Performance Reviews

How your Performance Appraisal is Hurting your Financials

Of late there has been a move to overhaul the annual performance review. It seems not a week goes by where another company announces their plans to realign their performance review practices. A key management challenge is to create a long term sustainable competitive advantage. Pre 21st century, this notion would have been based on tangibles such as financials, production line output and sales metrics. However, there has been a growing body of evidence that suggests most companies overlook and mismanage their most critical asset: Human Capital.  

Annual appraisals are not authentic conversations and by only soliciting yearly feedback, employees lack the motivation to be part of the team. The new generation of workers are smart and tech savvy. Millennials want more training and more opportunities to grow. In a survey by TriNet and Wakefield Research, 85% of millennials reported they would feel more confident if they could have more frequent performance conversations with their manager. Simply put, employees want to be appreciated. Another survey discovered that 83% of employees found recognition for contributions to be more fulfilling than rewards or gifts. Furthermore, HR experts are now finding that focusing on improving an employee’s strengths, rather than their weaknesses, boosts engagement, and bottom line results. However, it’s imperative that managers have more frequent discussions with employees to help them develop their key skills and competencies.  Managers who know their employees’ strengths are 71% more likely to have employees who are energized and engaged.

Having a team that lacks motivation and engagement hampers the overall business performance. In a recent study, it found that companies with low engagement scores earn an operating income of 32.7 percent less than companies with engaged employees. Furthermore, engaged companies grow profits as much as three times faster than their non engaged counterparts. Employee satisfaction and engagement are increasingly becoming measurements of success and companies would do well to consider this when determining the overall performance of the business. Low employee engagement levels and high turnover rates cost the company a substantial amount of money and resources. Without having an engaged and motivated workforce, output collapses and the bottom line suffers. A thirty year study conducted in 2012, found that companies with enthusiastic employees consistently out produce and outperform their less satisfied counterparts. What’s more, according to a CEB report, 90% of HR leaders said the process didn’t yield accurate data. Basing employees assessments solely on the annual performance review or stack ranking system is not only ineffective, but also inefficient. In 2014, Deloitte set out to understand the value annual performance reviews bring to the organisation. They found that over 2 million hours a year were wasted on completing forms, holding meetings, and creating ratings. What’s more, the majority of the time was spent discussing the actual outcome.

Annual reviews not only fail to engage employees, but they fail to identify top performers as well. In fact, Research shows that two-thirds of performance management systems actually misidentify top performers regardless of forced rankings. The old system relies heavily on the opinion a manager may have of the employee, making the process highly subjective. Engagement, for example, is an abstract concept. If a manager rates an employee on how engaged they are, it’s based on what the manager considers to be high or low engagement. Typically senior executives spend less than three days a month working together with their team members, and devote less than three hours to strategic issues. The price of misused time is high. Adobe realised that their annual review required 80 000 hours from the company’s 2000 managers, equivalent to 40 full time employees per year.

The estimated cost for the entire performance review process of a company with 10000 employees is roughly $35 million. These costs could be tolerated if the results generated tangible improvement, but the outcome is never great. Performance reviews are a costly process, and if they are not handled in a way that yields the best results for the company and the employee, it ends up being a huge liability rather than an asset. The annual appraisal exacerbates the company's financial difficulties, contributes to mismanagement, and fails to motivate employees. Lost knowledge, training costs, interviewing costs, and recruitment costs all add up. Considering all of these associated sunk costs, it’s estimated that the average price to rehire a mid level employee (and to get them up to speed) is roughly around 150 percent  the annual salary of the employee they replaced.

In order for a company to mitigate the financial loss of their human capital, it’s imperative that they reconsider their performance review practices. As stated above, companies should adopt a practice that favours employee engagement and motivation. Creating a process in which managers can constantly engage and motivate their employees will benefit the bottom line. Tools, such as Impraise, can assist organizations by moving over from the annual performance review to a review system that is continuous and in real time.

Photo Credit: Rafeal Souza