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Why Your Company Needs a Formal Employee Review Policy

Whether you’re an employee or employer, annual reviews are a common occurrence in many businesses. The amount of time dedicated to employee reviews and performance varies greatly depending on the company and its stage in the business life cycle.

When a company adds more talent, this often leads to an increase in expenses. As a business, it’s important to maintain an expense base that’s sustainable and fiscally responsible for continued growth.

For many businesses, employee compensation is often one of, if not the largest expense, which highlights the importance of keeping it in check.

This article explains why an employee review policy can be a critical tool in the success of your business.

Leveling Employee Expectations

The review process can be an anxious and challenging time for people managers and employees.  Employees often believe they’re deserving of a larger pay increase than they receive, and, while some employees may have earned a pay bump, pay increase is typically based on several factors including company performance or other metrics.

Situations in which an employee’s annual raise does not meet their expectations can create a disgruntled relationship especially if employees don’t understand how their performance is measured.

Attainable Goals Create Visible Employee Metrics

As an employer, it’s important to create measurable goals for the business, but it’s equally as important to have specific measurable goals for each employee to assess their performance.

It’s best for employees and their leaders to co-create goals and identify areas they want to grow and focus on both in the short term and long term.

Successful goal setting is a process and takes time to develop. As the old adage goes, practice makes perfect. Don’t be deterred if at first it seems foreign — it’s well worth the time commitment.

Why Review Policies Matter – An Analogy

Let’s consider a company that has no annual review policy and awards merit increases and bonuses based on a flat rate applied evenly to all employees based on company performance.  We will call it company A.

Company A gives all employees the same percent merit increases regardless of contributions or accomplishments throughout the year.

Next, we have company B, they base merit increases and bonuses on individual employee performance as well as company performance.

Company B use the individual employees performance rating to help determine the merit increase and bonus they will receive.  Company B considers things like peer feedback, work product, and contributions that go above and beyond the scope of work.

Now, let me ask you:

  • If you were an employee, what company do you want to work for?

  • Why should someone working at company A care about their performance, if they get the same merit increase regardless?

  • Is company B incentivizing employees to have a vested interest in their work?

Merit Incentives Spotlight Areas for Training

While rewarding those who are high performers is a good investment for any company, let’s consider what else a formal review policy accomplishes.

As an organization, rating your employees based on individual performance allows you to identify those within your organization that aren’t meeting the expectations of the job. Your organization can then implement additional training and development plans as needed for those not meeting expectations.

This in and of itself makes the entire idea of a formal review process seem like a “no brainer”.

In its simplest form, a thoughtful, recurring annual review program allows you to accomplish two mission critical aspects related to talent retention and expense control: you award the company’s top performers and identify the lowest performers — it’s a win-win.

Read: How to Control Your Business Expenses

The Importance of Human Capital

Most great companies would attribute their success to the human capital (people) in their organization, something that shouldn’t ever be underestimated.

Formal review policies can help your company make sure its best employees stick around. By rewarding those who are top performers, you’re more likely to be able to retain them over the long term.

Employee turnover is an extremely expensive endeavor when you consider the cost of replacing someone and the time needed to learn the role and develop new employees. Large corporations can spend hundreds of billions of dollars a year on training and development for new employees — a cost that only continues to rise.

The cost of losing your top performing employees can be even greater when institutional knowledge is lost, which highlights why formal review policies are something every organization regardless of size needs to adopt and implement.

If you would like to learn more about programs or ways in which your business can implement a formal policy send us a message or give us a call.  With experience across a wide variety of companies and industries, we can partner with you to develop a program that fits any size business from startup to publicly traded.

Paloma Goggins - Business Lawyer in Phoenix, Arizona
Paloma Goggins is an experienced business attorney specializing in helping business owners buy or sell a business

I’m Paloma

I’m experienced business attorney licensed to practice in Arizona and Wisconsin. My client-first philosophy allows us to collaborate turning skills, passions, and knowledge into the ultimate form of change-making. Let’s innovate together.