An early trailblazer of performance reviews was the Welsh industrialist Robert Owen, who introduced a system of coloured cubes strung over workstations at his cotton mills in Scotland to denote the performance of the employees below. But it only became a trend from the mid-20th century when updated versions were widely adopted by US managers. 

A number of innovative companies have since seen the light and for the past decade or so have been ditching a practice that arguably undermines employee morale and in the process, productivity and profits. Given the wide distaste for the exercise, consigning it to the dustbin is surely one way to boost a company’s efforts at retaining, attracting or poaching talent.

The scale of the aversion to the process is more than just anecdotal, though there is plenty of evidence on that front. Many adults simply don’t like the indignity of being treated like schoolchildren who get gold stars for their efforts. 

Deloitte Consulting’s Bersin — formerly Bersin & Associates until it was acquired by Deloitte — found in a 2018 performance management study that “most performance management approaches are despised and fail to generate required organisational capabilities”. 

So one of the key takeaways from that study is that they are intensely disliked, by supervisors and subordinates alike, and don’t actually do much.

The group’s founder, Josh Bersin, noted last year that HR managers are constantly trying to reinvent this wheel, which remains stuck in a rut.

“One of the most frustrating, tired, and archaic HR practices is performance management. Most of us have had horror stories with our ‘performance appraisals’, leading HR leaders to try to reinvent performance management all the time,” Bersin wrote. “When I was running Bersin & Associates years ago we grew the company by 30-40% year after year with no performance management at all.”   

A 2015 study by PwC found that “growing frustration from employees and managers with the year-end performance process is leading many organisations to focus on creating a continuous feedback culture to take the emphasis off the year-end appraisal”.

But the PwC survey of 100 UK-headquartered organisations and 1,000 employees also revealed that the “majority of employees find the year-end performance review useful. Of those employees surveyed, nearly two-thirds [67%] said they help them understand how they are doing, four in 10 said they motivate them and nearly half [48%] said they help them progress and think about their career. Only just over a third [37%] said the end-of-year performance review is a waste of time”. 

Still, alarm bells should ring if more than a third of the workforce finds something to be a “waste of time”, and there is plenty of evidence that such time could be put to more productive use. 

Software pioneer Adobe, for example, dumped its annual performance reviews in 2012 after it conducted research which found that it took 2,000 managers 80,000 work hours to pull off the feat each year, the equivalent of 40 well-paid, full-time staff. 

Donna Morris, the people manager at Adobe then, wanted to stop the flow of talented employees who left each February over their frustration with the process. The result was a “check-in” system of regular but more informal consultations that did away with rankings. One result was a 30% decrease in voluntary attrition. 

“Adobe was founded on four core values: genuine, exceptional, innovative, and involved. Our old annual review process contradicted every one of them. So I said to our people: What if there were no ratings and no rankings and no forms? Instead, what if you all knew what was expected of you and had the opportunity to grow your career at Adobe, where each of you is so valued?” Morris said in an interview with the WhatMatters website in 2018.  

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Many other companies have also dropped the annual performance review, including IBM — tech companies are often cutting-edge — as well as OppenheimerFunds and others. General Electric (GE), long seen as the model for “stack ranking”, which saw a 10% cull of the bottom performing staff annually — an inhumane approach, to say the least, which even left the “unculled” demoralised as friends and colleagues were shown the door — also ditched the annual review for an app that allowed instant feedback and mentoring. 

But even the concept of “performance management” has problems, including perceptions that the “fix is in” in advance to meet budget targets and so forth as salary increases, bonuses and promotions are often tied to the process.  

One way to view the issue is through the prism of ESGs — environmental, social and governance issues — which in recent years have become entrenched in corporate culture. Employee well-being and happiness are among the lofty goals that the ESG zeitgeist aspires to, so perhaps investors who regard annual reviews with opprobrium — having in many cases been subjected to this stressful waste of time themselves — may start culling their exposure to companies that retain the practice. 

Adobe is a case in point. 

Since 2012, when it buried annual performance reviews, its share price has grown nearly 10 times higher, even after the 2022 carnage in tech stocks. At the end of 2012, it was worth $36.90. It is now around $340. 

By contrast, the Nasdaq Composite Index, of which it is a part, has risen less than fourfold since 2012. So Adobe has outperformed the rest of the market by a long shot since it bade farewell to performance reviews. 

In the 10 years until the end of 2012, Adobe’s share price roughly doubled, slightly lagging behind the Nasdaq’s performance. 

This, admittedly, is a pretty unscientific way of evaluating the matter at hand. But the point is that if a company’s share price is anything to go by, flushing the annual review down the toilet did not seem to hinder Adobe’s performance and may well have given it a lift.

A related issue is the rise of weekly or daily meetings in the corporate world. 

One recent survey of 76 companies found that when meetings were slashed by 40%, productivity rose by 71%. 

Surveying this and related studies and literature late last year in The Atlantic, Arthur C Brooks wrote that: “One of the most straightforward paths to happiness at work is to fight against the scourge of time-consuming, unproductive meetings at every opportunity.” 

The annual performance reviews fall into this broad category because they require meetings — albeit not on such a regular basis — that contribute to worker unhappiness, and an unhappy workforce is likely to be less productive than a happy one.

Consultant guru Bersin, who has been writing and researching the issue for more than two decades, found this to be the case when his company was acquired by Deloitte. 

“When we were acquired by Deloitte…We put together budgets, monthly business reviews, board meetings, and executive oversight. And this was done with the best of intentions: Deloitte wanted to make sure the business was performing well through the acquisition,” he wrote. 

“Well, while all that sounded good, it slowed us down. People spent time in meetings, meetings to prepare for meetings, and executive reviews. Each meeting took away time to talk about research, clients, and operations. So our growth rate started to slow, and ultimately performance began to suffer.” 

So performance review systems often, ironically, fail to meet their goals — in which case, they should not get any stars and be ruthlessly dispatched.

“Happy families are all alike; every unhappy family is unhappy in its own way,” is the famous opening line from Leo Tolstoy’s epic novel Anna Karenina. 

In the corporate world, the sentence could perhaps be modified along these lines: “Unhappy companies are all alike in the same way…”. And the sources of their unhappiness are annual performance reviews and the related scourge of regular meetings. 

If any readers have performance appraisal horror stories to share, please drop me a line at [email protected] and I will do a follow-up report with your tales of woe while keeping your identity anonymous.

Meanwhile, good investing, and maybe keep in mind companies that are happy. DM/BM