Scrapping performance reviews causes a significant drops in productivity, reveals research by CEB.
Only 4 per cent of HR leaders saw performance reviews as effective, found a study by insight and technology firm CEB.
Almost half of managers and employees believe the process needs a major overhaul.
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Just under half of those surveyed (42 per cent) said ‘significant changes’ or a ‘complete redesign or overhaul’ was required to improve their current systems that were often viewed as “backward-looking, inconsistent and too complex” by managers and employees alike.
“Organisations that have abandoned performance ratings have actually found the experience quite negative,” said Brian Kropp, HR practice leader at CEB. “Employees find it difficult to see the link between pay raises and performance.
“As a result they believe managers are more likely to give money to the person he or she likes. The research should cast a word of warning among companies that are thinking about jumping on this trend of abolishing reviews.”
More than 9,000 managers and employees from 18 countries took part in the study. It revealed that businesses spend an average of 43 hours per year per staff member on formal and informal conversations around goal-setting and performance evaluation, and on preparing for reviews.
The cost and time involved with staff performance ratings has led some organisations to abolish them altogether. However, the CEB survey found that by eliminating performance reviews, overall results and productivity can drop significantly.
Those organisations that no longer used performance ratings showing their employees scoring 14 per cent lower on their performance conversations with their managers.
The survey found that, while 51 per cent of HR leaders said they had no plans to remove performance ratings, 28 per cent would consider it, 15 per cent said they planned to do this in the near future and 6 per cent said they had already done so.
CEB found engagement and performance dropped by up to 10 per cent without reviews, making people much more likely to leave the company. It also found 8 per cent fewer employees believe pay rises are fairly allocated, while less than 5 per cent of managers feel able to manage talent effectively without ratings.
A lack of performance rating was also found to have a greater negative impact on high performers, with 28 per cent fewer high performers feeling satisfied with conversations with their manager.