Is Your Performance Review Doing Harm or Good?

by Stephanie Taylor Christensen on July 26, 2011
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As intended, performance reviews are a good thing. Employees are given feedback about their performance and what their professional future might hold. (The fact that the announcement of raises often accompanies these reviews doesn’t hurt, either).

While entrepreneurs often conduct performance reviews at least annually, most actually miss the point of the process: to identify, retain, and reward top talent.  Here are four common performance review mistakes that might actually be doing your small business more harm than good.

You measure simple activity. Your company is judged by your clients based on the results it delivers, not how much energy was invested in them. Hold employees to the same standards in their performance reviews. If you evaluate vague and broad categories of tasks without identifying those that had genuine impact, your review misses the mark. Ultimately, getting results is what separates a good employee from a subpar one, and keeps your business flourishing.

It ends with “so what?” While the dialogue a review generates can give valuable insight to both supervisors and employees, many sessions conclude without an action plan. In a study conducted among HR professionals and psychologists by Impact Achievement Group, more than 50 percent of respondents indicated that most organizations don’t use performance review data to make decisions when it comes to promotions, employee development, and termination. A performance review that lacks actionable takeaways is essentially the professional equivalent of a junior high “slam book,” giving employees a lot of feedback with no useful purpose.

You give merit raises to everyone. One common performance review error is awarding merit raises to all employees. While it’s fine to give the entire team a cost of living increase, a true merit bonus should be reserved for top performers. Further, the amount awarded should reflect the value of the performance. Many corporations stick to hard and fast formulas when determining compensation, relying on standardized percentages and “equity-based” calculations. While such formulas standardize processes, they can be a hindrance in retaining talented employees. The benefit of running a small business is that you aren’t bound by corporate HR policies. Use common sense and award top talent with a monetary figure that you believe is fair and attractive based on market insights. (Remember, if the talent is underpaid to begin with, even a large percentage increase will not amount to much more money). Leave top performers feeling nickel-and-dimed, and they’ll quickly become disgruntled, regardless of how positive review their review was.

You compare employees against one another. A truly effective rating system ranks employees against predefined standards of performance for your company — not against other employees, or even their own past performance. Such a system leads to skewed expectations that will never truly measure performance changes, up or down.

Stephanie Taylor Christensen is a former financial services marketer who brings more than a decade of experience in marketing and writing to her career as a full-time freelance writer and small business owner.

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