Ditch the annual employee review

Granting automatic pay raises following an annual review probably isn’t in the best interest of your small business.

By Michelle van Schouwen

Do you enjoy the annual employee review process? Do your employees? For many small companies, the answer is a resounding “no” on both counts. The often-dreaded annual review prompts employers to bring up problems they should have mentioned earlier, causes employees to lose sleep and/or prepare their own demands and grievances for airing… and no matter what else is going on, creates the expectation of an automatic, timed pay raise.

The annual review tradition has persisted not because it is the “right” way to provide feedback, discuss expectations, plan for the future, and dispense cost-of-living and merit increases, but instead because many of us employers neglect to meet these responsibilities in other, more sensible and organic ways.

Such as…

Supplying ongoing feedback: Follow the advice in The New One Minute Manager by Ken Blanchard, PhD and Spencer Johnson, MD, which posits that you should provide active management on an ongoing, immediate and somewhat informal basis (including “One Minute Goals, One Minute Praisings and One Minute Re-Directs”).

Making your expectations clear all year long: Further this concept with the idea that “there should be no surprises” for any employee who is paying attention. In other words, make expectations consistently clear. In dealing with individuals, this means ongoing mentoring and guidance. In managing the team, this means you’ve shared your goals and requirements through your employee handbook (read my article on employee handbooks if you have not already created one), via the stated purpose of your company (this Harvard Business Review article by Graham Kenny provides food for thought) and through your everyday communications with your team.

Rethinking the auto-raise: Many employees can bear the thought of the annual review for one reason alone: the anticipated annual pay increase. However, employers are rethinking the rote annual pay hike. New thinking is that pay increases should be based on the following factors: the employee’s current responsibilities and contributions, the employee’s performance factors as measured by the employer, the company’s recent performance, and (arguably lastly, because your company doesn’t control it) changes in the regional and national cost of living. Adhering to the dictates of automatic annual pay increases tends to reduce the influence of these factors in determining pay.

The reality is that most small companies struggle to hold the line on employee costs, especially increasingly bloated health insurance premiums. Another reality is that many employees do pretty much the same work year after year, with little increase in value to the company. The company may or may not see significantly increased year-over-year profits.

This results in employers at times providing disappointing pay increases in an attempt to address employee expectations. Eventually, some want or induce some long–term employees, whose years of annual increases have rendered them overpriced for the services they provide, to leave, thus allowing the employer to start over with less expensive replacements.

So, what’s a boss to do?

Implement new financial reward practices:

-Provide good merit-based pay increases for stellar employees when the company can afford to do so.

-Conduct periodic, as-needed reassessments of pay levels for ALL employees, rather than an obligatory “you are in my office and I’m giving you three percent more” annual review ritual. Entrepreneur’s How to Set Salaries article is a useful reference.

-Provide surprise, spot bonuses for great performance by individuals or the team, or standards-based bonuses that reward measurable performance.

-Do not create timed, expectation-creating bonuses for everyone at the end of each year or other predictable occasion – this can create the disgruntlement spoofed in National Lampoon’s Christmas Vacation when the expected bonus turns into a jelly club membership.

-Check out Bloomberg’s Say Goodbye to the Annual Pay Raise.

These new practices can improve your company’s performance and profitability while removing the burden of a not-so-sacred annual review ritual. Everyone will breathe a little easier.


Michelle van Schouwen is president of van Schouwen Associates, LLC (vSA), a B2B marketing company based in Longmeadow, MA. vSA is known for vSALaunch, its proprietary, modular and scalable system for product and service marketing launches, vSAConsult, its executive-level strategic planning capability, and for its expertise in integrated marketing for B2B. Also among the company’s most popular services is change management.

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