How Effective Are Annual Performance Reviews?

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Performance reviews are the great equalizer of the workplace– that time of year that fills employees and managers alike with an impending sense of dread. Everyone has to do them, but almost no one actually enjoys them.

In recent years however, more and more companies have been changing up the standard annual performance review format. Meta, for example, recently launched a new performance program called Checkpoint, which aims to reward output over effort. Twice a year, employees will be graded into one of four categories (Outstanding, Excellent, Needs Improvement, and Not Meeting Expectations). The Outstanding category comprises the top 20% of employees and awards bonuses as much as double an employee’s pay. Truly exceptional performers are rewarded with bonuses of up to 300% their pay.

Talk about incentivizing performance.

There are plenty of reasons why having effective performance reviews matters now more than ever.

For one, in a weak job market fraught with economic and geopolitical uncertainty, workers are increasingly ‘job-hugging (staying in their roles longer than they otherwise would), and there’s a growing pool of workers who are ‘quietly quitting’ (doing only the minimum that must be done to avoid being fired).

For another, the rapid adoption of AI tools is reshaping roles, teams, and workflows faster than most organizations have ever experienced. Traditional tools designed for an outdated era of work are not going to cut it.

But the biggest reason to overhaul performance reviews is that they’re simply not very effective. According to Gallup, only 14% of employees strongly agree that their performance reviews actually inspire them to improve. One study published in Psychological Bulletin also found that performance reviews actually made performance worse a third of the time.

So, it’s time we did a performance review on the annual performance review. What’s not working, and how can companies improve the process?

Why Aren’t Annual Performance Reviews Working?

There are four structural issues with the traditional annual performance review format.

They don’t occur regularly enough to drive change.

If you’re relying on the performance review to communicate feedback, you’re too late. By the time the annual review is scheduled in the calendar, the opportunity to course-correct will have already passed.

The other problem with having a once-or-twice-a-year conversation is that managers are likely to experience recency bias. In practice, that means that unless both parties are keeping track, the performance review isn’t likely to be a completely fair assessment of performance. Managers may remember things that happened in recent months, while unintentionally sidelining the wins the employee might have had ten months ago.

Some managers aren’t actively supervising the work of those they report to.

Many larger organizations are filled with “accidental managers.” These are individuals promoted to a leadership role based on technical performance rather than management training, skills, or desire. This phenomenon leads to overwhelmed leaders, high team turnover, and poor organizational culture. This happens particularly when top performers are promoted without training and are forced to rely on “on-the-job” learning.

Accidental managers often lack the training and context to provide meaningful performance feedback, leading to formal review conversations that feel hollow for both parties.

The problems with accidental managers go far beyond the performance review context. Here’s a short video worth watching.

Too much is being packed into performance review conversations.

Performance reviews typically serve multiple purposes simultaneously: they’re about developing the employee, but they’re also tied to decisions around pay and promotions.

In addition, these conversations provide employers with legal protection against wrongful termination claims by documenting poor performance, making employees aware of issues, and ensuring fair and consistent treatment.

Trying to kill three birds with one stone often results in missing all of them.

They can feel high stakes and anxiety-inducing

When performance conversations only happen once a year, they naturally feel extremely consequential to the people involved.

As a result, employees oftentimes aren’t approaching these conversations with eagerness to learn. They’re preparing for a verdict, not a discussion.

How Can Companies Improve Their Performance Review Processes?

We’re not saying it’s time to completely ditch performance review conversations. Having some process in place is still important for ensuring accountability.

Rather, consider making some improvements:

Separate conversations around performance and pay.

Compensation decisions are a high-stakes topic for the employees involved. Employees can naturally feel cautious or guarded about their performance. This can shift the conversation from improvement to self-preservation.

By splitting the two into separate conversations, employees are given space to be more reflective and open in their feedback discussions.

Replace the once-a-year review with regular check-ins throughout the year.

Having more frequent conversations helps to lower the pressure and make feedback more useful and actionable in real time.

This was seen in a company case study by Harvard Business School Professor Katherine Coffman, who found that by instituting more frequent feedback conversations, the company reduced the stakes of any single review and made these conversations feel less consequential to employees.

Gallup has also found that employees who receive daily feedback are 3.6 times more likely to strongly agree that they are motivated to do outstanding work than those who receive annual feedback.

Conversations should be forward-looking rather than backward-looking.

The traditional annual review is inherently retrospective, as it asks managers to evaluate what happened over the past twelve months.

Coffman’s case study found that a more effective approach is to focus instead on future goals, skill development, and career progression. The emphasis is on helping employees improve, rather than judging what has already happened.

Moreover, it may be more effective to reframe the “feedback” in performance reviews as “advice.”

Research by Harvard Business School Associate Professor Ashley Whillans found that employees who requested “advice” rather than “feedback” received much more concrete and actionable recommendations in their performance reviews. That one word change may seem minor, but it shifts the mental frame from assessment of the past to guidance for the future.

Set development goals that aren’t measured in performance reviews.

Development goals are stretch goals focused on driving employee growth, but they’re also aspirational and shouldn’t be measured in performance reviews.

Companies revamping their performance review processes are increasingly drawing a clear line between the goals used to evaluate performance and the goals set for personal growth.

Keeping them separate ensures that development goals won’t negatively affect formal evaluations, while still encouraging employees to think big and be ambitious.

Finally, Ensure that AI Competency is Part of the Review.

The ubiquity of AI tools in the workplace means companies are now setting AI expectations into their performance benchmarks.

BCG, for example, has set AI as one of its core competencies in performance reviews and determining promotions, alongside problem-solving and insight.

This is an important step in modernizing the performance review template and ensuring its evaluation method keeps pace with a rapidly evolving workplace.

As we head towards the year’s halfway point, we invite companies to rethink what their current performance review processes are actually accomplishing. If you’re not giving actionable feedback to employees and motivating them to think about how to improve, then it may be time to change course.