The Top 5 Problems With Annual Reviews — and How to Fix Them

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It is said that a company’s people are its greatest asset. Among CEOs, however, people are also their greatest concern.

Leaders are right to worry. Developing and nurturing a motivated workforce is one of the single most important things any organization can do to secure and maintain a competitive advantage. Unfortunately, most organizations do a very poor job of it — so poor, in fact, that only 15 percent of employees around the world are engaged at work.

There are many reasons contributing to this state of affairs, and a primary offender is the outdated performance management processes and technologies on which enterprises still rely to manage and develop their workforces.

At Betterworks, we recently surveyed nearly 800 professionals from both HR and people management roles in enterprises with 500+ employees to find out what is (and isn’t) working with their performance management programs.

A majority of our respondents still depend on annual (or less frequent) review cycles that do more harm than good when it comes to actually improving performance. The HR professionals we surveyed identified these top five problems with annual reviews:

1. They Cause Stress and Anxiety for Managers and Employees

If crucial conversations between managers and employees happen only annually, they become a source of stress for both parties, rather than a positive driver of performance and development.

2. They’re Too Subjective

HR teams are aware of the many biases — recencyhalo effectleniency, and others — that negatively impact the quality of annual performance reviews. When employees perceive these biases within the feedback they receive, they are unlikely to find said feedback useful.

3. They’re Too Infrequent

HR professionals agree that providing feedback just once a year does not allow employees the opportunity to course-correct when it matters most.

4. They Fail to Improve Employee Performance

One primary goal of performance management is to help employees meet today’s goals and develop their skills for tomorrow’s challenges. However, annual reviews aren’t effective for this purpose. In fact, Gallup reports that just 26 percent of employees strongly agree the feedback they receive from performance reviews is accurate.

5. They Don’t Provide Quality Feedback

Related to Nos. 3 and 4 above, feedback that is neither timely nor actionable will not help improve performance.

In a nutshell, everyone is aware annual reviews are fundamentally broken and ineffective for the modern workforce. As Peter Cappelli and Anna Tavis write for Harvard Business Review, the entire premise of annual reviews is to “hold people accountable for past behavior at the expense of improving current performance and grooming talent for the future.”

Despite this, many businesses still cling to annual reviews because they are unsure of how to implement a better performance management process.

The Solution? Make Performance Management Continuous

Identifying, developing, engaging, and retaining talent are business-critical objectives for every organization’s long-term survival. In today’s fast-paced business environment, setting goals and talking about employee performance once a year isn’t enough to ensure your workforce is agile, aligned, and motivated. Motivation is not a yearly event; it must be fed continuously through regular, ongoing conversations between managers and employees that focus on goal alignment, coaching and feedback, development of skills, and recognition of accomplishments.

Betterworks’ survey found that when performance-related conversations occur more often than annually, HR pros report fewer challenges with:

  1. Reviews being too subjective (reduced by 34 percent)
  2. Reviews failing to improve performance (reduced by 32 percent)
  3. Managers not providing quality feedback (reduced by 39 percent)
  4. Review processes not helping to retain top talent (reduced by 27 percent)

When moving toward a continuous performance management process, a great place to start is by requiring conversations about goal-setting and management on at least a quarterly basis. Too often, goals tend to be an exercise in setting and forgetting. Organizational priorities and objectives change over time. When managers have alignment conversations at least quarterly, it helps your organization stay agile and keeps employees focused on what matters most.

Secondly, it is important to recognize that employee motivation is tied to a future outlook. For that reason, managers should focus performance-related conversations on future growth and development, rather than looking backward at quotas and deadlines.

For many employees and managers, both giving and receiving feedback remain fundamentally uncomfortable activities. When HR is able to help managers shift the focus of performance conversations to development, both managers and employees can approach these conversations with less anxiety. As a result, they become far more open to feedback. Employees tend to be more motivated when they recognize their employers are invested in their growth, not just in what they can do for the company.

Finally, it is important to consider adopting tools and technology to facilitate the complex processes that power continuous performance management. In the Betterworks survey, only 41 percent of respondents said they use technology to help with performance management. It was no surprise, then, that 90 percent of HR respondents identified their biggest challenge with their current process as “running after everyone” to ensure completion.

A continuous performance management process requires the support of technology not only to ensure the right conversations are happening, but also to capture the critical workforce insights businesses need for strategic planning. Among other things, these insights can shine a light on progress toward top corporate priorities, help identify and reward outstanding talent, build a leadership pipeline, and inform cross-functional team creation and development.

Transitioning away from annual reviews won’t happen overnight, but the effort to make the shift can pay off big. According to McKinsey, organizations that have an effective performance management system in place are three times as likely to outperform the competition.

Deborah Holstein is chief marketing officer of Betterworks.

Deborah Holstein has more than 15 years' experience in marketing leadership roles in SaaS businesses. Currently CMO at HR software for continuous performance management company Betterworks, she has held marketing leadership roles at Yahoo and Cisco and has launched and grown technology startups including Hightail and Grokker. Skilled in building and leading highly engaged teams, Deborah is an active leadership mentor with Everwise and regularly publishes articles on marketing and leadership topics. She holds an MBA in marketing and statistics from New York University and a BS in business from Georgetown University.