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Annual Review vs. Annual Raise

4 Apr, 2011 By: Jim Kahrs, Prosperity Plus imageSource

Annual Review vs. Annual Raise

It’s that time again…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 saying, “All the employee wants to know is how much of a raise they are
going to get or provide excuses for why  performance reviews aren’t necessary.” 
So, how do you turn the review process into the productive management tool that
it should be? Let me outline a process that has proven to be very successful.

The Basics of Annual Reviews

The first thing to address is the overall purpose and 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 both
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. You should also keep copies of important memos or emails in the folder.
This folder will be very helpful when you sit down to write up the employee’s
review. Of course you can keep a digital file but it is best printed out to have
easy reference when the employee or sales rep is seated in front of you.

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 recorded 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 very well 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 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 as an accepted level. 
All increases to compensation must be tied to increased production.

A Successful Plan for Annual Reviews

Here is a proven method for handling the annual review process and
compensation plans for 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. 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. However, use discernment when employees get
defensive. Some will give excuses for poor performance; others will welcome your
constructive appraisal to help them redefine their strategies.

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

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 optimum success is to formalize a review plan and stick to it.
Simple but true. 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 to help you get
started on your way to making the review process the management tool it can be.

Jim Kahrs is president of Prosperity Plus Management Consulting. At

and 631-382-7762 Ext. 201.

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