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 But instead, let’s focus on the principles and practices that modern agile organizations use in place of the outdated practices of the past: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 that, 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.