Annual Performance Reviews Still Matter (When Done Right)

Believe it or not, we’re already in Q4. That means bonuses, raises, and the year-end annual performance reviews that go with them are coming up quickly.

With everything else on your plate at year-end, it’s tempting to rush through these reviews or skip them altogether. But for a lot of your employees, this may be the one structured time all year they hear how they’re really doing. And for this reason, it really deserves priority, thought, and the time to do it well.

If you’ve been rushing or skipping them, you’re not alone. Gallup found that 74% of employees get a performance review once a year or less. So if it’s rushed or skipped, some of your people may go the whole year without one honest conversation about where they stand. And without clear direction and structured feedback, employees are less likely to perform their best, and that affects your bottom line. Set them up to succeed, and they’ll return the favor.

But this only matters if annual reviews are done right. In this post, we’ll cover how to run annual performance reviews well, what your employees are hoping to hear, and what you, HR, and your managers each need to do.

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Why Annual Performance Reviews Still Matter

About a decade ago, the trend was to get rid of annual reviews altogether. Big names like Accenture and GE made headlines for dropping them in 2015, and the idea caught on, but it led a lot of companies astray. Mike Dixon, our President & COO, pushed back on this notion in his interview with The Business Blueprint with James May:

“We literally have been in organizations that are enormous, Fortune 200 size, and they don’t have a good feedback process. A few years ago, that was the trend. Let’s get rid of the annual performance review. That was not a good idea.”

And don’t just take our word for it; the data backs Mike up. In Gallup’s 2024 workforce study, 48% of employees who get feedback weekly or more were engaged. For employees who get it once a year or less, it was 5%. That gap is the problem. In theory, the idea was to take away the “formal review” and replace it with more frequent, effective touchbases. The reality is that for a lot of people, that didn’t happen. So instead of getting more feedback, a lot of people ended up with little or none (yikes).

Engagement matters for retention, output, and more. And again, this isn’t just about being a “good manager.” You need your people performing their best so the company does. For that to happen, feedback has to happen all year, not just in December (or once a year). We covered how to build engagement effectively in our post on measuring and improving employee performance.

But dropping the annual conversation doesn’t fix it either. For some people, it’s the only time they sit down and get honest feedback, and you can’t take that away. It should be an “and” approach, not an “or.”

The goal is more feedback, not less. Keep the weekly (or daily) coaching. Then use the annual conversation to pull it together: where they stand, what’s next, and what support they’ll get. Nothing in it should be a surprise. If employees walk away shocked by their feedback, it usually means your feedback system isn’t strong or frequent enough.

What Your Employees Are Really Wondering

Whether they say it out loud or not, every employee walks into a review with the same questions. A good review should answer them:

1. Where do I stand? Overall, am I doing a good job?
2. Am I getting a raise, bonus, or title change? And if not, why not?
3. What did I do well? Real examples, not just “good job.”
4. What do I need to work on? Again, specifics.
5. What help will I get? Training, coaching, a mentor, more time? What resources can get me there?

Addressing questions 2 and 3 directly and clearly is critical. Gallup found that only 23% of employees strongly agree they get the right amount of recognition for their work, and only 21% strongly agree their pay and incentives motivate them. (We shared more of our recommendations in our post on employee recognition strategies.)

If a manager can’t answer these five, they aren’t ready for the conversation. When drafting these reviews, make sure they address these questions directly, clearly, and consistently, especially when considering someone for a raise or promotion vs. another individual (not only because it’s the right thing to do, but to protect yourself and the company from unfair pay claims, etc.). If you’re not sure your process holds up, have HR or an employment attorney take a look.

Who Owns What: Leadership, HR, and Manager

This sounds obvious, but it’s one of the fastest ways reviews go sideways: nobody’s sure whose job is what. Here’s a simple way to split it up and avoid the classic “I thought so-and-so was doing that?”

Leadership: Set the rules, then make the final call.

• Set the budget and a raise guide. Pay bands alone won’t tell a manager what to do. Tie performance to a raise range. For example: top performers 4-5%, solid performers 2-3%, below expectations no raise (use your own numbers). This is often called a merit guide or merit matrix. Have HR or an employment attorney review it before it goes out.
• Decide who approves what, and write it down. Managers recommend. Then who signs off: a department head, finance, the CEO?
• Approve raises, bonuses, and promotions together, before anyone hears a word. That way you see the full picture, know it fits the budget, and can spot pay gaps between people who performed about the same.
• Give managers a “why not” sheet. One page for explaining a no: the benchmarks, where the person fell short, and what would change the answer.
• Hold managers accountable, starting with yourself. Set a due date for reviews and check that they happen. And do your own with your direct reports, because managers follow what leaders actually do.

Managers: Recommend and deliver.

• Recommendations to leadership. Managers know the work, so they recommend raises, bonuses, and promotions within your guide, backed by real examples from the year.
• Own the conversation with employees. Answer the five questions, follow up, and keep it free of surprises.
• Promise nothing until leadership signs off. A raise that gets promised and never shows up does real damage.
• Get these conversations right. Honest, transparent reviews done well are a big part of what keeps people engaged and builds strong teams, and managers are the ones who make that happen. Gallup found that managers account for at least 70% of the variance in team engagement. Get it wrong and it gets expensive fast (we break that down in the true cost of bad managers).

HR: Run the process and keep it fair.

• Own the logistics. Timeline, forms, and manager training, so every manager starts from the same page.
• Calibrate. Get managers together before reviews go out so a “top performer” in one department means the same thing in another. Without it, one team’s top rating is another team’s average, and that’s how pay gets unfair.
• Check every recommendation. Checks against your guide and budget before it goes to leadership.
• Keep the records. Includes ratings, the reasons behind them, and pay decisions. Also they flag pay fairness or legal questions early.
• Don’t deliver the message. That’s the manager’s job. HR can coach them, but employees need to hear it from the person they work with every day.

Here’s the short version: leadership sets the budget and rules, managers recommend, HR checks the work, leadership signs off, and then the manager delivers the news.

If you’re running a smaller team, you may wear more than one hat, but the same rules apply. Just write down who decides what.

A separate side note: don’t promote someone to manager just because they’re great at their current job. We talked about it in the accidental manager trap.

How to Run the Conversation

So what does a good one actually look like? Think of it in three parts: before, during, and after.

Before (don’t wing it)

• Look at the whole year, not just the last few weeks. It’s easy to remember what happened recently, so pull real examples of wins and misses from throughout the year (keeping notes helps!).
• Know what you can and can’t say about pay and promotions before you walk in. And if not sure, ask HR first.
• Ask your employee to prep too. Give them a heads-up and ask what they’re proud of and where they want to grow. It should feel like a conversation, not a lecture. Gallup found employees whose managers involve them in goal setting are four times more likely to be engaged.

During

• Start with what’s going well, and be specific. A generic “great job this year” isn’t enough.
• Then get into what needs work. Use examples, and keep it about the work, not the person.
• Answer the five questions, especially the raise and title one. Never dodge it.
• Let them talk! Ask what would help them most next year and where they want to develop/grow, then actually listen.

After

• Send a short written recap within a few days: what you talked about, the goals, and any support you promised.
• Put check-ins on the calendar (30, 60, and 90 days is one simple way to do it). That’s how the annual conversation turns into the ongoing feedback we talked about earlier.

When the Answer Is No

Not everyone is getting a raise or a title bump, and that’s okay. What matters is how you say it. A “no” with a plan lands very differently than a “no” with nothing behind it.

1. Say it plainly. Don’t bury it in compliments and hope they miss it.
2. Tell them why. Is it budget? Timing? A skill gap? Be honest. This is where your “why not” sheet comes in.
3. Show them what it would take. Name the specific skills or results that would change the answer.
4. Set a date to revisit it. “Let’s look at this again in June” beats “maybe next year.”
5. Offer real help. Training, coaching, a mentor, a stretch project. For current and future leaders, a 360 review can show blind spots.

It might sound something like: “I can’t offer a raise this cycle because of budget. Here are the two things that would put you in line for one, and I’d like to revisit it in June.”

If they push back, hear them out and take notes, but don’t change the answer on the spot. Tell them when you’ll follow up, and check with HR or leadership before you do. If they raise a complaint about discrimination, retaliation, or how they’ve been treated, stop and get HR involved right away.

Is Your Review Process Working?

Here’s a quick “gut check.” If any of these sound familiar, your process probably needs some work:

• Employees are surprised by what they hear
• Managers put reviews off (or flat out dread them)
• The same issues come up year after year (remember, culture is what you tolerate)
• Hard conversations keep getting delayed (our New Year’s eliminations post covers that one)
• Your best people leave soon after reviews (your biggest red flag)

If so, start small. Train your managers on how to give feedback, simplify the form, and ask employees afterward if the conversation actually helped. For more help, check out our posts on building a manager development plan and the true cost of bad managers.

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Don’t Wait Until December

Annual reviews are one of the best chances you get all year to show your people you’re paying attention. Done well, they help your best people grow (and stay). Done badly, or skipped, they cost you trust.

So start now. Pick a date for manager prep, decide your pay and promotion ground rules, and get your managers ready for those five questions. And if you’d like help training your managers or building a review process that works for your team, we’re happy to talk.

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