“Performance reviews.” The words strike fear and dread in the hearts of employees everywhere.

Their angst is understandable. Performance reviews typically are not done often enough and all too often are done poorly. A good performance review gives employees constructive, unbiased feedback on their work. A bad one demonstrates supervisor bias and undermines employee confidence and motivation.

The balance does not seem to have tipped yet in favor of the good ones. David Insler, a senior vice president at New York-based Sibson Consulting, estimates that only about 35% to 40% of companies do performance reviews well.

Frequency is clearly one of the issues. At most places, says Peter Cappelli, head of Wharton’s Center for Human Resources, reviews occur annually. “If you wait a year to tell employees how they are doing, they are almost always surprised and unhappy if the results are not positive. Humans are hard-wired to focus on the negative,” Cappelli notes. “So ‘balanced’ feedback always leaves us concentrating on the bad parts” of the reviews.

But he and others point to rapid changes in both the workplace and the workforce that are altering how performance is evaluated. For example, because more and more companies — from software and engineering to advertising, accounting and consulting — are heavily project-oriented, reviews are often done when projects are completed or at set points along the way. The annual review then becomes a no-surprises summary at the end of the year used primarily to share information about raises, bonuses and other compensation. 

As for the workforce, the latest influx of employees includes a generation of millennials (those born between the late 1970s and early 1990s) who are accustomed to constant and instant feedback — from parents, text messaging friends or social media sites. They want the same from their employers. As Daniel Pink, a workplace expert and author, noted in a recent article in The Telegraph titled “Think Tank: Fix the Workplace, Not the Workers,” millennials have “lived [their] whole lives on a landscape lush with feedback.” Yet when they enter the workforce, they find themselves “in a veritable feedback desert…. It’s hard to get better at something if you receive feedback on your performance just once a year.”

Competing Agendas

Cappelli cites studies showing that 97.2% of U.S. companies have performance appraisals, as do 91% of companies worldwide. Given their ubiquity, why do performance reviews have such a bad reputation?

Wharton management professor Matthew Bidwell suggests that reviews tend to have competing goals: Employees, for their part, are looking for frank, honest and helpful feedback, but know that if they don’t use the review time to pump up their performance, they might not get the top bonus or best raise.

Meanwhile, organizations “want to allocate rewards according to performance and merit, and they want to provide developmental feedback so that employees can improve,” says Wharton management professor John Paul MacDuffie. “But organizations also have to make tough decisions about who ranks higher and what kinds of bonuses people get. If the organization — in trying to make everybody feel good — doesn’t allocate rewards according to performance, then it will be seen as an unfair process.”

Also skewing the performance review process are biases that may be subtle or overt. For example, some managers tend to give better reviews to employees they themselves have hired. Other managers — and there is “overwhelming evidence” of this, according to Bidwell — show bias against women and African Americans, although there are indications “that those biases disappear over time.” Still other managers can be motivated by organizational politics or influenced by manipulative employees. 

Finally, some performance reviews under the auspices of human resources departments focus only on getting reviews completed — “100 percent compliance” — not on their quality. A Sibson Consulting/WorldatWork survey found that 58% of HR executives give their performance management systems a “C” or below, in part because managers don’t receive the training they need to deliver effective appraisals.

Samuel Culbert, a professor in the Anderson School of Management at UCLA, is an outspoken critic of performance reviews. “They destroy the trust between the boss and the employee, and cost the company enormous amounts of money in terms of time and wasted effort. The people being reviewed worry about pleasing their boss before they concern themselves with delivering results to the company,” states Culbert, author of Get Rid of the Performance Review! How Companies Can Stop Intimidating, Start Managing — and Focus on What Really Matters. In addition, reviews encourage employees not to speak out about problems they observe because it could adversely affect their career paths and compensation, Culbert states. As examples, he points to “employees at Toyota, BP and the nuclear reactor site in Japan who knew about defects” in their companies’ products, but failed to report them because of a lack of trust between employees and management.

Others are equally dismissive. Performance reviews “are rarely authentic conversations,” writes Daniel Pink in “Think Tank.” More often, “they are the West’s form of Kabuki theatre — highly stylized rituals in which people recite predictable lines in a formulaic way and hope the experience ends quickly.”

Insler points to another problem with the traditional review. “Companies are concerned that if it isn’t a quantifiable, very objective measure, then it’s not a good measure.” But in recent years, with the explosion of knowledge-based companies, “the ability to assess performance in a subjective and qualitative way” requires a process that looks at “first, what are the key performance criteria that are important, and second, how do you measure them when they are qualitative.” He suggests asking employees during the assessment process “how they do their job, what [competencies] they have developed and whether they are continuously improving their knowledge skills.”  

At Sibson Consulting, a division of The Segal Company, performance reviews are done at the end of each project — which typically runs from six weeks to six months, according to Insler. The company also has a semi-annual process — “focused on the developmental side of performance by noting employees’ key strengths and working on how to leverage them” — and then the more formal year-end review.

The company also recommends ongoing monthly or quarterly dialogue with employees in addition to the mid-year and year-end reviews. “Some supervisors in our client companies scoff at the idea of monthly or quarterly feedback,” Insler notes. “They say that if they aren’t talking to their employees every day, then they are missing something. We suggest at least a monthly conversation where you do a catch up review and offer the individual the opportunity to give feedback.”

Feedback Loops and Other Innovations

Indeed, the importance of frequent feedback crops up in almost every discussion of how to improve performance reviews. Daniel Debow is co-CEO of Rypple, a Toronto-based social software company that creates products designed to help people share continuous real-time feedback and provide coaching. Rypple’s target market is the 50- to 1,000-person knowledge worker firm focused on creative collaboration “where the model of a social network describes what is going on.”

The target employees are millennials because “they grew up in an age where feedback was how you learn,” says Debow, expanding on Pink’s earlier comments. “The idea of getting feedback to help you improve is natural. Millennials are clear on what they want their career to be about. They don’t expect to be in one company forever, but rather to develop a reputation and skill set that will carry them from job to job and help them establish their personal brand.”

According to Debow, senior level executives benefit from feedback as well. “CEOs, for example, want to know where they stand, want to be able to ask questions about their strategy, their presentations, what they need to work on.” The single most important determinant of whether people improve during coaching intervention “is whether they repeatedly ask for feedback from the people around them,” says Debow, citing research by leadership coach/author Marshall Goldsmith.

The Rypple system is built to allow an employee to ask for anonymous feedback — shown only to the employee and not to his or her manager or HR department. In addition, notes Debow, feedback is done in “small continuous loops” in real time so that employees can act on that feedback immediately. “It may be that someone says, ‘Let me give you a constructive tip: You need to stop interrupting customers when they talk because it bothers them.'”

The system also includes the concept of recognition — thanking and rewarding a team member for good work (with badges, for example), “which directly links to an employee’s increased motivation,” says Debow. The third part of the system is coaching. “Being a good manager means being a good coach. That involves setting goals and helping people achieve them through collaborative one-on-one meetings.”

Joe Cruz, senior IT project leader at Wharton, has been using Rypple since October. “It is not a formal review process,” he says. “It is more like, ‘You did something cool with this software implementation — kudos.’ The kudos are the public posts. If I had a negative comment, that would be private; it keeps the feedback cycle going…. Rypple is not a replacement for the program we have,” adds Cruz, “but a supplement to helping us maintain our high quality of execution.”

Cruz and others in his division “set up teams on the Rypple site with relationships built in. So I am directly connected to three people on my team. We can provide to-do lists, goals and feedback about each other’s performance. We use Rypple to drive our biweekly, one-on-one discussions and monthly group meetings. Because Rypple’s communication system is separate from all the emails we get, there isn’t as much noise in the experience. It can help filter out unnecessary information and keep us on track.”

Other companies have come up with approaches to performance reviews that get away from the more traditional methods.

Culbert suggests performance previews rather than reviews, and he defines them as “discussions that take place when there is still time to get good results.” He suggests that companies “change the politics by putting the bosses’ skin in the game…. Their job is to make sure every direct report succeeds; to ensure this, their evaluations should be the same as their direct reports.” And he advises setting up conversations between employees and bosses “to make sure they [find out] what they need from each other to get good results.” In an article in The New York Times last month, Culbert elaborated: “No longer will only the subordinate be held accountable for the often arbitrary metrics that the boss creates. Instead, bosses are taught how to truly manage….” 

In a different take on management involvement, MacDuffie points to a senior executive at Merrill Lynch who holds regular conversations with key supervisors about up-and-coming talent within the company. “He wants to keep an eye out for opportunities for these people,” says MacDuffie. “He thought it was a good thing for employees to feel like there were managers at a higher level who were thinking about their advancement on a regular basis. It was a sign of being appreciated.”

Pink in “Think Tank” suggests that performance reviews be done by peers. He tells of a large American engineering firm that allows employees at any time to award a $50 bonus to a colleague. Instead of annual acknowledgements from bosses “who may not remember your heroic deeds, these modest bonuses allow colleagues to recognize good work instantly.” The result is a workplace where feedback “more regularly bursts through the dry sands of office life.” In 2010, Pink reports, employees in the engineering firm gave each other close to 2,000 bonuses.

Other advocates of non-traditional performance reviews suggest 360-degree feedback — a process whereby individuals are reviewed not just by their bosses, but by their subordinates, peers and, if appropriate, their customers and suppliers. The feedback is often anonymous and the idea is to have more than one evaluator.

Another approach is forced rankings. “If you look at complaints that people have about performance appraisals, it is that you always want to give everyone an A-plus,” says Bidwell. Forced rankings don’t allow that to happen. But the problem is “they foster a lot of competition among peers. Also, to the extent they are done across a large group of individuals, they are seen as political.”

Jeffrey Pfeffer, a professor at Stanford University’s Graduate School of Business, would agree. In a Businessweek article, Pfeffer notes that “peer comparisons invariably create competition and discourage collaboration — a big problem [when it is time to] transfer knowledge in the workplace.” In addition, he writes, “many of us believe we are above average and resist being told that we aren’t…. Since performance assessments often require half the staff to be rated below average, they can pose a threat to people’s self-esteem. As a result, employees often discount them.”

Besides feedback, a key theme in discussions about performance reviews is the need to “better train and educate supervisors and managers around how to conduct these discussions,” says Insler. “We have all experienced good managers and bad managers. Good managers provide feedback and direction that will help individuals achieve success. Bad managers don’t. They worry about who is at fault and who can get blamed if something goes wrong.”

Case Study

SAS is the world’s largest privately held software company, with 11,800 employees and worldwide revenues last year of $2.43 billion. Headquartered in Cary, N.C., SAS has more than 400 offices globally. In 2010 and again this year, it was ranked number one on Fortune’s “100 Best Companies to Work For” list. The company is a leader in business analytics, software and services.

MacDuffie teaches a case study on SAS in his courses at Wharton, and over the years has invited senior executives from the company to be guest lecturers. Until the last decade, says MacDuffie, the company did not have a performance review process.

That changed, however, when the vice president of human resources saw that new employees hired from universities (often PhD or faculty-level statisticians) “were accustomed to feedback in the university setting” and felt the company would benefit from a formal appraisal process, MacDuffie says. SAS was certainly in favor of feedback, he adds, “but the belief was that good managers should be providing informal feedback all year rather than saving it for a formal annual review. And in fact, good managers were doing that. But those supervisors who were not good managers were not offering feedback at all. Their employees would get their merit increase and not have any idea where it came from or what it was for.”

The company decided to pilot an appraisal process in one division and eventually instituted the process throughout the company. The system, based on a product bought from an outside vendor and then customized by SAS, “is systematically tied to a performance and merit reward cycle and therefore to promotions,” says MacDuffie. “It does have a 360 degree feedback feature but that is only used for developing employees’ competencies; it has no influence on pay and promotion decisions.”

Because SAS’s revenues hinge on customers choosing to annually renew updated licenses for SAS products, notes MacDuffie, “the company is very customer responsive, and innovation is driven by customer requests.” Given that orientation, many of the managers also do programming, “actually sitting next to or near their employees and writing code. These interactions end up facilitating the feedback process.”

That, in turn, has led to another innovation in the performance appraisal system. “While teaching managers how to do reviews, the company was able to identify those individuals who are brilliant technical people but do not have very good managing skills,” says MacDuffie. “The company then created a separate advancement track based on technical competency, and called the people on that track ‘SAS Fellows.’ The SAS Fellows can now advance and get recognition and status without having to” play a management role as well.

A Critical Need

Despite criticism of performance reviews from all sides, very few experts would suggest throwing them out. According to the Sibson Consulting/WorldatWork survey, “an overall performance management process — one that focuses on goal setting, feedback, coaching and clear statements of the company’s performance expectations — is absolutely critical” and indeed, is found in the highest-performing companies, says Insler.

And while some companies have tried to do away with performance reviews, the bottom line seems to be that, in some form or another, these reviews play a necessary role in company culture. “I don’t really see how you run an HR system, how you reward people, without some form of performance review,” says Bidwell. “It’s not clear to me what the alternative is.”

No matter how you run a performance review system, adds MacDuffie, “it’s unlikely everyone will enjoy it. But if you neglect it or write it off, it can be incredibly destructive, create perceptions of bias and politics, and lead to [an atmosphere] of cynicism in the workplace. That corrodes the idea that there is any notion of performance that matters and is rewarded.”