What we're talking about

A performance review (sometimes called an appraisal) is a formal assessment of how an employee is getting on at work. Typically taking place every six or 12 months, they should, alongside more regular and less formal one-on-ones, play a key part in your management strategy. 

The review involves a line manager (or business owner) and the employee getting together for an hour or so to exchange feedback. You'll look back over how the preceeding period of work has been for the employee, discussing high points and low points, and strengths and areas of development that have emerged. You'll also look forward, setting objectives and redefining expectations, as well as addressing where the business is going and the part the employee will play in this. Any compensation or salary talk is usually kept separate from this process.

Why it's important 

All businesses need to nurture the people that work for them – and that's especially true now when employee retention is such a critical issue. Performance reviews are a means of getting out of the weeds of the day-to-day and properly taking stock. Employees can think about their own performance, personal development and objectives; employers have a structured, formal framework for rewarding good work, offering tangible, evidence-based feedback and helping guide employees to improve in specific areas. 

Annual reviews have come under a fair bit of criticism in recent years, with the sense that this one meeting is the subject of a disproportionate amount of focus, and that it's often carried out in a way that's neither encouraging nor useful for the employee. One major study from management consulting company Gallup suggests only 14% of employees strongly agree that their performance reviews inspire them to improve. That's often because they're executed poorly. Doing them regularly – and as part of a wider feedback and development ecosystem – is what you're aiming for.

Things to note 

It should be part of a wider feedback plan. This isn't about squeezing everything into one or two meetings a year. Instead, you should be looking to create a culture of continuous feedback, so that any issues don't come out of the blue. That's where things like weekly or monthly one-on-ones come in, along with group check-ins and upskilling programs. These will allow you to monitor progress towards longer-term goals set in the performance review and nip urgent issues in the bud. 

Think about what you're measuring. Defining metrics for success is an important part of performance reviews. The goals you set should be SMART: specific, measurable, attainable, relevant and time-bound. Thinking these through will mean you can give more specific and useful advice, going beyond the arbitrary pat on the back. Your employees will also appreciate being measured against similar criteria to others – you'll need to ensure objectives are consistent with others who carry out the same role or who are at the same level. 

It shouldn't be linked with compensation. It's best practice to conduct salary discussions separately, because bringing money into the conversation distracts from the importance of the feedback in and of itself. 

Brush up on your feedback skills. What you say in a performance review is important – but so is how you say it. Giving and receiving praise and criticism is an art form, and a little emotional intelligence can go a long way in terms of how your employee feels and reacts after the meeting. Some tips: frame it as a conversation, rather than a test or a monologue. Ensure you're totally present in the meeting, listening actively. Be candid rather than skirting around difficult subjects. Pair your observations with specific examples. Focus on the positives and the future, rather than berating them about past mistakes. Avoid blame and comparison. 

How to conduct a performance review 

1. Define metrics. Decide on the areas you're assessing for the employee in question, and how you measure success. Here's a good starting point for deciding what to measure. There are also lots of online tools to help you choose and keep tabs on your metrics, like Workday, Lattice and Eloomi. 

2. Ask around. Everyone has biases and no individual can paint a full and objective picture of an employee's performance. So, get what's called 360 feedback by consulting others who work directly with the person in question. Write up some questions that are tied to the metrics that you've established, but allow space for subjective comments. Look for specific examples of whenthe individual has done something well or less well – try to avoid vague generalizations.

3. Prepare yourself. Now it's time to look through and structure the insights you've gathered and review the employee's performance. Make sure you've got tangible evidence, examples and data where needed. This could include previous performance reviews and targets. Write everything down, mapping it onto a performance evaluation sheet (see the Tool section below for an example). Also think about what you're bringing to the meeting, such as broader info on the business. Finally, draft a meeting agenda.

4. Ask your employee to prepare. Invite the employee to their performance review at least a couple of weeks before it's due to take place. They need time to prepare and direction on how to do so. One good way of doing this is asking them to self-evaluate using something similar to the evaluation form that you've used.

5. Host the meeting. Use your agenda, evaluation forms and supporting notes to guide you. You may want to discuss the past, going over strengths and areas of development as revealed over the period in question and referring back to prior performance reviews, before spending most of your time planning improvements for the future. This should involve helping the employee set a few achievable and measurable goals, and advising as to how you'll support them in getting there. Both parties should know the next steps when they leave. End on a positive note, and make sure the conversation is documented.  

6. Follow up. You'll both need time to think over what was raised in the review, so take a few days for comments and queries. Then create a final written post-review plan – or just have the employee sign and take away an updated version of what you brought to the meeting. On your side, try to elicit feedback from your employee on how they found the process. That way, you can improve it for next time. 

7. Keep it going. And so begins the cycle leading up to the next performance review. Don't let this feedback fall by the wayside – keep checking in on how things are going. Use it as the basis for frequent one-on-ones, and ensure that your employee knows you're always around to revisit objectives.

Key takeaways 

• Your employees are the absolute backbone of your small business. Performance reviews are one way of ensuring that they feel supported to achieve their goals. So, don't cancel or rearrange reviews. 

• A good performance review should include analysis of prior work but primarily be concerned with future goals. It should be supplemented by consistent feedback throughout the working year – so no big surprises. 

• This is a sensitive discussion. Don't underestimate the value of emotional intelligence, and don't make promises you can't deliver on. 

Learn more 

Perspective. Business magazine Forbes chatted to a bunch of managers on how they're making performance reviews simple, painless and effective. 

Example. From HR software brand Gusto, here's what three small businesses have adopted instead of the typical performance review model. 

Tool. Courtesy of the Society for Human Resource Management, here's a template for a performance-appraisal form and for a performance-appraisal self-assessment form. 

A version of this article was published in the Courier Workshop newsletter. For more deep dives into essential business concepts, sign up here.