Many of us blindly accept the premise of the performance appraisal system and do not question its effectiveness. In his article, Don’t Redesign Your Company’s Performance Appraisal System, Scrap It! Fred Nickols advocates dumping the entire system. He believes the hard costs (billions of dollars annually) and unknown soft costs are not worth the return from the current system.

Nickols’ research and surveys indicate there is at least a $2,000 per employee cost associated with the performance appraisal system. If you think about the HR resources, time spent on performance reviews, time invested by managers, and the associated system costs, this number might be too low.

If the hard costs are staggering: consider the soft costs. Many employees view this system as an obstacle to higher performance and a structural disadvantage in the organizational culture. In other words, it might seem extreme to dump the entire performance review system, but in doing so, you will open up resources and possibilities with your employees which are not feasible right now.

Executives like performance reviews systems, because in their view:

1. The system provides employees with an opportunity to receive feedback regarding their performance, usually at least once a year and often on an interim basis during the year. This leads to reduced error and waste, increased productivity, improved quality and service for customers, as well as enhanced employee motivation, commitment, and a sense of ownership.
2. The system provides an opportunity for performance related discussions that include the following aims: setting work objectives for the employee, aligning individual and organizational goals, identifying training and development needs, and discussing career progression opportunities.
3. The system standardizes performance appraisals and makes them objective by providing uniform processes and criteria. This further results in a fair, valid, and legally defensible basis for rewarding and recognizing individual performance.
4. The system affords the corporation legal protection against employee lawsuits for discrimination and wrongful termination.

Nickols argues that the performance appraisal system actually reduces productivity, performance, is damaging to morale and motivation, and is fostering a short term view.

The article is persuasive, we recommend reading it: http://www.nickols.us/scrap_it.htm