Why are performance reviews important?

An effective performance evaluation measures an employee's progress and demonstrates the supervisor's interest in the employee's personal development. It can also highlight training needs and provide the employee with a focused opportunity to discuss workplace interests, problems, and goals.

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A solid plan for a performance evaluation starts with the manager identifying the goals that, if met, will increase the organization's value. These goals may not only include concrete, fact-driven goals such as increased productivity and revenue, but also abstract, intangible goals such as improved employee morale and engagement. Once the key goals for the organization’s success have been identified, the manager should use the appraisal as an opportunity to assess and align his or her employees’ performance so that those goals can be met or exceeded.

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Common objectives of effective performance evaluations include:

• Identifying a limited number of critical behaviors that are vital to the organization's ability to meet its goals
• Clarifying the performance measures expected of employees and those results considered essential to the success of the business
• Seeking honest feedback, as employees perform better when they are allowed to speak openly.
• Applying uniform performance standards that assure fairness and eliminate confusion
• Giving employees a stake in the process by encouraging them to help set their own performance goals and assess their progress in meeting them
• Making performance management an ongoing process that reflects changes in the business
• Gathering information for succession planning and the development of training programs by identifying employees who have the interest and potential for advancement
• Improving coaching by encouraging supervisors to observe an employee's job performance and compare it with performance standards on an ongoing basis.
• Providing a tool to determine wage adjustments based on a worker's contribution to the organization

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Clear expectations and performance standards, along with achievable goals, will increase retention and improve morale. Employees are often more engaged in their jobs, and therefore perform better, when they understand what is expected, how to meet those expectations, and how their performance is tied to the success of the business.

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Legal Issues Affecting Performance Evaluations

Discrimination: Performance evaluations present legal risks of both intentional and unintentional discrimination. Unintentional discrimination may occur if the review process has a disproportionate impact on protected classes.
To avoid charges that the procedure is biased, merit-rating systems and the pay differentials that result from them should be based on job-related factors—that is, on objective evaluation of performance relative to specific requirements of the job. The following steps will help protect an organization against charges of discrimination:

• Have up-to-date job descriptions, and evaluate employees' performance relative to the requirements specified in the descriptions.
• Thoroughly train supervisors on effective procedures for merit rating and feedback to employees.
• Give employees the chance and a place to note their comments/disagreements regarding their evaluations.
• Explain and monitor the organization's evaluation programs. Make sure that managers sign off on their subordinates' reviews. Larger organizations may want to consider reviewing appraisals to see if there is any statistical evidence of bias.

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At-will employment: Performance appraisals have become the subject of lawsuits ranging from discrimination claims to lawsuits alleging that an appraisal program created an employment “contract.” The employee handbook should make it clear that the description of appraisal and discipline programs is “advisory” and may be altered at management's discretion. 

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Defamation: Defamation is a false statement about a third party that causes them some type of injury, including harm to their reputation. If a performance evaluation is less than stellar in any way, it is crucial to include information that supports the reasons for the evaluation so that it will not be considered false.
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Retaliation: Employers should take care not to use a performance evaluation to retaliate against an employee for exercising a right or enjoying a benefit to which they are entitled under federal and state law. Employees are protected from retaliation under Title VII for reporting or assisting in an investigation or for opposing any practice that is unlawful under that title.
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Privacy: State privacy laws may prohibit employers from engaging in certain activities related to performance evaluations. For example, in some states employers may not require employees to submit to polygraph tests. Laws may also govern how employers handle employee information in order to prevent identity theft.

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Summary‍

The performance evaluation is an opportunity for a manager and an employee to meet and discuss the employee's job performance, organizational priorities, and future performance goals. The evaluation should focus on key behaviors that are important to the organization and on the employee's progress in reaching established performance goals. An appraisal may be done on a formal or informal basis, but ideally it will be an ongoing process. Discussion of wage increases, when available, has also traditionally been part of the periodic performance appraisal, but it is best for any discussion of pay to be conducted separately from the performance review.