Unwieldy Performance Appraisals

Posted by Trevor on 16 August 2012 | Post a Comment

I am all for looking forward and setting goals, but a recent article on Forbes.com criticizing performance appraisals strikes me as pretty ideological. The Forbes piece recommends “feedforward” rather than “feedback” for employees, and the article further recommends that managers should serve as “Coach, not Executioner.” That may work in large companies (those with more than 500 employees), but in the small business world, if you are not prepared to fire your own mother you should not be in business. According to the SBA 50% of small businesses no longer exist after five years and of the failures 70% are down to cash flow mismanagement. I wonder how much those failed companies spent on coaching poor performers and those overwhelming performance appraisal systems.

Most appraisal systems grade you in order to determine past performance and establish the following year’s salary and bonus structure. It would be hard to remove that part and simply say, “We’re not going to look backward, we’re just going to look forward.” How do you pay bonuses and determine the next year’s salary based on goals alone? How can “feedforward” work unless the small business senior management team is willing to allow profit sharing for employees?

My contention with the performance appraisal systems is not that we have them, but that they’re cumbersome and unwieldy. In effect, they do the opposite of what they’re designed to do and end up being a means to an end by themselves. People spend months working on getting their performance appraisal forms right. I even know people who’ve had other people write their appraisal for them, because they can’t understand what the questions are asking. In my opinion, the system is broken. But in any small business you have to have something that looks back and says: “How did you do?” Otherwise how else do you even know what goals to set for the next year?

I’m more of a proponent of profit share, or reward for performance. In the past I’ve had every employee linked to the performance of the company, not just revenue, but earnings. It puts the right pressure on everybody when the delta between revenue and cost becomes the pool from which your bonus and pay raise come. This does two things.  First, it helps people understand that if they perform well, they’ll probably increase revenue, and that’s a good thing. Also, if people are cost-conscious, that’s probably going to increase the delta as well. It goes both ways.

Based on the results, that is two businesses with EBITDA of  greater than 80%,  I find my way to be a very healthy way to run a company. Often what I tend to see elsewhere are businesses with employees who think they’re contributing just by doing their job. Meanwhile, they’re filling bags with Post-it notes, stationary, and other company property. When a portion of someone’s salary or bonus is based upon company earnings performance, it changes their mentality. I think that’s quite important.

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