Employee Performance Management Challenges
In Small and Medium-Sized Organizations

Analysis of Performance Appraisals in SMBs

The Kapta team has been conducting detailed interviews with Human Resources leaders and managers in our target market: organizations with fewer than 500 employees.  We have interviewed over 120 HR vice presidents, directors, and managers in the following locations: Colorado, California, New York, Massachusetts, Georgia, North Carolina, Pennsylvania, and Maryland.  Globally, we have spoken with HR professionals in the UK, Germany, Egypt, Austria, Hong Kong, Singapore, South Africa, Israel and India.

We conducted interviews with organizations in the following industries: non-profit, hospitality, Internet services, finance, marketing, manufacturing, education, professional services, high-tech and retail.

During our research, we gathered tons of information that was useful in building our product and business.  We got input on our business model, pricing, product features, marketing messages and customer support model.

We also learned how small and growing organizations deal with key HR problems - namely, how they think about and approach performance reviews.  The findings were surprising because we learned that small companies have some very different approaches to talent management than larger organizations do.

Why is this data important?  According to the Bureau of Labor Statistics, over half the US workforce is employed at companies with under 500 employees.  Also, providing HR solutions to small companies is a very hot market right now.

Here's a summary of what we learned.

• Total number of interviews: 120
• Time: July 2011 to May 2012

Performance Review process

15 percent of the organizations we talked to do not conduct formal performance reviews.  This doesn't mean that they don't encourage managers to talk with employees and for everyone to do their best work, just that there are no formal records or rankings of performance.

However, most companies do performance reviews, most often (70 percent) once a year.  30 percent of the companies we talked to do formal performance reviews more than once a year.  We met no companies that do reviews more than once a quarter. 

The main benefits cited of doing frequent performance reviews were:

• Encourage more dialogue between managers and employees
• Better tracks the dynamic nature of business
• Allows managers and HR to identify performance issues more quickly

Most companies (84 percent) told us that they use performance review data in compensation decisions - to determine bonus pay and salary increases.  The remainder use performance reviews for development purposes only.

Review Cycles and Timing

34 percent of smaller organizations reported that they do performance appraisals on employees' hire date anniversary.  The rest conducted focal reviews, with the most common timing being December to February for completion of annual reviews.  This is a considerable contrast to larger companies, where the vast majority (over 90 percent, in our experience) do focal reviews for the whole company.

Performance Review Technology

54 percent of the organizations we met with use pen and paper (or Excel or Word documents) for their performance reviews.  Most wanted to move away from this process and toward an automated system in the next 24 months.

23 percent of companies used an automated performance review system provided by their payroll vendor or PEO (professional employer organization). 

22 percent of companies used a commercial software tool to automate performance reviews.  Most of these had been in use for less than 36 months, although some had been used for over five years.  In several cases, companies were on their second or third vendor.

When it came to deciding which type of performance review software to use, there were considerable differences of opinion.  51 percent preferred best-of-breed systems versus 21 percent who wanted performance management to be included in an HR software suite.  45 percent didn't have an opinion or said it would depend on other considerations (such as price, ease of use, and service).

When asked about the very hot area of "social performance management," 64 percent said they were very interested in or would use those tools.  36 percent indicated that they weren't interested in social performance management or that it would not be accepted by their organizations. 

Despite the fact that software tools are growing in popularity and many companies expressed a desire to move to paperless HR, we found that 85 percent of companies still keep paper records of performance reviews.  In almost all of these cases, performance reviews are printed and signed and stored in the employee's HR file.

 

Goal Management and Competency Tracking

64 percent of companies score competencies in their performance reviews.  Most companies track between 3 and 7 competencies, but we met one organization that tracked 13 competencies for all employees!

Interestingly, some companies track employee goals but don't use them as a factor in performance reviews.  16 percent of the organizations we talked with track goals separately from performance.  In those cases, performance reviews are based on competencies and behaviors.

95 percent ask employees to perform self assessments as part of the review process.

47 percent of companies allow managers to "cascade" goals to employees. 

The most common rating scale is a 5-point scale (57 percent) with 22 percent using a 4-point scale and others using variable rating scales.

Other interesting data points

• Favorite reporting tool: Microsoft Excel
• Most important talent management reports: status report and score distribution report
• Top three benefits of automating performance reviews: increase employee engagement, make better business decisions, lower costs

 

Our analysis

What does all this data mean?  That there's a huge opportunity to help small and medium-sized organizations improve their performance management practices.  Almost all the HR professionals we met consider talent management to be one of their main strategic priorities.  Most of the people we spoke with told us that they felt under-served by existing solutions and that there weren't many vendors who were focused on solving the needs of small companies.

When talking with potential customers about what they would look for in a performance review system, we consistently heard the following requirements:

• Simplicity
• Easy to use, intuitive
• Encourages managers to have performance conversations with employees