’d like to give you this.” These organizations also combat the diminishing returns bias by offering things other than money from time to time. “Now that we landed that big client, we’re all going going out to a fancy dinner on the company!” These things have value that can’t be strictly calculated by our economic brains, and therefore are less susceptible to the perils of tradition if-then rewards. For more, see my colleague Rich Visotcky’s post on this topic.

All bonus programs suck, some suck less.

Because bonuses are if-then rewards, they are fraught with all the problems above. However if your business climate simply demands that salary+bonus is necessary to make the business less fragile, then we can think about ways to optimize the if-then rewards. Such as making the bonus hinge on a team goal versus an individual one. Or having the bonus be tied to something at a higher level, such as profit sharing based on the overall company performance. We could even take the “bonus” idea out of the realm of money/currency, and instead offer things that are valuable but less specific. Maybe a company paid vacation, or just extra paid week of vacation, or a new tablet/computer.

Now what?

Well, I think the age of one-size fits all systems is past. Each of the companies referenced above (and be sure to read through some of the examples below), are creating their own systems for managing employee salary and performance from their principles and values that live inside their organization. I’ve outlined a few principles above that hopefully you can use when creating a system to replace annual performance reviews and salary adjustments inside your organization.

Strategic Plans Suck

TL;DR: Running a company is a complex problem. Complex problems do not benefit from traditional planning/analysis. We know this in product development and have moved away from predictive planning practices, but for some reason they still persist at the Strategic Planning level.

Strategic Planning, the way it’s traditionally implemented by many companies, is a huge source of waste. It simply doesn’t work. Worse, the amount of time most management teams spend in strategic planning is astronomical. Some organizations I’ve seen actually have a multi-month process that outputs a 1+ year strategic plan. Surely talking about strategy is important, but the traditional “documented strategic plan the company will execute to” is a relic of management from less complex times. We live in a different world now.

Traditional Strategic Planning makes the following assumptions:

-  The market will remain constant for the next year
-  Your customers and their buying habits will not change
-  You will have the same employees you have now to execute the plan in the future
-  Your competition will move slower than you
-  We can know now what will be best in the future

Plans have no business value (your customer isn't going to pay you for the strategic plan, only for the actions that might emerge from it). And even the companies that do a good job planning spend equally as much time adjusting and reacting during the course of the year. Here are a few things that do have business value in relation to strategy, and tactics for what you might try instead of traditional strategic planning.


Information Has Value

If we had all the information needed to make a decision and act upon it, we wouldn’t actually need a plan in advance. The fact that we sit down and discuss plans at length means, by definition, we do not have all the information we need to make a decision. With the information, we can’t possibly decide now what will be best in the future. Additionally, once we get the requisite info, it’s a statistical certainty that any plan we had will change.

Suggested Tactic: Our time is better spent seeking out the needed information instead of planning. State a testable strategic hypothesis, and start gathering the data you need to make a go/no-go decision to execute. Aim for hypothesis that will generate the most surprising information, as the value of information is directly related to how much it surprises you.

Lead Time Has Value

Just like the goal for product development is “sustainably short lead time” so to should be the goal of a management team. Go from new information to decision made to action in the quickest way you possibly can. Alot of the waste in traditional strategic planning is that there could be a 1+year cost-of-delay between the plan and the execution of the ideas to generate actual business value.

Suggested Tactic: Build strategy into the normal operation of your management team. Lencioni’s “The Advantage” model would call these ad-hoc topical meetings or quarterly offsites. Unless you’re in an incredibly stable market, I’d suggest at least monthly if not weekly strategy-focused meetings. While some discussion and analysis is needed, the output of these meetings must be decisions made on what to execute on (and what to ignore). Too much discussion and analysis is delaying the total lead time towards realizing business value.

Options Have Value.

The idea of “real options” as a way to think about a set of problems and possibilities is a great model. All of the strategies and ideas you have in your organization can all be thought of as options. We can manage these strategic options the same way we would financial options – in real time and empirically. See below for further reading, but the basics are: Options have Value so we want many possibilities, Options Expire and we need to know by when decisions are required, and Options should not be committed to unless you are sure they will pay off.

Suggested Tactic: Keep an options board – a big visible list of strategy options, their perceived value, the info you’d need to assess their actual value, their expiration date, and date of last reasonable decision point. This board could be the backdrop to every strategy meeting.

Strategy Follows Structure

Strategy can be emergent and real-time if you have the right organizational structure and values/vision are in clear and known. No strategic planning needed. This is a key take away from Stanley McCrystal’s book, Team of Teams. And it scales. I can’t stress this enough – it scales in all industries and for any type of strategy work you’re doing. If you feel that a strategic plan is necessary for action to happen at your company, perhaps the root cause is the structure of your company, not the planning process.

Suggested Tactic: Spend your time as a management team consistently reinforcing vision/values, and use small empowered teams that are able to make game-time decisions without seeking permission from anybody.


Further Reading: