As a small firm (~75 employees), we have never had a formal employee performance review system. What are the benefits of implementing one?

A formal performance review gives supervisors a chance to communicate expectations, no matter how minimal the expectations may be. It also provides an opportunity to share both positive and negative feedback. Both are crucial to an employee’s growth and development. Employees may not be aware of their mistakes unless you point them out, but they also need to know that you recognize their successes. Supervisors may choose to help the employees set both short and long term goals during the review. These goals may also help facilitate discussion in the follow up reviews the supervisor will have with the employee.

But reviews should not solely be focused on the employee’s performance. Supervisors should give the employee an opportunity to openly share his/her thoughts on the company. Employees may be able to see improvements the company could make that no one else can.

Reviews are also more effective when performed more than once a year. Regular reviews allow supervisors to provide timely feedback to employees. Some companies try to set monthly reviews, but quarterly is a more realistic goal.

If you are communicating expectations and providing feedback to your people you are acomplishing the major objectives whether you do this "formally" or not.

As companies get bigger, it seems to me that formalization devolves the process into a "check the box" compliance mentality rather than any desire to achieve the objectives above.

There is a lot of software out there these days to help formalize these systems, but again it is not needed if you are accomplishing the above. It might be great that the employee can update their progress on a goal in the system, so if the manager checks they will see that the employee is x% completed toward the goal. For me, if I am really interested in their progress I will ask the person directly rather than check some software program to see if they updated their status.

I would concur with the comments and add that what is discussed during the formal review should come as no surprise to the employee since feedback about performance is an on-going process. It shouldn't be considered an event. As far documentation, emails, appointment records, etc also serve as documentation of "performance feedback".

A formal review process is often a strategic opportunity for a small company. It can serve to provide clear direction and priority to what is expected of employees, and can set the stage for linking annual (or interim) objectives with the goals of the business and compensation opportunities. If done properly, such a process is a great motivator. If it is not well thought out or well executed it can act as a disincentive. Be very careful, as implementing a formal review process is much more complex than it appears (which is why there are many books written about it). I'd be happy to share insights if you'd like to contact me separately at [email protected].

I am interested in learning more. Sounds interesting.
An Employee or the Human Capital is the most important asset of an organisation. Thus the formal review process if done correctly and without any bias (which is the key thing over here) helps in motivating an employee in adding value to an organisation which in turn makes an organisation profitable in the long run.

In addition to the comments posted above, a performance review process helps to align goals, provides input to the performance to plan reporting process and certainly, stimulates and motivates the top performers in your organization.

When companies start out, the management team knows everyone personally, and there may not be a need for a specific performance review. In large companies, there are so many people and levels of management review that a detailed and formal process is required to ensure consistency , fairness, and compliance with non discriminatory employment regulations. In between is where the problem lies.
I believe the problem lies in communication of performance issues between and among management and employees. During the course of day to day business people know who is doing what well or badly, and what needs to be improved, but they just dont have the time, momentum or personal courage to address the issue. A formal review process forces the issue. Since the challenge is to bring reviewer and reviewee together, the main prupose of the review document is to stim,ulate discussion ina routine as opposed to targetted environment. In this case the questions and structure of the review is un important compared to actually causing a face-to-face or heart-to-heart discussion. We recently introduced a 3 question review form in a 20 person company. The questions were (in not more than 5 lines)(i) What were your achievements this last year, (ii) What problems did you face this year, (iii) what changes would you like to see in the coming year.

And to spread the workload, the employees were asked to complete their self evaluation to be reviewed by their supervisors. This enabled the task to be completed surprisingly quickly, and we felt that the employee assessments were generally accurate and often more critical than supervisor evaluations.