Recently, IBM joined the ranks of dozens ofother global companies including GeneralElectric, Microsoft, Accenture, and Deloitte, who are replacing theannual performance review procedures they’ve had in place fordecades with new performance managementmethods.

The traditional annual performance review process that globalcompanies like GE and IBM have had in place for years wereoriginally designed to help companies increase performance andrevenue. However, new research shows that this widespread processdemands more than 200 hours a year of managers’ time, butresults in little or no correlation with actual businessresults.

Why it doesn’t work

For those who are lucky enough to be unfamiliar with theinfamous and often tedious annual performance review,here is a short history.

In the 1980s, General Electric and companies like it popularizedthe idea of consolidating employees’ performance reviews each yearinto one number. That number is then traditionally used to rankeach employee against his or her peers. Each year, the employeeswith the lowest rankings are asked to leave.

Human resources professionals originally designed this system and ones like it to stripcompanies of unproductive employees and reward productive ones. Butas any HR manager who has seen a good employee get crushed by anunfair review knows, this system can also result in the loss ofsomeone who may have statistically had a challenging year, butmaintains characteristics that could benefit the companylong-term.

Review systems also tend to lead to grade inflation, as managershave an incentive to give employees high scores so the reviewdoesn’t diminish their engagement or loyalty. In other words,incentives aren’t always necessarily aligned to facilitate the goalof the reviews themselves.

Additionally, the traditional annual performance review processis linear, not cyclical: Employees receive feedback from managers,but not the other way around. Because of this, it can putemployees and managers on the opposite side of the table, creatingan imbalanced dynamic in which one person (the employee) is put ina defensive position.

Research shows that this can lead to the opposite outcome formerGE CEO Jack Welch intended, and result in lost productivity for theemployee. As any employee who has been through this process knows,it can also create an uncomfortable atmosphere that discouragesteamwork and breeds unhealthy competition. That’s bad for business.

The fact that they are annual is inherentlyarguably the employee performance review’s biggest flaw. Employeescannot tweak or change the way they are completing a project ifthey don’t receive feedback until well after the project has beencompleted.

Seventy-four percent of millennials, who surpassed GenerationX’ers as the largest generation in the workforce last year, saythey feel “in the dark” about their performance. This,compounded with the changing nature of work, the competitive war ontalent, and the increasing number of tools companies haveaccessible to them from a technology standpoint altogether seem tobe finally taking down the pervasive, dreaded performancereview.

Case studies

To date, nearly 10 percent of Fortune 500 companies have doneaway with annual rankings. Here is what they are doing instead.

Netflix: Treating people like adults

Sheryl Sandberg has called Netflix’s former Chief Talent OfficerPatty McCord’s document outlining the company’s culture andphilosophy “the most important document ever to come out of theValley.” Why? Because it explains, among other things, why theannual performance review process was never really a cultural fitfor the innovative company.

The process they created instead is based on one concept: treatemployees like adults. “If you talk simply and honestly aboutperformance on a regular basis, you can get good results probablybetter ones than a company that grades everyone on a five-pointscale,” McCord has told the Harvard Business Review.

Netflix was one of the first to implement a 360-degree reviewsystem several years to help employees and managers facilitate acircular feedback process. It’s designed to foster two-wayconversations that lead to high performance.

But what about performance bonuses that are usually based uponGE-style rankings? Netflix’s theory is that if you hire the rightpeople, they will already be motivated to work their hardest andwon’t need performance bonuses to incentivize them. The companybelieves in market-based pay and relies heavily on industry data toensure fair market rates for talent.

During 2013 alone, Netflix’s stock more than tripled and itsU.S. subscriber base grew to 29 million. Oh, and it won threeEmmys, making Netflix a benchmark case study on how innovativereview processes can help propel productivity and profit.

IBM: There’s an app for that

To revamp its performance review system, IBM first crowdsourced ideas from its 380,000employee pool through its internal social media platform. Thecompany then sorted through the 2,000+ comments from employees andgrouped them into themes.

The result? An app-based performance review system called“Checkpoint.” With Checkpoint, IBM employees receive feedback fromtheir managers on short-term goals they created in the app at leastonce a quarter. At the end of the year, employees are still judged,but there is no overall score like there was in the past. Thereview is based on five dimensions that include things likeskills and responsibility to others, rather than just businessperformance.

Accenture: A focus on more coaching, lesscriticizing

Accenture, one of the world’s leading professional servicescompanies, announced that they are shifting away from traditionalannual performance reviews last August.

“Once a year, I’m going to share with you what I think about youdoesn’t make any sense. It has to be every day after every clientor business interaction. Now it’s all about instant performancemanagement,” said Accenture CEO Pierre Nanterme.

Last September, the company implemented a “performanceachievement” approach that is designed to enable the company’s336,000 employees — two thirds of which areMillennials — to receive timely feedback on an ongoingbasis throughout the year. The new approach includes real-time,frequent, forward-looking “coaching discussions” that helpemployees build upon their strengths, understand what is expectedof them in their work, identify areas for growth, and develop aplan to help them achieve their career goals.

So what’s the main difference in their old and new approach? Inaddition to being more frequent, the “coaching discussions” aredesigned to be more positive and constructive than the traditionalperformance critique.

Deloitte: Reclaiming two million lost hours

Last April, Deloitte announced that they’ve realized the processthey have in place for evaluating their employees’work was broken. When Deloitte analyzed its reviewprocess, research showed that its managers were spending nearly twomillion hours a year on performance reviews.

The company changed its system so employees spend less timelooking backward and more time looking forward. They found that byremoving ratings, the conversations shifted from justifying pastperformance to discussing employees’ growth and development.

The new system is built upon uprooting a major element of thetraditional performance review: questions. By changing howquestions are asked, to whom they are asked and in what contextthey are evaluated, Deloitte has created a new performance review system that doesn’trequire compression into a single number.

General Electric: Data mining employees’performance

GE’s new performance review process isessentially based on two principles: continuous dialogue and sharedaccountability. Managers and their direct reports hold frequent“touch point” meetings, rather than annual ones, in which managersand peers coach each other in order to achieve business andpersonal performance objectives.

In order to provide its teams with the tools it needs to succeedin this new approach, GE enlisted the help of a top internal ITteam to develop and launch a smartphone app. The app acceptseverything from voice inputs to handwritten notes, and is designedto facilitate employee engagement and a culture oftransparency.

A “summary conversation” between employees and managers stilltakes place at the end of each year. But the new process and toolsare designed to provide a more robust set of data on which to basesalary, promotions, and future assignments.

Microsoft: Better collaboration leads to betterperformance

Microsoft had a big problem with its annual performance reviewprocess: employees cited its stack-ranking approach as the“single most destructive process” at Microsoft— one that drove “untold” numbers of employees away.

What was so bad about it? One of the things employees detestedthe most about it was that it required managers to grade theirsubordinates on a bell curve. This meant that employees were ratedon a number scale from 1 to 5, 5 being the best. Since annualbonuses were tied directly to scores, there was high incentive tobe ranked at the top.

Five-star Microsoft employees would therefore avoid working withother 5-star coworkers since they knew a successful projectcompleted by them both could hurt their individual chances ofreceiving five stars again. The process also incentivized managersof low-performing teams to distribute top ratings to employees whomay not have deserved them, since they were forced to distributeratings equally among members of their team.

Microsoft gathered feedback from thousands of employees over thecourse of several years before implementing a change to theprocess. Based upon the feedback, in November 2013, the companymade two sweeping changes. It did away with the curve entirely,which for the first time, gave managers the freedom to allocaterewards to employees as they see fit. It also did away withratings.

Today, while Microsoft may not have the same allure as Google,it has made great strides in communicating its culture to theindustry and in continuing to engage top talent.

Lessons Learned

Employees with world-class talent expect and appreciateworld-class HR practices. The annual performance reviewprocess has been broken for decades. Let’s learn from thesecompanies and fix it.