I get this question a lot. I tend to revert to my lawyer days when I respond, "It depends." A performance management process, formal or informal, is only as good as the leaders who are managing it. Without good leaders, it really doesn't matter what kind of performance management process a company uses. Performance reviews serve a critical purpose, tracking individual performance and the impact of that performance on a team and the organization as a whole. Leaders provide actionable feedback, and the employees gain a clear understanding of where they stand in terms of achievement and development. Sounds great, right? The problem is...it usually doesn't work that way. Why? It boils down to leadership.
There are a lot of moving parts in a performance management (PM) process, whether formal or informal. In order for the process to work, each part must be living up to its end of the bargain. Leaders have a high level of accountability during this process. Let's talk about a couple of important steps.
Employees set goals based on the strategic initiatives of the organization. Leaders are responsible for setting the strategy. If the folks at the top have not done their job, then it is very difficult for employees to set goals. Employees then become task-oriented and focus on their job descriptions as the basis for what is expected of them during the year. (Don't get me wrong - there are certain functions within an organization where task-based reviews make sense, such as meeting a daily or monthly production requirement on a manufacturing line. I'm not talking about those jobs. I'm referring generally to higher-level roles.) Identifying the organization's strategic objectives gives employees a chance to understand their part in achieving those objectives. Goals then need to be set early in the year to give employees the benefit of time to accomplish them. If you're operating on a calendar year and it's now April or May, having full-year goals becomes challenging. So get moving early, or set goals that have an appropriate timeline to be achievable.
There are so many acronyms for how goals should be constructed. SMART seems to be the most popular. The bottom line is that goals need to be specific, objectively measurable and reasonably achievable (although they should be challenging!), and there should be a clear timeline for achievement. Leaders must review the goals their employees set and provide guidance to ensure the goals are aligned with the strategy and are properly constructed. The problem? It takes time. The process starts to break down very quickly if leaders don't do their part.
Then comes the "Mid-Year Check-In" or something along those lines. Most annual PM processes have a mid-year check-in process. Leaders are responsible for reviewing progress to date. This gives employees a chance to make course corrections where necessary. The problem? It takes time. Leaders AND employees should be preparing for this meeting. Instead, the meetings might be off-the-cuff, spontaneous and lacking real substance. This becomes a setup for failure at year end, leading the employee to be surprised by negative feedback (which might be a result of the forced ranking system). I have seen employees prepare diligently for mid-year reviews only to walk out of the leader's office saying, "All he/she said was to keep up the good work." Honestly? Useless.
YEAR-END FORMAL REVIEWS
Then comes the official performance review. Once again, leader preparation is critical. As Marcus Buckingham explains, leaders spend way too much time focusing on weaknesses rather than harnessing strengths. If you think of a one-hour performance review, we probably spend 45-50 minutes going over what went wrong, and we brush over the wins. Buckingham tells us, and I agree, that it should be the other way around. If it isn't, we probably aren't capitalizing on what the employee CAN do (recognizing, of course, there are always exceptions to every rule).
The worst is when an employee walks out of a performance review truly stunned by the feedback. Are there situations where leaders do a good job throughout the year and the employee just doesn't get it? Sure. But in my experience, if an employee is truly stunned or goes from highly successful one year to less-than-successful the next year, for example, there's a leadership problem.
The alternative to a formal process is to require leaders to be in regular feedback mode. Day-to-day coaching becomes a necessity instead of an aspiration. How many leaders do you know who are really good at day-to-day coaching? Look - it's not entirely their fault. Some people get thrust into leadership roles who don't want them or aren't ready for them. It's one thing to the best salesperson. It's another thing entirely to lead, educate and inspire a team of people to be great salespeople. If the response a leader has is sheer relief when a formal, annual process is going by the wayside, I might be concerned that the leader thinks he or she is off the hook. In fact, the opposite is true. The obligation for leaders to provide regular feedback becomes increasingly important because there is no longer a formal process. That's why leader capability (enabled by great tools and support from HR) is critical. The company's lawyers will want to know how feedback is being documented. Documentation. Documentation. Documentation. It is to lawyers what "location-location-location" is to realtors. If the formal process goes away, does that mean formal documentation is going away, too? It doesn't have to, which is where HR comes in to identify tools for leaders to use to track and manage coaching conversations.
A performance management process is only as good as the leaders who use it and the tools they are given (including training, development and resources) to enable them to be successful leaders. Before ditching a formal, annual PM process, ask yourself what you stand to gain and lose by doing so. Ultimately, the PM process should be something that drives performance and culture, not inhibits it.