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How to Create an Employee Performance Review System

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Giving performance reviews to your employees is an essential part of running a business. However, it is something managers and employees dread the most. Why? For the manager, it feels like it’s just another item on the to-do list

Only two out of ten employees feel their performance is managed to motivate them to do great work. It is important to move from performance management to performance development. This type of review is inspiring. It also helps employees feel like they are part of the conversation.

Over the past couple of years many companies did performance reviews differently. Some large businesses even removed their performance review systems as well. 

The Traditional Methods

There are several types of traditional performance review systems. Here are a couple which seem to be the most popular in large and small businesses:

  • 360-degree feedback – This system engages an employee’s peers, direct reports, and supervisor to provide feedback on the employee’s performance. Review the pros and cons of this type of system before implementing it in your business.
  • Management by Objectives (MBO) – The manager and employee develop goals before the review cycle. They review the results at the end. For example, “Reduce turnover in department by 25%.”
  • Rating Scales – This type of review is the most common. To assess performance, the manager rates the employee on items such as behaviors and competencies.

Why a Performance Review is Important

Use your performance sessions as coaching opportunities. Also, employees should feel valued. Plus, they should know you value and care about their opinions. 

Reviews are a great time to discuss goals. It is also a great time to discuss what they would like to achieve. You should also be telling them what they do well. Then, you can discuss a couple of opportunities for improvement as well. 

In the past, think about annual reviews you received. How could they be better?

The review meeting can be an occasion to really spend time with your employees. This is also your chance to inspire and encourage them as well. Your employees may even look forward to spending time with you too.  You could also use the time to find out what your employee likes and dislikes. They could tell you some of their ideas for the team or the department as well. 

Make your review session a two-way conversation.

Make it enjoyable and spend the time to really understand your employee. The important thing to remember is that it’s about a conversation. 

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Adopt Frequent Feedback Cycles

You should also be providing regular feedback, not just on an annual review date. 

The main ingredient to an effective performance review is that nothing should be a surprise. You should also be giving feedback on performance daily. It can be a 5-minute huddle at the end of the day or a sit-down meeting. If an employee is not performing well, you should work to get them on track. 

Finally, if performance doesn’t improve, then it is time to start the disciplinary process

The performance review, however, is not the time to discipline. It should be about employee motivation. It is a time to be encouraging as well. Also, your employees should look forward to the review.  Stop the review period being a dreaded event.

Jacquelyn Smith of Business Insider, provides fourteen phrases to avoid in a performance review. For example, a manager should never threaten a person’s job. They shouldn’t humiliate that person or compare them to others. 

Best Practices and Examples

Here are some methods to give feedback to your employees:


At the beginning of the review period, discuss with your employees what goals they should be working to accomplish. Choose 3 or 4 goals and ensure they align with the company’s strategic direction. For example, if your company has a goal to increase sales then everyone involved should have that same goal.

This is the MBO method we discussed above. This is a great system to apply if the employee has clear based goals that truly align with the company. Also, they should understand and agree to the goals and they feel they are achievable. There are pros and cons of this system. 

Soft skills

List 3 or 4 characteristics or soft skills that you originally wanted in the employee when you interviewed for that position. For example, collaboration, persuasion, and emotional intelligence may be important. Talk to your employee about them and give ideas to help. 

For example, you may have an employee who is great at persuading others but doesn’t listen to other ideas during team meetings. Give suggestions to help your employee improve. 


Hard skills

List 3 or 4 hard skills that are primary for that position. Ask your team members forideas to make their job better. For example, if you have a carpenter that must use machine power tools, but one tool is causing her a problem, this could be an opportunity for equipment updates. She may have a better idea of what type of equipment is needed.

Career Path

Discuss career paths with your employees. Do they see themselves as managers? Or would they like to take a different path? How can you also help them reach their goal? Find out what opportunities they are most excited about pursuing. 

You don’t want to lose your employees. Even average performers play a critical role in your company. Most employees also want to know where they are headed and not having a career path can be a reason for turnover in your company. By listening to their interests, you can develop a plan to help them achieve their goals.

Company direction

Talk to them about company direction, answer questions about new systems and processes. Also, find out what they need to do their job better. Let them know they are important to the company.

Salary reviews

Don’t tie the review to pay. Tom DiDonato, chief human resources officer at Lear, wrote in Harvard Business Review that he believes that annual reviews aren’t being done correctly. He thinks salary reviews and performance reviews should be separated. He says, “Performance reviews that are tied to compensation create a blame-oriented culture. It’s well known that they reinforce hierarchy, undermine collegiality, work against cooperative problem solving, discourage straight talk, and too easily become politicized.” 

At Lear, annual performance reviews were replaced with quarterly coaching sessions. Pay is adjusted only to changing local markets and special stock awards are given to high performers.

Treat Your Performance Reviews as a Coaching Session

You should share feedback and get to know your employee’s strengths and weaknesses. You should also help and guide them to do great things. 

Consider quarterly reviews. Many times, employees feel like they really have to work hard or be on their best behavior a month or two before the annual review. More frequent performance reviews could help ease that anxiety and prevent this from happening.

Your employees shouldn’t dread the review process. It should be something they look forward to doing. They should also know they will receive encouragement, direction, and understand the value of the review. 

Small businesses can’t afford production loss. They also can’t afford underperforming employees or turnover. Coaching sessions can help ensure your employees stay as well. Employees don’t leave good companies or good managers. Ensure your managers are conducting performance reviews to inspire their employees, not just to check an item off a list. 

Finally, show your leaders that by doing this successfully they are empowering their employees and minimizing the risk of losing them.


Author: Kimberley Kay Travis

Kim Travis has over 20 years of experience in business, human resource management, and leadership roles. She has specialized knowledge in employment law, employee relations, recruiting, management consulting, small business growth, leadership development, workplace safety and health programs, and writing business content.