Everyone hates annual performance reviews, so why do Startups still rely on them?

Drive Capital
Jul 24, 2017 · 5 min read

Originally published by Robert Hatta on June 1, 2017

Annual performance reviews are an easy target these days. At best, they are part of an outdated corporate framework from the bygone days of cubicle farms and TPS reports. At worst, performance reviews fail at the one thing they are actually meant to achieve: improving performance.

Along with the countless hours of lost productivity that go into the annual charade, a 1996 article published in The Psychological Bulletin concluded that nearly one third of performance reviews end up decreasing overall performance. And a 2013 studyconfirmed what we already know: everyone hates annual performance reviews. Over the last five years, many large companies have decided to ditch them.

So why do so many startups still default to using an annual performance review? I believe tech startups embrace annual performance reviews as an overreaction to underinvesting in HR.

Startups certainly have a visceral aversion to formal HR processes. In their defense, the function can become a caricature of compliance-minded risk avoidance (aka the “fun police”). Describing this phenomenon, Fast Company’s Cale Guthrie Weissman writes, “Indeed, the idea of startup culture–one that has beer on tap and ping pong tables–is a direct response to bureaucratic rigmarole like a human resources department killing a buzz.“ Moreover, many view HR as the antithesis to the move fast and break things mantra of the tech industry. A Stanford study on over 200 tech startups found that engineers hate HR because it adds costs and slows down decision making. As a result, most startups don’t think about performance management, let alone invest in it. Some don’t even know performance management is a thing.

In the early days, companies can get away with avoiding formal HR processes. Teams are small, loosely coupled tribes of individual contributors. The mission and milestones are clear and easy to communicate across a small team. However, as the team grows, the best individual contributors are often pressed into management roles, without training. Some, especially engineers, may not even want to be managers. This cycle continues. Chaos ensues. Growth slows down. This is where many startup founders retreat to established frameworks for cover, and in walks the annual performance review to save the day.

For all the flack that annual performance reviews take at big companies, they are especially damaging at startups. Setting annual objectives and then reviewing them a year later just doesn’t align with the dynamic nature of startups. Strategies change. Roles change. Priorities change. Monthly cycles (nevermind annual) can be too infrequent to keep teams and individuals on-task and aligned.

Compounding the issue, many startups adopt annual reviews to help add structure to compensation decisions. However, tying performance reviews to compensation is also fraught with issues. A 2016 Harvard Business Review paper found that tying compensation reviews to performance reviews tend to shut down honest, open feedback and result in an emotionless dance that does nothing to improve performance.

So how should startups handle performance management? Here are 5 practices I’ve seen work well for startups looking to get beyond the annual performance review.

Hire experienced managers sooner than you think you need them.

Many founders reject the idea that someone could spend their whole day in meetings versus writing code or calling customers. So teams expand horizontally under individual contributors who are also doing their jobs. Managers end up with so many direct reports that one-on-one meetings (the regular check-ins required to keep people on track) fall to the wayside. Performance suffers.

Keeping individuals motivated, aligned and effective — in other words, “engaged” in their work — can be a full-time job. And, in a company that is growing rapidly, management is a critical job. A good rule of thumb is to hire or promote someone into a management role when you can no longer meet with each member of your team individually in a week.

Make sure your high-achieving individual contributors want be managers before forcing them down that path.

Not everyone enjoys managing people. Many great engineers get their energy from building and solving problems with code. Time spent in meetings or recruiting is painful and unnatural to many high-performing individual contributors. However, many people equate managing people with career growth. Be sure to delineate growth opportunities within the company both as a manager and individual.

Invest in time and tools for young managers.

Providing your managers with basic training isn’t nearly as complicated or time-consuming as you might fear. There are many easy frameworks for providing real time feedback (I’ve found this framework to be great) and effective one-on-one meetings (check out Lead Honestly). These aren’t difficult concepts to grasp and implement but they require time. Let your managers manage and require that they spend the necessary time to do so.

Performance management doesn’t require big IT budgets either. There are lightweight tools like TINYpulse, 15Five and Ambition that quickly measure and track employee engagement and performance. These platforms provide managers with the insights and data to most effectively coach their direct reports.

Decouple performance feedback from compensation

As noted earlier, combining performance management with compensation reviews has been found to be both ineffective and highly demotivating. The logic makes sense: people equate good performance to salary increases, bonus, etc. For certain roles like sales, it does make sense to have performance drive a part of compensation. However, sales commissions are tied to deals and independent of formal reviews.

Compensation should be set based using external factors like the stage of the company vis-a-vis the market and factors related to the role an employee holds. When someone is promoted, given more responsibility or opportunities for impact, they should receive commensurate increases in salary as they move up the org chart. Yes, moving up the org chart is the result of great performance. But it is the change in role, title or job description that should trigger the comp change. Use performance evaluations to discuss strategies on how to get that employee to their next promotion.

Performance management = actual management. Performance management is not an annual thing. It’s an everyday thing. We prioritize agile processes across all other parts of the business, why wouldn’t we use the same approach when people, especially younger employees, thrive on constant feedback. The answer for HR-averse startups isn’t HR. It’s good management. Instead of hiding behind the broken construct of annual performance reviews, invest in performance management sooner.

Performance Matters

The Midwest is the opportunity of our lifetime, driven by people with the decades-long conviction to solve big problems. These are their stories, unapologetic and honest.

Drive Capital

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Drive Capital is a venture capital firm based in Columbus, Ohio. We invest in people who have the decades-long conviction necessary to solve big problems.

Performance Matters

The Midwest is the opportunity of our lifetime, driven by people with the decades-long conviction to solve big problems. These are their stories, unapologetic and honest.

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