It’s that time again.  Time for the dreaded annual review with one of your key staff members.  For some companies, this is such an arduous process that they simply stop doing it.  I’ve had many a dealer tell me that they believe it’s a waste of time.  “All the employee wants to know is how much of a raise they are going to get.  They aren’t interested in having their performance reviewed.”  So, how do you turn the review process into the productive management tool that it should be?  In this article I’ll outline a process that has proven to be very successful.

The Basics of Annual Reviews

The first thing to cover is the overall purpose and the elements of the annual performance review.  The first purpose is to review the employee’s performance over the last year.  In order to do this properly it is important that you keep a file for each staff member that reports to you.  The folder should include the good and bad things that have happened during the year.  Start with a sheet of notes.  When you notice something or have a situation to handle make notes on the sheet.  For example, let’s say you had to talk to the employee about being consistently late.  Write the date and details of the discussion on your note sheet.  Be sure to add good things as well.  You should also keep copies of important memos, etc. in the folder.  This folder will be very helpful when you sit down to write up the employee’s review.

The second and most important part of the annual review is future planning.  As you go through the employee’s strengths and weaknesses you want to outline what they should focus on for the coming year.  These get turned into a game plan with specific goals.  Of course these goals need to be written up and put into the folder from the previous step.

The last part of the review process is to address the employee’s compensation for the coming year.  For many employees this is the part of the review they are most interested in.  It is critical that you handle this properly.  Too often employees are given an annual raise even if they haven’t earned one.  This is addressed in the Hubbard Management System in a policy letter dealing with penalties and rewards.  In the policy letter Mr. Hubbard states, “WHEN YOU REWARD DOWN STATISTICS AND PENALIZE UP STATISTICS YOU GET DOWN STATISTICS.”  The statistics Mr. Hubbard is speaking of are the production measurements of the employee.  When you give a raise to someone who hasn’t earned it through increased production you are in actuality rewarding down statistics and will get future down statistics and continued low production.   All increases to compensation must be tied to increased production.

A Successful Plan for Annual Reviews

I have helped quite a few dealers implement the plan that is outlined here.  It has proven to be a successful method for handling the annual review process and compensation plans for their employees.  

Step 1: Create a Review Calendar

One of the cardinal rules of annual reviews is that they should be done on time.  When you forget about the review or miss the employee’s anniversary date you send a message that they aren’t important to you.  Of course your employees are your most valuable and important resource.  Create a calendar for annual reviews. The calendar should list all employees and their anniversary dates.  Use something like Outlook to create a simple reminder system that will alert you when an anniversary is coming up.

Step 2: Distribute Review Materials

You need to have a formal document to use for the review.  Annual review documents are available from a number of sources.  A good document allows you to rate the employee on a graduated scale in all areas of their job.  

'How do you turn the review process into the productive management tool that it should be?" 

Jim Kahrs
Annual Review Vs. Annual Raise

The scale should have ratings like outstanding, very good, good, needs improvement, unacceptable, etc. and should rate areas like knowledge of work, quantity of work, quality of work, reliability, initiative, etc.  Approximately one week before the employee’s anniversary date the manager should be given two copies of the review form. The manager is to give one to the employee with a memo informing him or her of the review date and asking that they fill out the form as a self evaluation.  

Step 3: Manager Review Write Up

At this point the manager fills out the review form for the employee’s performance.  The employee’s folder is referred to as a tool for remembering what happened during the year.  Once the write up is complete the manager must go over it with his or her supervisor.  The purpose here is to allow for help and direction and to provide a sounding board.  The manager and supervisor can also discuss compensation strategies.

Step 4:  The Actual Review Meeting

When the review date arrives, the manager and employee should meet in a quiet area where you won’t be disturbed.  It’s better to do the review in the office but if you don’t have a quiet spot you can have the meeting off site.  As the manager the first thing you do is go through the employee’s self evaluation.  Have the employee take you through the entire document.  It is important to listen to what they have to say without rebuttal.  Right now you’re getting their viewpoint.  If you want to outline plans for improvement you need to understand the employee’s viewpoint.

Once they have taken you through their write up go through yours.  Go through each item and discuss why you rated them as you did.  If there is a major discrepancy between your rating and the employee’s you may want to spend a little time explaining why you see it differently.  Be sure to outline areas that need improvement.  The review should be a balance of past performance and future goals. 

Step 5:  The Compensation Element

I strongly recommend that you do not discuss compensation during the initial review meeting.  Make it clear to the employee up front that the purpose of this meeting is to go through the review and that a follow up meeting will be scheduled to discuss compensation.  The plan that works best for compensation allows for employees to receive an annual raise up to the Social Security Administration cost-of-living adjustment referred to as the COLA.  Go to the following web address to see annual COLA rates, .  If an employee’s performance and production over the past year was excellent they could be given a raise based on the full amount of the annual COLA.  If their performance and production was good but not great they might get a portion of the annual COLA.  However, if their performance and production don’t warrant it you should not give any raise.  Additional income potential beyond the COLA should be offered in the form of production incentives that are tied directly to the employee’s post.

Once you’ve decided how you are going to adjust the compensation, schedule a follow up meeting to go over this with the employee. Be prepared to handle any questions or objections they might have.

The key to success is to formalize a plan and stick to it.  Once you do, the process of conducting annual reviews becomes much easier and fruitful.  The entire staff knows what to expect and can now focus on the process.  You no longer have the two opposite viewpoints mentioned at the opening of this article.  If you need a review form or would like a copy of the policy we use with our clients just drop me an email.  I’d be glad to send along copies to help you get started on your way to making the review process the management tool it can be.

Jim Kahrs is the President and Founder of Prosperity Plus Management Consulting, Inc. 
If you have any questions please don’t hesitate to call 631-782-7762 or email.