Why Are Performance Reviews Important + 4 Ways They Benefit Your Organization

Performance reviews are often dreaded by managers and employees alike. They take time to write and deliver, and it can be uncomfortable to criticize another person—even when feedback is constructive.

The review process can be stressful, and employees may find the outcomes unfair. When done incorrectly, performance reviews can be ineffective for managing employee performance.

But when done the right way, performance reviews can benefit your employees and your organization. Therefore, improving this process can be a much better solution than doing away with reviews altogether.

What is a performance review?

An employee performance review is a process in which team members are evaluated on their work performance and receive formal feedback. Managers may review progress toward goals, recognize achievements, and identify opportunities for professional growth.

Some organizations involve only managers and their direct reports in performance reviews, while others invite colleagues, company leaders, and customers to provide feedback. The employee review process typically occurs at least annually, with more frequent performance reviews becoming increasingly common.

Why are performance reviews important?

Employee reviews aren’t only an opportunity to reflect on past performance—they can help optimize employee performance in the future. This can lead to better outcomes for your team members and your organization.

Here are some additional benefits from an effective performance review process.

Provide valuable feedback to employees

Performance reviews provide a regular, structured opportunity to give employees feedback so they know where they stand on their goals and how to improve.

This process helps team members grow professionally—which also benefits your organization. In addition, constructive feedback leads the way for personal improvement, which levels up your entire team.

Nurture employee talent

Documenting feedback lets you see how employee performance changes over time. Then, you can identify patterns that help you build an appropriate career path for each team member.

For example, if their goals and interests align, an accountant who excels in forecasting may be well suited for a financial planning and analysis (FP&A) role.

Identify learning and development (L&D) opportunities

Performance reviews are an excellent opportunity to explore the future and discuss career development goals.

Mapping these goals to types of learning and development can encourage professional growth and close skills gaps. For example, you might offer leadership development for a new manager who wants to lead a larger team or an online course to an individual who wants to master a specific skill.

Boost employee engagement

Employee reviews are a great time to offer recognition, examine career development opportunities, and discuss a pay increase—all of which increase employee engagement.

Boosting employee engagement can lead to other benefits, as high levels of engagement are associated with lower turnover and higher productivity and profitability.

Read more: 7 Things Employees Want From Employers

Make fair compensation decisions

Performance reviews are often tied to compensation, bonuses, and promotions. This helps ensure that these decisions are based on an objective evaluation of an employee’s performance so you can maintain pay equity.

What are the benefits of performance reviews for your team members?

Performance reviews can sometimes feel like an unnecessary, stressful exercise for team members—but they don’t have to be that way. Instead, performance reviews offer several benefits for employees.

Improved transparency

Employees are evaluated at work each time they complete a project, are due for a raise, or are being considered for a promotion. Performance reviews provide a structured process for these evaluations and make the results more transparent.

Discussing reviews with each team member gives them insight into how company leaders perceive their job performance and gives them a chance to respond to those perceptions.

Achieve career growth

Lack of career advancement is a top reason for employee turnover. However, your team members want to advance in their careers, and performance reviews are an ideal time to receive feedback and discuss opportunities for career growth.

Match your employee’s professional goals with future opportunities within your organization and build a professional development plan to help them get there. Then, when the time is right, promote your employees and revisit their development plan to help them continue on their path.

Improved communication

Performance reviews offer a structured opportunity for open communication between employees and managers. While managers should offer feedback and recognition regularly, a formal review provides an opportunity to tie it together for a high-level overview of the employee’s performance.

These reviews can improve the relationship between team members and supervisors and enhance the overall work environment.

Read more: How to Create a High-Performance Culture

Earn compensation increases

Compensation increases are the most notable benefit of performance reviews. Many organizations award merit-based raises during their review cycle, with top performers often earning higher average increases.

Performance reviews may also be tied to promotions, increasing an employee’s lifetime earning potential.

Making performance reviews fair

Biases can run rampant in performance reviews, making them ineffective and unfair. For example, gender and racial biases can influence performance ratings for people from historically marginalized groups.

In addition, proximity bias can lead to more positive feedback for office-based employees than their remote counterparts. And recency bias, in which feedback is entirely based on the past month or two, can lead to skewed evaluations.

Keep these biases in check to ensure the employee performance evaluation process is fair, effective, and well-received.

Set clear goals

Ensure your team members understand their responsibilities, goals, and performance expectations. Review these during onboarding and at regular intervals so team members know what they’re working toward and how they’re being measured.

It’s essential to use objective criteria to evaluate employee performance, such as key performance indicators, to ensure evaluations are based on objective and fair standards.

Read more: How to Create Professional Development Goals That Work

Gather feedback from multiple sources

Managers may not work closely with their team members daily and don’t experience every aspect of their work. Therefore, consider gathering feedback from several sources, such as company leaders, colleagues, customers, vendors, direct reports, and the employee’s manager.

Multiple perspectives provide a more well-rounded view of the employee’s performance.

Provide continuous feedback

Feedback shouldn’t come as a surprise during performance reviews.

Instead, managers should provide regular, constructive feedback year-round so team members know where they excel and where they need improvement. In addition, ongoing feedback helps employees address performance issues before their review.

“We have an annual cycle where there’s an opportunity for self-review, peer-review, and manager feedback, but we have also included directional feedback at the mid-year point,” says Suzie Rogers, VP, People Partnerships at Checkout.com. “This is an opportunity for people to stop, pause, reflect, and still get that 360-review without the formality of doing it at the end of the year and not having it tied to a rewards outcome. People can take stock of how they’re progressing against their goals.”

Read more: What You’re Missing if You’re Not Building a Culture of Continuous Learning

Record employee recognition and feedback in your performance management system so it’s documented and available during the review process. Documentation can reduce recency bias, in which managers base performance reviews on recent employee activity.

Include specific examples

Biases can often take the form of favoritism. For example, employees may receive better performance evaluations and ratings if they’re generally liked or share commonalities with their manager or other team members.

Interrupt these biases by providing clear examples to back up performance feedback. For example, if you say, “John consistently goes above and beyond in his work,” share a specific instance where he went out of his way to help a colleague or provide an exceptional customer experience.

If you can’t think of a specific instance, reconsider whether the feedback accurately reflects the employee’s performance.

Encourage employees to provide feedback

Encourage employees to actively participate in the performance review process by providing feedback. They should feel comfortable challenging any feedback they disagree with so they can have an open and honest conversation with their manager.

Team members should also feel comfortable sharing what they need to succeed at your organization and attain their goals—or to push back on unrealistic goals. This can help prevent employees from feeling that they’re being held to an unrealistic standard.

Help your employees see the value in performance reviews

Performance reviews have many benefits for both organizations and employees. Communicate these benefits to your team members so they understand why you do evaluations—then demonstrate that they can lead to real change.

For example, offer opportunities for learning and development and award raises and promotions as they’re due. This will help you create a culture of feedback and recognition where each team member welcomes performance reviews as an opportunity to grow.

Want to learn more about how WorkRamp can help you level up with performance management? Contact us to request a demo.