Are annual performance reviews necessary?

June 27, 2012: 10:54 AM ET

Ninety-eight percent of human resources executives say yearly evaluations aren't useful, according to a recent survey. So why are companies still doing them?

FORTUNE -- If you've ever been frustrated, annoyed, or otherwise perturbed by annual performance reviews -- whether giving them, getting them, or both -- here's something that may surprise you: Not even the HR people in charge of overseeing yearly appraisals really think they're worth doing.

At least, that is one finding from a recent poll of 2,677 people (made up of 1,800 employees, 645 human resources managers, and 232 CEOs) by San Francisco-based rewards-and-recognition consulting firm Achievers, which numbers Microsoft (MSFT), 3M (MMM), CVS (CVS), and Levi Strauss among its clients.

Although virtually all the companies surveyed use some form of annual evaluation as their chief means of giving performance feedback to employees, only 2% of HR people think these reviews accomplish anything useful.

What's more, the study found a big disconnect between what CEOs think is going on below them and what employees say actually happens. (What? That doesn't shock you?) Consider: 57% of CEOs believe their people are "regularly recognized" for their hard work and contributions. Employees who agree: 9%.

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While 61% of employees say they would welcome immediate, on-the spot feedback from bosses and peers about how they're doing, only 24% say they get it. Meanwhile, 54% of CEOs believe they do.

"That gap may be because CEOs are projecting, based on their own behavior," notes Achievers chairman Razor Suleman. "Chief executives usually give their own direct reports frequent feedback about their job performance, so they think everyone is doing that all down through the ranks."

If not even the HR department sees any real value in annual reviews, why are they still so ubiquitous? Part of the answer is that, for legal reasons, companies need a formal, standardized method of creating a "paper trail" that documents discussions about performance problems, in case a terminated employee later decides to sue. Still, with the technology currently available, there's no logical reason why managers couldn't track and report the same information in real-time instead of once every 12 months.

"The annual review is a relic of the pre-electronic past," observes Suleman. "It persists mostly out of inertia. If you ask, 'Why are you doing this?' the response you usually get is, 'Because we've always done it this way.'" A far more productive way of giving feedback, he adds, is "having coaching conversations every day, instead of once a year."

A cynic might note -- correctly -- that Suleman naturally favors that approach: His company is in the business of selling software that clients use to give employees real-time updates on how they're doing. Nonetheless, there is plenty of evidence that, without daily or weekly conversations about their work -- especially pats on the back for a job well done -- your best people are likely to quit.

One of the many strange quirks in the current labor market is that, although unemployment is high, people who have jobs are not hesitating to ditch them for a better offer. A new study from PricewaterhouseCoopers says voluntary turnover has increased by 14% since 2010 and is still rising. The No. 1 reason people give for quitting, according to the U.S. Department of Labor: They don't feel that their efforts are recognized or appreciated by their direct bosses.

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"Employees want to know what they are doing well and where they can improve," says Kristen Leverone, a senior vice president at outplacement and coaching giant Lee Hecht Harrison. "Career conversations are critical to engagement and retention."

The firm did a poll, released last month, showing that 52% of employees say they rarely or never get on-the-spot feedback.

Leverone acknowledges that managers now are stretched so thin that frequent coaching sessions are tough to fit in. But she says even a two-minute chat, on some kind of regular basis, can help: "Quick check-ins are just as important as full career discussions."

Or as Razor Suleman puts it: "Think about a football team. During a game, the coach and the quarterback are in constant communication, play by play. What if they only talked once a year? Would they ever win a game?"

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About This Author
Anne Fisher
Anne Fisher
Contributor, Fortune

Anne Fisher has been writing "Ask Annie," a column on careers, for Fortune since 1996, helping readers navigate booms, recessions, changing industries, and changing ideas about what's appropriate in the workplace (and beyond). Anne is the author of two books, Wall Street Women (Knopf, 1990) and If My Career's on the Fast Track, Where Do I Get a Road Map? (William Morrow, 2001).

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