Performance Reviews: A Decision Analysis Perspective

Personnel decisions are real decisions, but rarely (if ever?) do decision analysts talk about them in the terms of the trade. Perhaps we should. To get started, I’ll offer my take on the DA of HR, so to speak.

A performance review seeks to determine the performance of an employee – how well is s/he doing the job. (Let’s not get into scales, weights, etc, but assume there is a metric.) Ostensibly, that measurement is supposed to answer/inform three questions/decisions:

1. Should this employee be fired?
Not to be blunt, but the ultimate question is whether the employee should continue to be an employee. However, it’s well known that 99% of reviews have absolutely nothing to do with this question. The employee is doing his/r job, hasn’t done anything wrong, and won’t be fired unless there is some sort of downsizing event. In the small minority of reviews that do visit this question, management has already decided to fire the employee and is just trying to build up a supporting paper trail – more CYA than VOI.

2. What does this person do, anyway?
This is perhaps a backward way of saying that the review may result in a promotion or reclassification of the employee. Is s/he running the whole pirate ship but still classified as a powder monkey? While the importance of job titles varies from industry to industry and firm to firm, they still matter a great deal in in many settings, and done well they can have a positive effect on employee morale. However, as far as the review is concerned, most of the relevant information is available before the actual meeting. Modest VOI at best.

3. How much should this employee be paid?
This is obviously an important decision and one that has to be made on a regular basis for nearly all employees. Still, the most relevant information is how much people with similar skills making in the local market. Raises (and they are normally raises, even in depressions) tend to be bracketed based on the overall circumstances of the firm, and a sense of fairness across the team.

So, if the information gathered in a performance review has at best modest impact on the actual decisions, and reviews are unquestionably costly in terms of labor, why do most companies do them? I would argue that the main reason is ingrained habit, reinforced in some cases by HR people who would like to upsell their role in the business. But, more prescriptively, should we do them? I say yes, but not for the VOI. The reason comes down to something decision analysts often observe in practice – sitting down with the right people and having a conversation about the right questions has a way of resulting in better outcomes. For a company, being forced to admit that there’s a huge and scary downside leads to ways that risk could be mitigated. For an individual, discussion of achievements and (ahem) other incidents is an essential part of coaching for better performance and longer term professional development. So do them, but don’t think you’re gathering imperfect information. What you’re really after is imperfect control, leading to better outcomes for both the employee and the firm.

Thank you for reading this post. I figured you would, so I’ve given you a 3, “Meets expectations”. See you next year.