Boost Performance with Performance Reviews

Small businesses that skip this corporate ritual are missing opportunities to improve productivity.

One of the allures of running your own business can be getting away from the bureaucratic nonsense that puts sand in the gears of many big organizations. But one ritual of big business—if carried out correctly—can make your enterprise far more effective. It is the employee performance review.

According to studies over the past decade by Mark Huselid, professor of human resource strategy in the School of Management and Labor Relations at Rutgers University, businesses that conduct regular employee appraisals and use other “best practices” of human resource management are able to increase the overall effectiveness of their organizations, enjoying improved morale, increased performance, higher productivity—and a dramatic boost in profitability, as a result.

By how much? According to Huselid’s data, companies that implement top-notch human-resource practices have reduced turnover by 7%, increased sales-per-employee by more than $27,000 a year, enhanced profitability by more than $4,000 per employee, and increased their market value by more than $18,000 per employee.

Regular performance reviews are not just about offering encouragement to good performers and addressing the shortcomings of others. They can help you uncover hidden problems. And, they let employees know how critical their contributions are to the firm’s success. “They send the message to employees that you care, you know them, and you’re on top of things,” says Michael Lara, CEO of Benison International Group in Miami, a provider of tech products and consulting services. “They keep you on track for excellence.”

So why do so many small businesses neglect to review employees? “People are uncomfortable judging people,” says Robert Chanin, director of human resources for The Alcott Group, a professional employer organization that provides HR and other services. “A lot of managers dread the thought of sitting across from somebody for that annual one-on-one, especially if they don’t have pleasant news.”

As many as one quarter of American workers don’t get regular appraisals, according to a 2006 survey by Adecco Staffing North America, a global provider of workforce services. “They simply may think they don’t need to,” says Bernadette Kenny, Adecco's chief career officer

But, without performance reviews, you may be flying blind. “In a small business in particular, the performance review is like a dashboard—it gives you all kinds of gauges about quality, job knowledge, customer service,” says Chanin. “If there isn’t any gauge, you don’t know if your business is doing well or not.”

The performance review process can be a great motivational tool, too. “They’re one of the tools businesses can use to get employees more involved, increase their motivation, and help them achieve success,” says Barrie Gross, a human resources expert and employment law attorney who heads Barrie Gross Consulting, a San Francisco-based HR training and consulting firm.

CAVEAT

Performance reviews will only pay off if they are done correctly. Please click here for a list of Do's and Don'ts.

Evaluations can also help you transform sub-par people into performers, rather than lose them, says employment law attorney Lynn D. Lieber, the CEO and founder of Workplace Answers in San Francisco, a provider of Web-based training in human resources, financial, legal, and ethics compliance. “The key,” Lieber says, “is to give the person notice that there’s a problem, and offer them a sincere opportunity to improve.”

In her own shop, Lieber used a performance review to let a sales rep know that she was spending too much time yakking and surfing the Internet. “We told her, ‘Here’s how many people you need to call per day, you need to check in with this number of existing customers a week, no more gossiping, no celebrity Web sites in between phone calls, and you have to check in with your manager once a week so we can make sure there’s progress,’ ” Lieber says. She also gave the employee 90 days to clean up her act. “The woman worked very hard to correct the behaviors,” Lieber says. “And at the end of the 90 days she was working at top capacity.”

Patricia Thorp, president and founder of the Coral Gables, Fla.-based public relations firm Thorp & Co., credits an annual performance review with saving her company from a disastrous talent exodus. “One of my most valued employees told me she’d just turned down a job that offered her 25% more money,” says Thorp. “That was really a red flag for me.” She realized that industry salaries had taken a sudden leap upward, and Thorp & Co. risked losing key staffers. “I immediately raised the woman’s salary to match the offer, and everybody at her level got a heck of a raise, too,” Thorp says.

Lara, of Benison International, a former Army staff sergeant, says his military background convinced him of the value of frequent performance reviews. During their 90-day probationary period, he reviews new employees every 30 days—and every six months afterward. In between, he uses evaluation tools like “mystery shoppers” to test how employees perform. “Twelve years in the military sold me on the importance of this,” notes Lara. In the service, he says, monthly sit-downs with soldiers keeps them motivated and revealed potential problems.“I realized early on it would work for my business, too,” he says.

Lara, who used downloaded free performance-review forms from Web sites such as HR.com, is now upgrading to a comprehensive “human capital management” program from Success Factors. Starting at about $8 per user per month, it allows managers to create online appraisal forms, set goals, track employee progress and get detailed reports on results. The system automatically sends evaluation forms to employees at review time.

In companies with fewer than 10 employees, a formal process—with multi-page evaluation forms and sophisticated software--might seem impractical. But, the experts say, it is important to create a routine review process. It’s an easy way to help the business owner learn what’s working well and what isn’t—and head off performance problems, before they start affecting the bottom line.