Understanding Performance Reviews

For most employees who aren't in management, performance reviews often involve submitting a self-assessment and then awaiting feedback and pay adjustments. This process can lead to confusion and uncertainty about its workings. Ideally, it should be transparent; however, many employees lack a complete understanding. Companies are now exploring innovative methods to revamp this challenging process. While each organization has its own unique approach, this article outlines the various stages involved in the performance review process typical of mid to large-sized firms, particularly in the IT sector.

If you're part of a well-funded startup, the following details may not apply to you, but they might provide insight into why some professionals shy away from larger corporations.

Performance Ratings

1. Self-Appraisal: This initial step requires employees to document their self-assessment by answering specific questions. While many are familiar with this stage, those needing guidance can refer to my article on crafting an effective self-appraisal.
2. Manager's Evaluation: Contrary to popular belief, this is only one of several steps. Managers typically keep their own notes and gather feedback from team members. They compile this information to create a documented evaluation and propose an initial rating.
3. Next Level Evaluation: This phase is particularly enlightening for early-career professionals. It involves aligning ratings with the next-level manager or executive to ensure fairness and appropriate distribution based on performance. If there are discrepancies in views, ratings may be adjusted at this stage.
4. Department Roundtable: Although informally named, this stage is where managers within a department discuss their direct reports' ratings. The goal is to ensure that employees with similar roles and outputs receive comparable ratings and promotions. Managers must justify their ratings, particularly if they advocate for a higher evaluation for an employee.
5. Bell Curve Distribution: One objective of departmental alignment is to ensure that ratings follow a bell curve distribution. While no one openly admits it, management aims to adhere closely to this model, where roughly 70% of employees receive a mid-range rating of 3 on a five-point scale. To achieve this distribution, some ratings may need to be adjusted.

HR Calibration

Once department ratings are finalized, a calibration session with Human Resources typically occurs. This meeting addresses any unique cases or exceptions to ensure that ratings adhere to company standards.

Promotions and Compensation Increases

Promotions occur simultaneously for select individuals, based on two primary criteria:

• Job Readiness: Demonstrating performance at your current level and meeting expectations for the next level qualifies you for promotion consideration.
• Business Need: While this may be less significant at junior levels, it becomes crucial as roles advance. Managers must justify promotions based on business needs.

When it comes to compensation increases, it’s vital to recognize that this process is separate and influenced by multiple factors:

1. Budget Allocation: The annual budget for performance reviews varies yearly, influenced by revenue, profit margins, and projected expenses. The finance department meticulously calculates budget allocations, which limits what managers can offer in salary increases.
2. Salary Midpoint: Each role has a defined salary range. Employees' current salaries in relation to this range significantly affect compensation decisions. Those below the midpoint often receive more substantial increases than those at or above it.
3. Compensation Recommendations: Modern HR systems incorporate these factors to generate compensation recommendations. Managers can adjust salaries within their limits, but any increase must be balanced by reductions elsewhere to remain within budget.

This video, "Why Bother With Performance Reviews?" explores the relevance and effectiveness of performance reviews in today's corporate landscape.

"The Truth About Performance Reviews: More Harm Than Good" discusses the potential downsides of performance reviews and their impact on employee morale.

Final Thoughts

Regardless of your position, performance reviews can be a source of significant stress. Managers often face pressure to meet their direct reports' expectations, which can result in undesired ratings and salary increases due to factors beyond their control. As highlighted in this article, various variables and multiple decision-making layers contribute to this complex process. If you didn't receive the raise you expected, it might not solely be your manager's fault.

I hope this article sheds light on the performance review process and helps you ask informed questions during discussions with your manager. Feel free to leave comments or inquiries, and I'll do my best to address them. Thank you for reading!

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