This week I received a question from a good friend Dave Denny, the entrepreneur of a great Contract Furniture business in the Bay Area, Inside Source.  Dave asked what I think of 360° Performance Reviews.  To answer that question, I have to talk about reviews in general.  Honestly, I can’t say I am a fan of the Performance Review. I wonder who even came up with this idea and somehow managed to get us all to buy into it year after year without question.  Somehow we adopted this process where we sit down with an employee once a year, find some way to rate their performance, and then give them a raise.  Does anybody really like Performance Reviews?  Does anybody think they make a real difference?

First of all, are we evaluating performance or determining how much to pay someone?  Are these the same thing or different?  Their connection during this process is tenuous at best.   For example, I have been at companies which have not handed out raises in a while.  Either they were successfully working an incentive program focused on performance bonuses or times were tough and they were holding the line on expenses.  Eventually, after a normalization period, the braver employees will start asking for a review.  They attempt to make management feel guilty for their “dereliction” to this “fundamental right” every employee has.  If this happens to you, make no mistake, they could care less about a review, they are asking for a raise.  And they know if they can get you to review them, they will get a raise.  Once you review the brave employee, word gets out and the rest will follow.  You just increased payroll 5% to 7% and have nothing to show for it.  When I sense someone trying this set-up on me, I immediately take them over to their manager’s office and sit them down, and before I close the door and leave, I tell the manager to take the next fifteen minutes and tell Joe exactly how he is doing and where he could be better.  You should see the look on Joe’s face when he realizes he isn’t getting a raise, but instead he is getting exactly what he asked for, a review.  Let that spread around the company.

But for now, Performance Reviews are a part of our reality so let’s deal with them.  They basically fall within three different methods:  Employee Ratings, MBO Systems, and the newer 360° Feedback.  Regardless which of these is used, you then have a whole myriad of different options regarding how to adjust compensation within them.  Then you need to decide timing issues (all at once, anniversary dates, etc.).  And remember, management sees a review as a method to gain higher levels of performance.  Employees see reviews as salary negotiations.  Each of these topics is an in-depth subject, but as a manager of the review process here is what you should know.


With its roots in the historic Xerox dynasty, the Employee Rating system has been used in almost every company at one time or another.  This system list different criteria deemed to be valuable and asks the manager to rate an employee on a scale from, usually 1 for unsatisfactory to 5 for excellent, in each category.  Categories can cover areas from work habits to skill levels.  There is sometimes a small section at the bottom for some comments regarding strengths and weaknesses and how an employee can improve during the next year.  The score is added up and then averaged and the employee finds out they are a 3.8.   The problem with this evaluation is its subjectivity.  Manager’s can’t really remember the in and outs of a full year’s of performance, so they are left to resort to scoring the employee based on how they feel today.  Is today a good day?

Next the manager knows his ratings will determine his group’s compensation and that he is often competing for available compensation increases against other departments.  This is compiled by the unintended consequence created in asking a manager to rate his group.  You are in effect asking them to rate themselves on an aggregate basis.  How can a manager being doing his job superbly if his group average is a 2.6.  So with the manager stuck between bringing home “pork” for his group and his own abstract evaluation, the game rigged for scores to average between 3.6 and 4.2.  That’s right; take out last year’s reviews and see if I am right.  So why do we need a five point scale? You really didn’t need a review to identify your 2.0 employee.  You already know they aren’t performing and the review process isn’t going to fix them.  As I discuss in, Building the A Team, they need to go and if you’re looking for the review process to help, you’re moving too slow on getting rid of them.

If you are using an Employee Rating system, I recommend you throw away those forms bought at the stationery store.  Replace the rating criteria with three sections: 1) How strong is the skill level of the employee as it pertains to doing an excellent job. 2) List your A Player Attributes and score the employee against them. 3) Increase the size of the comments section and spend your time here, writing how the employee can move to the Next Level (not just improve minor aggravations). Also have the employee self rate themselves prior to the meeting using your form.  This will help focus the discussion.

In the 1950’s Peter Drucker, management guru, developed the idea of Mannagement By Objectives or MBOs.  And somehow they became the basis for many company’s performance reviews.  The idea was to take out the subjective flaws in the Employee Rating system and determine measurable and time driven criteria for performance evaluations.  With a MBO Program, an employee is given five or six objectives and goals for each.  They are then scored after some set period of time to determine if the employee met, almost met, or exceeded the goal.  MBO Programs have the benefit of at least raising compensation for the attainment of goals and if set up properly, should advance your company.  But again, they have had their major problems.  First, employees quickly figure out they only need accomplish five goals to receive high review scores and raises.  This has received a great deal of criticism particularly at the Executive Level for often gaining only short-term results.  MBO Programs do not address the basics of someone’s job performance and they do not address whether the employee is an A Player.  Too many have figured out how to scam the system leaving managers with a bad taste after giving high scores to an employee who is marginal at best.  And then being told by HR, it is because they didn’t set the objectives right in the first place.  MBOs can become a fractionalized system where the general health of the company fails.

MBOs have their place.  They can be effective in implementing a specific program or when used in Change Management practices.  Sometimes the need to “change”, for the future health of the company, far outweighs daily job performance and MBOs can be a hammer to drive specific behavior.  If used, I prefer it for Incentive Plans rather than annual reviews.

With the flaws of these systems we have seen a new model espoused by consultants everywhere – The 360° Feedback.  So here’s your answer Dave, Yuck!  Who came up with this one?  A Leader is to set expectations based on what the business needs to accomplish in order to thrive. If he can not do this he fails.  Then the Leader needs to Build an A Team to achieve these expectations.  These are critical to your business’s survival and success.  Now you’re going to ask for the results to be evaluated by a consensus of the same group who is responsible for the results and give them more money based on their answers?

There are three basic usages of the 360°.  The first is a Peer to Peer review.  This is plagued with the politics of friendships, jealousy, power-plays and alliance building.  The process is conducted with the promise of anonymity creating a secret behind closed doors backroom scheme.  Am I the only one who thinks this sounds like and episode of Survivor or Big Brother?  I know the consultants will tell you it is only a part of the process.  Here’s a money-saving tip.  Spend the time you should, out of your office and among your employees and you will know how they “feel” about each other.  They still love to gossip about each other. You can then build this into the evaluation process however you want.

Secondly, we see the subordinate to manager 360° Review.  This one is to meant to ask Manager’s group how they “feel” about him.  The first question is, how well do the employees understand the job responsibilities, demands and expectations of their boss?  Have they read his job description? Did they set the expectations of his performance?  As a COO, I believe most employees have about a 10% awareness of what I do.  So rather than rating performance, this 360° can at best rate a manager’s accepted style.  Are you willing to put your manager’s performance in the background and make his style the priority?  This isn’t about becoming Homecoming Queen, save the popularity contests for something other than your business.  Use feedback to help, but as a Leader you must be able to accurately evaluate your manger’s performance – good and bad.  This is a battlefield necessity!

Sometimes customers are compromised into participating in this 360° process.  Just like floor time, someone needs to get in the car with your salespeople and see how customers are reacting to them.  Ignore the instinct to take over the sales call and just sit back and watch them.  You might find that sales results will tell you everything you need to know here.  And again, does it matter if you have a really popular salesperson that is at 50% of his goal?  If anything you would want a 360° from non-customers; those who chose not to buy from him.

The fact is that eventually an under-performing teammate will be exposed and executed by the team.  And someone with bad leadership style will fail.  Yes, even poor sales ability will surface with complaints and goals not being met.  But as a Leader it is your job to sit across from someone for whom you have set expectations and tell them how “you” have evaluated their performance and results.  If you can not do this, you will not have their respect and you are wasting time setting the expectations in the first place.  I believe in Tough Leadership and the 360° is a circumvention of one of those tough duties.  This is a moment of truth.  This is the eyeball to eyeball stuff that counts!

So what is the answer?  Start by making sure you are reviewing people all of the time.  Go back and read the One Minute Manager by Kenneth Blanchard and Spencer Johnson.  I know it is not a cool book anymore, but it still works.  When you see something good happen, talk about it … when you see something wrong happen, talk about it.  No one who works for you should need a review to know exactly where they stand at any given moment.  And the idea we are planning to do this once a year, sorry HR guys, is just preposterous and builds an environment of distrust.

If you are firing C Players, like you should, you will end up with an A Team.  Your focus shouldn’t be so much to review them.  They are still working with you because you have already reviewed them in your mind.  They are doing their jobs and have the A Team Attributes you need for success.   Your focus should be on Coaching and Leading them to the Next Level.  Instead of formally reviewing how well people are doing their jobs, create a Development Program.  Make it known that getting a 5.0 for doing your job is not the goal. That is the expectation!  The goal is to raise the level of your job’s contribution.  Start with a blank piece of paper and ask how this employee can bring in additional revenue or increase profit margins.  Ask what they can do to create new or additional value in their positions.  Then work on the game plan to get them there.  Do this across your entire group and you will see results that far exceed anything gained from performance reviews.  You will see a Best in Class Organization.


You may find some of the review methods I’ve discounted can actually work very well in a Development Program.  For example a MBO Program that restructures someone’s job for higher performance makes sense.  Or a 360° for a young manager who needs to develop a higher self-awareness to move to the next level is a good idea.  Reviews focus on the past.  Development Programs are future bound!

Still there remains the compensation side of things.  I don’t have the time to write my thoughts here, but let me ask this question. Why pay someone more money for doing the job you are already paying them for?  Make it clear to everyone that annual raises for doing your job really well will be at the market rate only (at best -10% to 2% these days).  Increases above this rate will be for bringing added value to the company.  You are going to pay people more for delivering more.  This is how your employees and your business will move forward together.  What a concept!

For the last twenty years the Review Process has been softened and watered down.  Management has been managed into worrying about being popular, political correctness, internal politics, and the pressures of entitlement.  These strains have encouraged many to avoid the confrontation and step back from one of the primary duties of a Leader; looking someone in the eye and evaluating their performance against the expectations which have been set.   Being a Street Smart Leader means you have to know when to step up!