Your Annual Review Process Is Costly

Calculate the true cost of your performance management system. Then ask yourself about the return on investment.

BY SHONNA WATERS

Originally Published in Inc.

Take the average manager salary, multiply it by the hours spent on performance reviews, add employee time, HR overhead, and the cost of bonuses distributed based on meaningless distinctions.

What are the returns of this investment?

If you’re like most organizations almost nothing.

Ninety percent of HR leaders admit their performance management systems don’t yield accurate information. Yet companies keep investing millions of hours into processes that fail to deliver.

The decimal point delusion

Here’s what this looks like in practice. At a major government agency where I led performance transformation, 90 percent of employees received ratings between 3 and 4 on a 5-point scale. Bonus outcomes depended on distinctions as small as 3.7 versus 3.8.

Think about that.

Cash bonuses—real money—were distributed based on differences that are statistically meaningless. Less than one percent of employees received a rating of “unsuccessful.”

When we surveyed the workforce, only 41 percent believed promotions were based on merit. They knew the system was broken. The data confirmed it.

This isn’t unique to the government. Research by Gallup shows that only 2 percent of CHROs believe their performance management system works. Sixty-four percent of employees report that reviews aren’t worth their time according to Betterworks. The disconnect between effort and value is staggering.

The real cost

Some organizations will spend millions of hours annually on manager time, calibration meetings, and documentation. At the end of all that effort, you get data nobody trusts.

I recently discussed these challenges in an executive roundtable with scientists who also led performance management at some of the largest companies in the world to learn from their experiences. Alexis Fink, PhD, who participated in the roundtable, saw the data trust issues especially in highly competitive tech environments. She led performance systems at Microsoft, Meta, and Intel and to attract talent, these companies need systems that feel fair and valuable, not burdensome. The traditional performance review fails on both counts.

Companies like General Electric, Accenture, Deloitte, and Adobe have eliminated or fundamentally reconceived their systems. They recognized the return on investment was deeply negative.

The simplification equation

Here’s the reframe: simplification is a value extraction, not subtraction. The goal is to not reduce decision quality while investing less time.

That sentence matters. Most leaders fear that cutting the process will mean worse decisions. But when your current process produces unreliable data, you’re not just sacrificing quality by simplifying, you’re also removing waste.

As he shared in the executive roundtable, David Landman, PhD, who managed performance systems at Goldman Sachs, operated in an environment where differentiation directly impacts business results. Even there, he found that elaborate rating systems didn’t improve data or decision quality. They just consumed resources.

The audit

Audit your performance review system with ruthless pragmatism. Here are three areas to evaluate.

1. Rating scale: Does debating 3.7 versus 3.8 help make any of those decisions? Or is it just an illusion of precision?

2. Mid-year review requirement: Is it producing coaching that improves performance? Or compliance theater?

3. Forced distribution: Is it identifying true top and bottom performers? Or forcing artificial differences?

For each, ask: Does this help me identify employees who need intervention, recognize exceptional value, or spot promotion-ready talent?

If the answer is no, cut it.

What you’ll find

When you run this audit honestly, you’ll find that most of your performance management process adds cost without adding value. The elaborate rating scales, calibration meetings, and documentation requirements serve the system, not decision-making.

Cut ruthlessly. Keep only what helps you decide who needs support, who deserves recognition, and who’s ready to advance.

Your managers will spend less time on process and more on actual performance. Your employees will trust outcomes more. And you’ll finally get a return on investment that justifies the effort.

The current system has a negative ROI. Doing nothing is the expensive choice.