How Startups are Revolutionizing Performance Reviews

January 29, 2015

Managing employees at a startup requires ingenuity. Instead of using traditional performance reviews, consider these three alternatives.

The employee review process is an important part of any businesses. There must be some way for employees to receive feedback so that they can both improve themselves (if they wish to) and better serve their company. Nonetheless, traditional performance reviews do not meet the needs of every company.

Occasionally, traditional employee review processes do not translate well to startup business environments, in which employees wear many hats, metrics are continually changing, and job descriptions are fluid. If you’re part of a startup and charged with overseeing employees, here are some alternatives that might be more suitable to your situation than standard performance reviews.

Manage by Objectives

Management by objectives (MBO), now considered a dated strategy from the 1960s and 1970s, has its place in startups. This strategy, which was first put forth by Peter Drucker, makes a distinction between job descriptions and performance goals. It judges employees’ performance based performance goals, instead of tasks listed in job descriptions. By shifting the focus from tasks to long-term goals, MBO gives employees flexibility to work in a manner that suits their strengths.

For startups, MBO has two benefits. First, it does not use job descriptions as the primary paradigm for evaluating employees, so it can accommodate fluid job descriptions. Second, it empowers employees to find their own solutions for achieving goals, which is helpful when there are not already set best practices in place.

The most notable company using this process, and the one responsible for the practice’s new renaissance is Hewlett-Packard. Now, startups are adapting the MBO process to suit their needs. Many are turning to MBO based review structures so that they can help employees be the best they can be.

Adjust SMART Goals

The SMART system (Specific, Measurable, Attainable, Relevant and Time-based) slightly modifies the MBO system to set better goals for employees. SMART makes sure that the goals set are right for the business and the employee by sorting them into important categories.

For instance, “sell 1,000 more widgets through the company’s website by the end of the year” meets all of the SMART criteria. It is specific, but still flexible. At startups, employees often must test for the best business practices, so it’s important to give employees freedom to try several strategies. Flexibility helps make SMART goals even more effective.

Smart goals are the way to go for most companies, especially for smaller ones that can filter each goal through all of the five categories.

Do Away with Individual Rewards

Performance reviews are often directly linked to individual incentives, usually in the form of raises and bonuses. While it makes sense, at least on the surface, to reward high performing employees with more compensation, this may actually undermine employee reviews. Instead of looking at how the employee being reviewed can improve and better help the company, it becomes a discussion of what the employee needs to do to increase their earnings.

Doing away with review-based rewards will remove this from the process and let managers and employees have a more open and honest discussion about the employees place within the company — something that needs to be regularly revisited in growing startups.

Instead of reserving funds for review-based raises and bonuses, use this money to recruit higher quality employees from the outset. Offer a higher salary, and you will get better performers. This strategy works for Netflix, which stresses salary over incentives.

If you’re concerned about using incentives to motivate employees, implement a profit-sharing program or offer stock options. This way, employees benefit when the company does well, not just when they, individually, do a good job.

Bonus: Free Guide to Conducting Quarterly Reviews

Reviewing performance shouldn’t be an annual process. Learn how the fastest growing companies establish quarterly operating review process to ensure focus stays on the things that matter and their teams stay on the right track.

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Marketing Associate, Online Customer Experience

<strong>Katherine Wood</strong> is Marketing Associate, Online Customer Experience at <a href="">Red Ventures</a>. Previously she was the Managing Editor at <a href="">Talent Tribune</a>, a data-driven HR blog powered by <a href="">Software Providers</a>.