Goodbye annual review, see ya performance ratings

annual review

You work hard all year. Your projects go well. Your company makes bank.

Yet at the end of it all you have a stilted, scripted conversation with your boss, in which you learn you're a "3" because you "met expectations." This, despite all your manager's happy talk during the year.

So goes the perpetually weird ritual known as the "annual review" that rates and ranks workers across a company.

The good news: Companies are starting to get just how ineffective the practice is when it comes to spurring better performance, retaining talent and boosting morale.

The review process of old is "entirely demotivating," said Kris Duggan, CEO of BetterWorks, a creator of goal-setting software. "It's like FitBit sending you your step count once a year. Nobody's behavior changes."

Related: Amazon workplace story raises dread of 'rank and yank' reviews

And it can be a colossal time-suck for managers and employees alike. The consulting firm Deloitte estimated that the whole exercise took an average of 28 hours per employee, with the heaviest burden falling on senior leaders.

So an increasing number of companies -- including Accenture, GE, Microsoft, CIGNA, The Gap and Deloitte -- have decided to overthrow the annual review in favor of monthly, bi-weekly or even "on demand" conversations between managers and employees.

Many are also ditching ratings and rankings altogether.

And 46% of companies have said they plan to make a significant change to their review process next year, according to CEB, a firm that advises corporations on best practices.

Here's what companies are hoping to change:

Dated to relevant: A big reason employers are overhauling their performance reviews is to make sure the company stays agile in markets where competitive demands can change frequently.

So setting goals once a year is out-of-sync with many business cycles. They may be out of date by April, said Duggan, who recommends goals be revisited and revised at least quarterly.

Related: How companies are changing old ways to attract Millennials

What's more, if employees feel they will be assessed primarily on one early set of goals that may discourage their striving for something bigger or more experimental throughout the year.

Artificial rankings to more authentic assessments: Rating employees with a number or category ranking can be demoralizing and frankly, off-base.

Number ratings, for example, often are part of a forced-curve review system. That means more than 40% of employees -- regardless of how great their contributions -- will be relegated to the middle group of performers, said David Rock, director of the NeuroLeadership Institute.

What's more, unless a company explicitly shows employees that it values and rewards teamwork, employees may be less willing to collaborate with each other knowing that only a chosen few will make it into the top ranks, Rock said.

While Accenture didn't use numbers, it used to apply category ratings on a curve (e.g. "consistently performs with peer group"). But no more.

"All employees heard was a label, not feedback," said Ellyn Shook, Accenture's chief human resources officer.

Judgment day to ongoing coaching: Having more frequent conversations about performance rather than one or two do-or-die meetings every year makes the experience less fraught for everyone.

Plus, companies that have made the switch stress that managers should use the conversations as opportunities to coach employees to help them better achieve their goals and priorities throughout the year.

That's especially true at Accenture, where Millennials now comprise a majority of employees. And they typically are looking for more coaching and a better understanding of what's expected of them, Shook said.

"People feel they're the center of the conversation, rather than the process being the center," Shook said.

GE is moving toward "continuous touchpoints" between managers and employees, said Valerie Van Den Keybus, GE's culture and innovation manager. "[The new system] aims to create a trusting environment where [they] can focus not only on performance but growth and development opportunities."

That may be nice for the employees, if it works out that way. And it's still too early to tell at most companies whether it will.

But if it does, it could be even better for companies' bottom line.

As Shook put it, "When we grow our people, we grow our business."

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