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15 Apr

After Apple abolished its annual performance review, then-chief talent officer Daniel Walker called those reviews the ‘stupidest thing American companies do.’

Performance reviews are commonplace at big companies, and in theory enable managers to give detailed acknowledgment and constructive criticism. But in reality they do more harm than good because employees focus on impressing their manager rather than on performance per se. Microsoft made this problem worse with a stack ranking system, in which managers graded people on a bell curve, each grade going to a fixed number of employees.

As one employee remembered, “If you were on a team of ten people, you walked in the first day knowing that no matter how good everyone was, two people were going to get a great review, seven were going to get mediocre reviews, and one was going to get a terrible review. . . . It leads to employees focusing on competing with each other rather than competing with other companies.” Another described sabotage, either open and direct or subtly withholding just enough information to keep colleagues from getting ahead in the rankings. Without trust, managers could not influence anyone.

Until the company finally dropped the practice in 2012, surveys regularly told leaders that employees simply did not want to work together. Performance reviews and stack ranking undermined the company’s efforts to build a community around shared values. The new performance management process emphasized teamwork and employee growth, and collaboration—not to mention satisfaction and productivity—increased soon after.

Some companies favor direct feedback over occasional reviews. Tesla has kept an annual performance review, but employees say it is simply routine because managers communicate feedback continually throughout the year. As one former Tesla employee pointed out, managers focus on the moment: “If people kick ass, tell them right away. And tell them in front of people. If you have to set aside time to do this, it’s wrong. . . . You want a culture of excellence that’s constantly providing feedback so people feel they are growing all of the time.”

Employees across organizations have this same qualm with performance reviews. In a Gallup survey, only 14% of employees strongly agreed that their reviews inspired them to improve. If managers aren’t providing regular feedback, then the feedback comes too little too late; ergo, “by the time the employee is hearing praise or correction, the issues are history—they have either been resolved or are in the distant past.” But nearly half of employees said they receive feedback from managers at most a few times a year, even as other surveys suggest that workers who receive weekly rather than annual feedback find that feedback more meaningful and motivating for outstanding work and to make them more engaged overall at work.

While it seems intuitive to provide immediate feedback to employees, few companies actually do so. Managers prefer the control and deliberation that annual (or quarterly) reviews give them—at the cost of discouraging immediate reactions. After Apple abolished its annual performance review, then-chief talent officer Daniel Walker called those reviews the “stupidest thing American companies do.” He found them a tremendous waste of time, as there are more effective ways of relaying feedback to employees.

Likewise, Netflix dropped formal reviews in favor of informal conversations year-round—even as employment exceeded 10,000. Many HR experts can’t believe that a company the size of Netflix doesn’t hold annual reviews. But former chief talent officer Patty McCord, in a 2014 article, pointed out, “If you talk simply and honestly about performance on a regular basis, you can get good results—probably better ones than a company that grades everyone on a five-point scale.”

Jessica Neal, Netflix’s chief talent officer from fall 2017 to spring 2021, conceded that this frequent feedback can be “cold and mechanical.” While many people might cringe and be frightened by Netflix’s policy, she said others find it exciting. “They know that they’re going to work hard and do great work. No one wants to be bogged down by people who won’t do the same.”

That’s in stark contrast to ExxonMobil, which has clung to a variety of 20th-century norms, including annual performance reviews and internal ranking. As Businessweek described, “Those interviewed described an organization trapped in amber, whose insular and fear-based culture—once a beacon of corporate America—has become a drag on innovation, risk-taking, and career satisfaction.” The reporters point to the company’s slowness in investing in breakthrough technology, such as shale oil drilling, and the departures of employees “fed up with not innovating.” The company also discourages collaboration and psychological safety while paying above-average compensation in order to convince talented people to stay.

Annual performance reviews can still be effective, but only if closely tied to company culture. Amazon regularly checks in with employees regarding their performance, but mainly to promote the company’s values. The process begins with the employee discussing three such values of Amazon that he or she achieved that year, and three others to work on the following year. The manager then provides feedback bringing together the values and the performance. The process leads people to internalize the company’s values and align their goals with those values.

What matters is not the exact system of performance reviews, but managers’ willingness to give frequent, ideally immediate, feedback to employees. Feedback that comes out only a few times a year or that pits employees against each other will weaken, not extend, leaders’ influence.