Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / The Hidden Output Cost of Performance Reviews
Transcript
- Luna: So I've got a question that's been bugging me. We talk a lot about tools and workflows and meetings — but what about the annual performance review? Does that actually help or hurt productivity? Lucas: It's a great question, and the data is actually pretty damning. A study from the University of California in 2024 tracked companies that ditched traditional annual reviews and found that measured output went up by six to eight percent within two years. Luna: Six to eight percent — just by stopping one process? That's huge. Lucas: It is. And what's wild is how much time those reviews actually consume. The same study estimated that a manager spends about forty hours per employee per year on review-related activities — writing, meeting, calibrating. For a team of ten, that's four hundred hours. Luna: Four hundred hours. That's ten full work weeks. Just to produce a document that might not even improve performance. Lucas: Exactly. And the research on whether reviews actually boost performance is mixed at best. A meta-analysis from 2022 covering over fifty studies found that the average effect size was essentially zero — no meaningful improvement in output. Luna: So we're spending ten weeks of manager time per team for zero gain. That seems like a terrible return on time. Lucas: It gets worse. There's also a demotivation effect. A Gallup survey from 2023 found that only fourteen percent of employees said their performance review motivated them to improve. Meanwhile, twenty-six percent said it actually made them feel worse about their job. Luna: So more people are demotivated than motivated. That's a net negative on morale, which we know hits productivity. Lucas: Right. And you have to factor in the opportunity cost. Those four hundred hours could be spent on coaching, strategy, actual work. Instead, they're sunk into a ritual that everyone dreads. Luna: I'm curious — who's actually moved away from this? I know Adobe famously dropped annual reviews back in 2012 or so. Lucas: Adobe's 'check-in' system is probably the most cited example. They replaced annual reviews with ongoing, informal conversations between managers and employees. And they reported a thirty percent reduction in voluntary turnover after the switch. Luna: Thirty percent lower turnover? That's a massive retention win. And you'd think that alone saves a ton in recruiting and training costs. Lucas: It does. Cargill did something similar — they piloted a continuous feedback model in one division. They found that teams using the new system had twelve percent higher engagement scores and saw a measurable uptick in project completion rates. Luna: Okay, so the alternative seems to work. But why aren't more companies doing this? Is it just inertia? Lucas: Partly. But there's also a very uncomfortable reason: performance reviews are often the only documented basis for firing people. Without them, companies worry about legal exposure if they need to let someone go. Luna: That's a real concern. You need some record of poor performance to justify termination. But couldn't continuous feedback serve the same purpose? If someone's underperforming, you'd have a trail of documented conversations. Lucas: You'd think so, but the legal teams tend to prefer the formal, annual document. It's easier to present in court. So there's a genuine tension between what's productive and what's protective. Luna: That makes sense. But if the productivity cost is six to eight percent, maybe the legal risk is worth recalculating. Lucas: Some companies are doing exactly that. They're moving to a hybrid model — quarterly conversations with a brief written summary, rather than an all-day annual ordeal. And early data suggests that preserves the legal cover while cutting the time cost. Luna: What about the quality of feedback? One critique I've heard is that without a structured annual review, managers get lazy and feedback becomes too infrequent or too vague. Lucas: That's a real risk. The research from the UC study actually noted that companies that simply abolished reviews without installing any alternative saw no improvement, or even a decline. The gains came when they replaced reviews with a structured continuous feedback system. Luna: So it's not just 'stop doing the bad thing' — you have to actively install a better thing. Lucas: Exactly. And that's harder. It requires training managers to have real conversations about performance, not just fill out a form. It's a cultural shift. Luna: Speaking of cultural shifts — we try to make this show a small part of that, giving you ideas you can actually use. And look, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it makes a real difference. No ads, no sponsors — just listeners who find value in what we do. So if that's you, we appreciate it more than we can say. Luna: Alright, back to the numbers. So the six to eight percent output gain — is that consistent across industries, or does it depend on the type of work? Lucas: The UC study found the effect was largest in knowledge-work settings — tech, consulting, finance — where output is harder to measure and motivation matters more. In manufacturing or retail, the effect was smaller, maybe two to three percent. Luna: That makes sense. If your output is clear and measurable — units produced, sales closed — the review process might be less distorting. But if your work is more subjective, the review itself becomes a bigger pain point. Lucas: Right. And there's another angle: bias. A 2021 study from Harvard found that performance reviews consistently penalize women and minorities, especially in subjective categories like 'leadership potential' or 'communication.' Removing annual reviews actually improved diversity metrics in some firms. Luna: That's a powerful secondary effect. If the process itself is structurally biased, then killing it doesn't just save time — it might also make the workplace fairer. Lucas: Exactly. And that's a hard thing to fix within the review system itself. You can train reviewers, but bias still creeps in. Removing the formal review and replacing it with ongoing, real-time feedback reduces the opportunity for that kind of bias to accumulate. Luna: So what's the bottom line for a manager listening? Should they just cancel their next review cycle? Lucas: I'd say: don't cancel without a plan. But start building a plan today. Move to quarterly check-ins, or even monthly. Invest in training managers how to give useful, specific feedback in the moment. The research is pretty clear that the annual ritual is costing you more than you think. Luna: And maybe the best argument is the simplest one: if you're spending forty hours per employee per year on something that doesn't improve output and might even hurt it, that's time you could spend on literally anything else. Lucas: Right. And given that productivity growth across the economy has been sluggish for years — around one point five percent annually in the US — a six percent boost from just changing one process is enormous. It's a free lunch, if you do it right.